BJP led coalition NDA - won the Indian General elections again by a thumping, unexpected, majority. Perhaps they were able to communicate their message better than others and win the confidence of the electorate. After all this kind of a win cannot be subscribed to favourable caste equations only - something which has been the basis of Indian electoral strategy for a long time.
So what is in it for the stock markets.
A strong majority government does matter but what will matter more are the steps they take and the global environment - which because of the trade wars - haven't been very favourable. This means that India's exports haven't done very well. Also some of the events in the past 4 years have increased the uncertainty in the markets. Some of these are
So what is in it for the stock markets.
A strong majority government does matter but what will matter more are the steps they take and the global environment - which because of the trade wars - haven't been very favourable. This means that India's exports haven't done very well. Also some of the events in the past 4 years have increased the uncertainty in the markets. Some of these are
- Demonetisation
- GST
- NBFC Crisis
- IBC code 2016 (Insolvency and Bankruptcy Code)
The Indian economy - while still growing - has shown signs of a slowdown. Slowing consumption is a case in point.
In this backdrop what can be expected from the new Government.
Well the majority win ensure that in both the houses of Indian Parliament - the lower house - Lok Sabha and the upper house - Rajya Sabha, the government should be able to push through reforms through the legislative process. Remember in the last term that was not possible as the Govt. was not in majority in the upper house - Rajya Sabha. So it would be prudent to expect reforms like
- Privatisation ( and not necessarily only disinvestment)
- Land and Labour reforms
- Urbanisation
- Industralisation
- Export Growth
To revive the investment cycle ( especially private sector) is not going to be an overnight job in light of the Global Trade wars - a factor on which the govt. has little control on.
Therefore the focus should be to revive investments on infrastructure and perhaps investments to build capacities in industries which overtime can become export led and help reduce India's current account and fiscal account deficits.
Well all of this will require the government to spend monies. Can the govt. then borrow more money to spend on building infrastructure etc. - perhaps not as it is already running a large deficit.
So two clear areas emerge from where the govt. can hope to get monies
a) Monetise existing assets of the Govt. e.g. Public Sector Enterprises, Assets owned by Govt. Departments, Land, Roads etc etc. The capital generated can then be put to use to build infrastructure - roads, metros, airports etc etc.
b) The Panel on Economic reforms - led by former RBI Governor Bimal Jalan is expected to submit its report anytime - by June end. The panel is expected to detail the amount Reserve Bank should transfer from its reserves to the Govt. A favourable report will give govt. monies ( by way of transfer from Reserve Bank) to spend on infrastructure.
Besides all the above ease of doing business, better tax compliance, lower interest rates are some of the other factors which will be favorable for the markets.
One thing is clear that none of these steps can show results immediately i.e. as soon as the new government is elected. So why did the markets go up on a favourable election outcome - well could be what is called as "hope trade" i.e. in expectation of reforms. Is this euphoria - be careful then!!
(Disclaimer : For information only and not to recommend investing in any manner)
