Key takeaways from 3 Years of Modi Sarkar…

In the last week of May 2017, the ruling NDA government under Narendra Modi will complete 3 years in power. Over the last 3 years, the Nifty has given a Compounded Annual Growth Rate (CAGR) return of 9.8%. That is about what an investor would have earned in a debt fund over the same period. That means the equity markets have not really indulged in fireworks during the last 3 years. If you were to play the Devil’s advocate, you can argue that jobs creation has really slowed in the last 3 years and most of the benefits that we see today are an outcome of weak global crude oil prices. One can also argue that NPAs in the banking system have burgeoned sharply in the last 3 years and the PSU banks are a lot more brittle today than what they were 3 years ago.

But all these factors do not take away from the fact that there has been tangible progress in economic terms in the last 3 years. In fact, many of these factors, when put together, actually place India in a very sweet spot. Let us look at some of these key positive changes in the last 3 years…

Inflation is well and truly under control…

While inflation continued to be an issue in the first two years due to the impact of drought, the situation has largely improved since the middle of 2016. CPI inflation and WPI inflation continues to remain in the sub-5% zone. In fact, the CPI inflation has now fallen below the 3% mark. The food grain production was up by 9% in 2016 and it is likely to be buoyant in the current year too. The other key determinant of inflation is the landed cost of crude oil. With the US planning to widen its shale coverage and flood the oil markets with shale oil, the global prices are likely to hover around the $50 mark. That is notwithstanding the supply cuts that OPEC and Russia may attempt. Sustained low inflation props up the real growth and also helps to keep the interest rates low.

Fiscal responsibility has been the focus…

For a long time, the FRBM Act was more on paper with successive finance ministers using every possible leeway and growth pretext to loosen on the fiscal target. What this government has done in the last 2 budgets is to put emphasis on the sanctity of the fiscal deficit targets. The government appears to be on target to reach 3.5% fiscal deficit target and revenue deficit of 1.5%. That will be a big boost to the confidence of foreign investors. Tight fiscal discipline is also positive from an external rating perspective. But to the credit of this government, it has not swerved from its fiscal responsibility targets despite the pressure from industry and economists to adopt pump priming over fiscal responsibility as the core economic focus. Remember, this fiscal discipline has been observed despite higher outlays on rural spending, national infrastructure, OROP and 7CPC.

Key Legislations see the light of day…

It is during the last 3 years that the all important GST Bill was passed and is now likely to be implemented from July 01st onwards. Despite the minority in the Rajya Sabha, the government has managed to push through the bill and also managed the transition quite effectively. Secondly, the FIPB stands abolished and that was something that was long overdue. The delay in the Land Acquisition Bill has put a lot of infrastructure projects in limbo but that too is likely to get through sooner rather than later. The government has also taken an important step in institutionalizing the monetary policy by appointing a Monetary Policy Committee (MPC) to replace the erstwhile monolithic structure of monetary policy.

Government has been bold via demonetization…

It must be said that the government in the last 3 years has shown the courage to take up initiatives like demonetization despite the initial hiccups and the popular protests. In fact, if the state election results in UP and the MCD elections are any indication, then the people at large appear to have supported the move. Above all, the demonetization drive has achieved two things. Firstly, it has given a boost to the government’s battle against black money. Secondly, it has put India surely on the path of digitization, which is likely to have long term benefits…

Then, why is the Nifty giving just 9.8% CAGR returns…

It may be unfair to really judge the government by the returns on the Nifty and the Sensex. They are as much about sentiments and global flows as they are about domestic fundamentals and reforms. The good news is that the government has shown the courage to put India on the path of economic reforms even if it means temporary disruption and pain. That is something the people at large appear to have appreciated. The reason for the tepid performance of the Nifty is more because the capital investment cycle has lagged and therefore revenues and profits have not grown.

But all that could change rapidly. We have an interesting economic matrix right now. Inflation is under control and crude oil prices will stay weak. Domestic incomes and spending is picking up and that could translate into massive benefits for the Indian corporates. With digitization will come, greater transparency and a deluge of investments into equity and equity-linked assets! We may have just seen just the beginning of a big re-rating phenomenon. The best is yet to come on the stock markets front!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: