How will Modi 2.0 affect your investments? Part-1

By Raju On 26 May 2019

    

The NDA has had a remarkable victory in the recently concluded general elections with an absolute majority. The BJP on its own has also got a simple majority. This is a very strong mandate given by the people to Mr Narendra Modi’s agenda and policies. It has essentially given a free reign to the incoming government to continue with existing policies and also to take hard decisions, if required.

Our crystal ball is predicated on a few key factors:

  1. The mess in the NBFC/Banking space and how soon it can be resolved
  2. Growth of the Indian economy
  3. Global factors with the US taking a hard stance on most issues

Let’s go deeper on each of these and see what they could foretell.

The NBFC mess which started off with IL&FS defaulting, continuing with liquidity stress at DHFL, Reliance Capital, IndiaBulls Finance and others is not over yet. The RBI to its credit, is trying to bring in bank type treasury management at these NBFCs - whether these measures help in clearing this up is debatable. What we understand is that the government is averse to bailing out any distressed company and we support this as it is not the job of the government to bail our private companies. We only expect that the government appointed board at IL&FS concludes its work soon and the expected losses are crystallized soon. What we do want the government to do is to be tougher on credit rating agencies and bring in more transparency and liquidity in the overall debt market. Lip service will not do. This is going to be a long drawn out process and may impair the banking sector for months to come. We expect liquidity will be limited for infrastructure and other capex projects, even housing loans may be impacted.

Modi in his first term had an arguably mixed record on economic factors. He brought in some big reforms; the new bankruptcy law was a good success, demonetisation was not. India became the fastest growing large economy during his term. GST is still a work in progress and the innumerable small glitches have yet to be sorted out. We believe Modi will bring in further bold reforms in his second term as that is why he has been given such a strong mandate. Economic growth has slowed to 6.65 as of Dec 2018, lowest in 6 quarters. He needs to create a humongous number of new jobs, which will be difficult as the private sector has become averse to further capital investment and the public sector is shedding jobs as per divestment plans. Hence, he needs to focus immediately on exports as the main job creator, be it in labour intensive sectors like tourism, construction or services. Consumer led demand has definitely slowed, as can be seen from the sales data of FMCG and auto companies, how will the new Modi government incentives consumer growth remains to be seen. The biggest reform Modi 2.0 can take is in the agriculture sector, where he needs to free the agrarian sector from the clutches of middlemen and APMCs. Whether the farming sector is ready for such bold reform remains to be seen. Mr Modi has the appetite to undertake big and bold reforms and he may continue in the same vein in this term. However, the results will have their own story in their own time. A rapid economic turnaround is what the doctor has ordered and we wait to see the implementation.

Part 2 to follow.

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