What the next government says and does in the coming months is crucial to boosting confidence in the policy settings and the economy
The new “government's reform initiatives in economic and fiscal policies in the next two to three months may have significant implications on the sovereign credit rating on India,” says Standard & Poor's Ratings Services commenting on the outcome of the elections.
The National Democratic Alliance (NDA), led by the Bharatiya Janata Party (BJP), has won the lower house of parliament with a wider margin than expected. The alliance and the BJP have won 339 of the 543 seats. In “our view, NDA's strong showing indicates that it will have a reasonably good political platform to tackle structural issues,” says S&P.
"What the next government says and does in the coming months is crucial to boosting confidence in the policy settings and the economy," said Standard & Poor's credit analyst Takahira Ogawa. "If confidence rises, investment and consumption in India could strengthen, after being held back by the uncertainty surrounding the election."
However, the government will face hurdles in sustaining growth in the medium to long term. The hurdles include reviving investor confidence, managing fiscal consolidation, regaining fiscal prudence, improving the current account balance, and boosting the banking sector's financial strength. Many Indian banks are publicly owned.
Investments, particularly in infrastructure and the mineral resources sector, face slow approval processes at central and state government levels. This has reduced economic growth potential.
The outgoing United Progressive Alliance government recently expanded the food subsidy system and its fuel subsidy reforms are incomplete. In the past two budget years, the government increased non-tax revenues by accelerating disinvestment of shares in government-owned companies, increasing dividend receipts from government-owned companies, and delaying payments, such as fuel subsidies.
In our view, the challenge for the next government is to regain fiscal prudence in a sustainable way. Implementation of a goods and services tax could help stabilize government revenues, while potentially improving the country's growth prospects, by promoting inter-state transactions, and general efficiency of the economy.
"If the next government fails to lift confidence, its task of turning the economy around will get heavier," Ogawa said.
The general sentiment in the economy has been improving in the run-up to the election. It remains to be seen if the new government can keep up that momentum and lift the economy. The first possible glimpse of that would be the announcement of a revised budget, which we expect in a month or two.
India Inc Appears More Confident
Industry and market leaders appear more confident after the decisive victory of the NDA. Says Vijay Kalantri, President of All India Association of Industries (AIAI), “In view of the clear mandate given in the 2014 Lok Sabha elections, India seeks a stable government which is the dire need of the hour. People of India have en-mass reposed their full confidence in the BJP Prime Ministerial candidate Narendra Modi.”
He believes that in view of the slowdown in the economy, slump in domestic and foreign investment as well as tapering of flow of investment to overseas countries due to policy paralysis and non-transparency in policies which the country has been witnessing, people from all walks of life have turned to BJP and reposed their confidence in Modi. The Gujarat model of development, which brought in its wake enormous success has caught the imagination and instilled hope in the people of this country that the Government led by Modi can bring about many good changes through good governance and transparency.
Kalantri hopes that the new government would devote attention to the implementation of GST, doing away with retrospective Tax, GAAR, more transparency in regard with coal, gas and mining linkages, infrastructure and promoting small - scale enterprises to generate employment and rationalization of tax-policy and multiple licenses and redundant laws.
Similiarly, Dr. Ajeenkya DY Patil , Chairman Ajeenkya DY Patil Group and Consul General of Guyana says "It is great to note that the people of India have given a decisive majority mandate for a stable government. This will provide a conducive environment for the growth of the economy and the nation at large”.
Dr. GVK Reddy – Founder Chairman & Managing Director – GVKPIL views on the 2014 Election results was also optimistic and said “The election results reaffirm the country’s faith in democracy. The people’s confidence and mandate for stability has ensured that there will be economical and political stability in times to come. We are confident that with a strong mandate, the new government will do well and will implement economic policies that benefit the country’s people and its industry. This will create an environment conducive for growth and ensure prosperity of the nation, thereby fulfilling its enormous potential.”
Shashi Kiran Shetty Executive Chairman of Allcargo Logistics Ltd. says “India has voted for economic growth and prosperity in the hope for change. With great power comes great responsibility. As a progressive business community, we should stress on strategic planning and dialogue with the new government on revival of business and investors sentiment in the country. We are upbeat on this new wave and congratulate the nation to live up to the true spirit of democracy.”
