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Posted on 24-May-2019 Comments  0

Modi 2.0 - Markets

Why stock markets are so excited about Modi 2.0

A market skeptic asked me after the results; why are markets so excited about Modi? He had a point. During the last 5 years, the Nifty gave an average return of around 9.5%, which is lower than the 11.5% CAGR that the Nifty returned since inception. Let us look at five key reasons why the markets are excited about Modi 2.0.

Look at wealth creation

You will be surprised to know but the stock markets created $1 trillion of wealth during the 5 years of the Modi government. This is highest absolute wealth created by stock markets in any 5 year rule in Indian history.  While the index may not have performed that well, the real action came in the form of new listings and non-index stocks. That is a lot of wealth created in 5 years.

Financialization of savings

No previous government contributed as much to financialization of savings and building the indirect equity cult as the Modi government. AUM of Indian mutual funds moved up from Rs.8 trillion in 2014 to Rs.23 trillion in 2019. Such a huge growth on a large base is truly commendable. Also, the Indian mutual funds collect nearly Rs.8500 crore each month through SIPs, which is largely stable. Also mutual fund folios and demat accounts have seen a manifold increase. That is the kind of retail push that markets always wanted!
Continuation of reforms process

One thing Modi 2.0 assures the market is of a continuation of the reforms process. Some of the reforms like GST and IBC have been substantially value accretive for a lot of stocks in India. Modi 2.0 also means that the reforms momentum will continue at the same pace. In the previous regime, Modi has shown a penchant to take up bold reforms like IBC and GST and even out of the box reforms like the cash ban. That is the approach markets look for.

A divestment boost

The market expects that the decisive mandate for the Modi government for a second term will coax the government to be more aggressive in divesting government stakes. Strategic sale was spoken about but not pushed through. This will only mean more quality paper coming into the stock markets thus reducing the bubble risk.

FPIs like it; that is important

FPI have driven the direction of Indian markets for the last 25 years and they are truly happy about the return of the Modi government. That only assures that flows into India will continue at a rapid pace in the months to come giving the markets the much needed stability and support. If you are wondering why the markets rallied post exit poll; this was one of the key reasons!

Modi 2.0 - Economy

What are the economic challenges that Modi must address urgently

The victory of the BJP and the NDA has not only been emphatic it has been largely decisive too. While India has maintained above 7% growth in the five years of the Modi government, it gets a lot more complicated now. The global slowdown, higher oil prices and BREXIT promise a not so healthy cocktail.

Complete reforms agenda

Industry has been talking about third generation reforms but that can wait. The immediate priority for the new Modi government will be to take bad debt resolution and GST to its logical next step. Better implementation of GST, lesser leakages and simpler rates must be something to be worked on immediately. Secondly, the IBC has made a good start but the remaining insolvency cases have to be disposed off quickly to be effective. 

Project divestment starts

With a decisive second mandate, the Modi government can afford to be more adventurous. Greater autonomy to the PSUs, majority private participation and strategic sale must be pushed forward on a war footing. It is not just about revenues with respect to divestments. It is also about making the Indian PSU sector more competitive in the global market place. But above all, this effort will ensure that quality paper comes into the stock market. That will largely do away with risk of market bubbles.
Big export thrust

Over the last 30 years, the Indian economy has managed to follow a specific export narrative. Initially in the 1980s it was textiles followed by gems & jewelry. Later, software and pharma became multi-billion dollar export cases. In the last 10 years, India has not really had a clear export story. That is what India needs to focus on. Whether it is automobiles, steel, aluminum defence production; that is a call the government has to make. But whatever the choice, the government must have a multi-pronged strategy. This will include easy funding, easy processes, marketing support, collaborations etc. It is only a combination of all these that can give a true-blue thrust to exports.

Need to create more jobs

The people did not really question the Modi government on jobs in his first five years. However, voters may not be so charitable in the second innings. The government needs to seriously brain-storm on how to create more jobs. Agricultural has to become more profitable and SMEs need to get back their thrust. Government recruitments must start in a big way and the government has to take the lead on this subject. CMIE data may or may not be precise but intuitively you can see the unemployment problem all around. Jobs can put an end to a lot of problems, including that of consumer demand!

Modi 2.0 - Lessons

Opposition needs to learn some key lessons from the elections

As much as the victory of the NDA in general and the BJP in particular was emphatic, it also left some very critical lessons for the opposition. How they read the lessons will determine their future. Every healthy democracy needs a strong opposition and it is in India’s own long term interest.

Caste era is over

Be it the states of UP, Bihar or Madhya Pradesh, caste equations have hardly mattered. The nationalism narrative created by the BJP has really worked. In a way, the 2019 elections also marked the end of the caste era and the dominance of caste parties since 1989. Voters don’t care about caste issues any longer at the time of voting.

Understand the youth

What the Modi government managed better than the opposition was to make a direct appeal to the youth. The youth seems to believe in a strong centre based on nationalism and that is exactly what the Modi government provided to the next generation. Nearly 65% of Indian voters are below the age of 35 and for most of them the Congress party’s glory prior to 1989 is just a footnote of history. The opposition should understand this aspect and modulate their narrative accordingly. The young want decisive leadership and that is what Modi 2.0 promised. Every-thing else becomes secondary.
Have a positive agenda

The India of today and the India of tomorrow believes in a positive agenda. No point in running a campaign just highlighting the mistakes of the ruling party. That is the big blunder that the opposition parties committed. Modi used that campaign to his advantage and used the party machinery and media to full effect. That surely worked better than anything else.

Devil lies in the micros

If it was a Modi wave, why did Congress perform so exceedingly well in Punjab and Kerala? While the wave was there, people still respect grass root leaders who try to understand what people need. Amarinder Singh and Tharoor are examples of two leaders who delivered the state against all odds. There is a bigger lesson for the opposition that there is merit in micro level planning; the way BJP runs its machinery.

Roll up your sleeves, folks

The outcome has proved that to win an election in a complex country like India, you need feet on street. An army of armchair analysts divorced from reality will not get you anywhere. Also it is amusing to see leaders spending more time on Twitter than at the ground level. People like Amit Shah, Jagan, Tharoor and Naveen Babu have proved the need to roll up your sleeves!

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