Two years of Modi govt: Stage is set, corporates may soon steal the show


Two years ago, when the Modi-led government stormed to power, the Indian economy was in shambles. The twin deficits – fiscal and current account – were at discomforting levels. Inflation was raging in double digits. GDP growth had fallen to decade lows. No revival appeared in sight, especially with the administrative paralysis that followed a slew of high-profile corruption cases. Consumer sentiment was reeling under the weight of moderating growth and incessant inflation.

Much has changed since then, though the promised “good days” may still be a while away. A “fragile” economy two years ago, India is now hailed as a “beacon of stability”. The twin deficits are under control, inflation has been tamed, and GDP growth has revived. This year, the Indian economy is projected to grow at about 8%, the fastest in the world. While the dramatic collapse in global commodity prices has supported India’s macro fundamentals, consumption is the key growth driver. The much-needed revival in investments is still awaited, though the government has taken concrete steps to create an enabling environment for business and encourage entrepreneurship.

By putting in place a “fair and transparent” mechanism for the auction of coal mines, it has not only created a credible template for monetising scarce natural resources, but also restored credibility in governance. Large-scale corruption scandals – the hallmark of the previous regime – have been virtually absent during the last two years. Registering companies is now easier, regulations have been simplified, and most interfaces between businesses and the administration are being digitised. The government is also working on making the tax regime more friendly and transparent.

Among the other noteworthy reforms that the Modi government has undertaken are a new insurance law with enhanced foreign-investment limits, inflation targeting with an independent monetary policy committee for the Reserve Bank, a bankruptcy code, a regulatory framework for real estate, opening up nearly all sectors including defence to foreign investment, decontrolling fuel prices, permitting listing of stock exchanges, licensing many new banks, restricting subsidy payouts to the most deserving, and ensuring every family has a bank account.

It is encouraging entrepreneurship among women and the less privileged through initiatives such as Stand-up India and MUDRA. High-decibel campaigns around its Make in India initiative have contributed to India’s growing global stature. Given its recent successes in pushing through important legislation in the Rajya Sabha despite its numbers disadvantage, there is growing confidence that the Modi government will be able to roll out GST by the targeted April 2017.

The last two Budgets also highlighted the government’s federalisation initiatives. It has effectively moved public expenditure policy to the jurisdiction of the state governments. Together with decentralisation of fiscal policy, including taxation, this will alter the design of fiscal federalism in India. While raising revenue will be centralised, allowing for efficiency gains, expenditure management will rest with the states, allowing for effective allocation.

On the physical infrastructure front, India is building 18 kilometre of roads a day, which it is now targeting to double to 40 km a day. Increased activity is also evident in the ports, shipping and waterways sectors.

With targeted infrastructure spending, there is little doubt that India will have better and bigger roads, more efficient railway infrastructure, and will better exploit its rivers and long coastline. Coal production is going up and the government is targeting 100% power connectivity and 24/7 power.

In the two years that it has been in power, the Modi government has worked on creating a fertile ground for businesses to take seed and grow. The macro-level achievements are commendable: low and steady inflation despite two droughts, healthy revenue receipts, strict fiscal control, and a current account in near balance. Yet, investments have failed to pick up. Corporate earnings growth is still sluggish, reeling under the impact of two successive droughts. The precipitous fall in global commodity prices, which benefited the economy, has hammered commodity firms’ earnings and hurt banks’ profitability.

The stock markets had cheered Modi’s ascension on May 16, 2014. The Sensex soared 1,500 points intraday, one of its biggest single-day gains in history, and crossed the 25,000 mark. In 10 months, the Sensex rallied to the 30,000 mark and then the excitement gave way to disappointment. Yet, as we stand at the Modi-led NDA government’s second anniversary, there is optimism once again. The Sensex has bounced back and the tidings are good on the monsoon front. The results of the recent assembly elections – the NDA’s historic win in Assam and double-digit vote shares in Kerala and West Bengal – are apt anniversary gifts.

As the markets once again look at the future with hope, it would be prudent to watch out for potential party-spoilers. While in absolute terms, India’s control over fiscal deficit and inflation is commendable, in relative terms, these metrics are still far higher than its emerging market peers. Hardening oil prices could pose a risk to the macroeconomic comfort that India currently enjoys. If the monsoons play truant this year too, it could sow the seeds of a socio-economic upheaval. Having said that, a bounce-back in corporate performance will result in an earnings-driven rally far stronger than the hope rally around Modi’s ascension.

I feel it is a good time to increase allocations to equity. Just buy right stocks and sit tight.