Vijayan S, Head, Treasury & Markets, DBS Bank Ltd. India says "We believe that the new government will be progressive and help create a strong governance and investment environment for growth. We see the confidence among domestic and foreign investors returning to India & expect India to remain a very promising destination. The win is an opportunity to give much needed direction and decisions on the infrastructure, retail and insurance sectors to build jobs and bring fresh investments and address the more urgent issues to build confidence – e.g. recapitalizing banks in the public sectors, clarifications on some of the retrospective tax laws. We believe that the Modi-led government will be ready to take tough decisions, given the strong mandate it has received. "
Markets Could Rise Further
Anup Bagchi, MD & CEO, ICICI Securities commenting on the stock markets post election results said “ Given the exceptionally strong mandate, we do not foresee a meaningful correction, though markets may consolidate near current levels, since economic recovery will happen with a lag. Having said this, the fiscal discipline promised by the party could strengthen the argument for interest rate reduction in due course, which would make equity more attractive in relation to fixed income. Defensives sectors like Pharma, IT and FMCG may take a back seat, while the balance would shift towards sectors linked to domestic investment and infrastructure. Investors should continue with a staggered buying approach, and any near term correction may be used as a buying opportunity in high beta, capital intensive companies with robust balance sheet. “
Similiarly, commenting on the election outcome, Amar Ambani, Head of Research at IIFL said, “India has seen the strongest election mandate in ~30 years
since the era of single party governments. A near perfect marketing campaign by BJP, a pro-development perception about Modi, combined with a potent anti-incumbency combination of slow GDP growth, soaring price levels and corruption charges against the UPA, have put the BJP decisively in the driver’s seat. Absolute independence brings the promise of fast-track reforms and a surge in economic activity. Combined with certain macro tailwinds and reasonable valuations, a major part of the next 5 years will be a great period for the Indian stock market.”
Dipen Shah, Head- Private Client Group Research, Kotak Securities believes that “We believe that, the new Government will take steps and measures to take the growth rates higher on a sustainable basis in the long term. We expect steps to increase public investments and encourage private investments in infrastructure, ensure better Governance, reduce Fiscal Deficit (including control of wasteful subsidies), implement structural reforms like GST, DTC, improve Center – State relationships, control inflation by taking effective steps to ease the supply side constraints, etc. From the market’s perspective, it is a significant development. We remain optimistic on the long term prospects of the markets. However, in the short term, markets may remain ranged or may even come under some profit-booking, especially after the sharp rise witnessed in the recent past. The outcome was discounted by the markets to a certain extent. Based on our expectations that, strong reforms initiatives will be taken by the new Government, we continue to expect that, the domestic cyclical and infrastructure themes will out-perform.”
Swapnil Pawar, CIO, Karvy Capital expects the ‘Sensex to reach 38,500 by March 2017’ and says “ A real GDP growth of 6% in FY15 along with Inflation of around 7% should lead to a nominal GDP growth of 13%. RBI in all probability, will continue its current stance irrespective of the party forming the next government. While FII investments may pick up in a hurry, the longer term investors through FDI route will want to wait and watch if the new government manages to revive growth”.
Jayant Manglik, President-retail distribution, Religare Securities Limited says "Today, we may see volatility to continue on street as participants would be reevaluating existing bets and balancing their positions accordingly. It’s evident that positive bias is here to stay and any decline due to profit taking can be considered for initiating fresh long positions. Among the sectoral pivots, give preference to infra, banking and power counters alongside with FMCG to maintain the balance."
Realtors Hail Landslide
Hailing the NDA’s clean sweep of the Lok Sabha polls, realtors apex body CREDAI Chairman Lalit Kumar Jain appealed to the Narendra Modi government to immediately take up the much-needed realty reforms.
“It is a good omen and gives us a ray of hope in the otherwise dark era that has been witnessed during the previous government,” says Jain.
Recalling that the Atal Bihari Vajpayee government accelerated growth with a special focus on housing, Jain expressed the confidence that Narendra Modi will also follow suit. “We look forward to achieving the objective of mitigating the housing shortage and minimizing corrupt practices,”
Modi has a proven track-record of governance in Gujarat and people have reposed enormous faith in his leadership. The election results will lead to political stability, high economic growth and will help revive the investment climate.
Chairman, Hinduja Group
The sentiments are extremely positive, the new Government now must take all measures towards securing economic, social and national mandates for our nation.
MD & CEO, Yes Bank
The new government needs to drastically increase public spending on health and create a roadmap for universal health coverage. An equally urgent need is to make the direct taxes code and GST a reality.
Chairman, Apollo Hospitals
The BJP led government will provide an environment conducive for growth and investments, with major reforms in infrastructure and renewable energy sector. This is important as India's economic environment will act as a catalyst in reviving the global economy.
Chairman, Suzlon Group
With a strong mandate, the new government will do well and will implement economic policies that benefit the country's people and its industry. This will create an environment conducive for growth.
CMD, GVK Power Founder
I am optimistic that the scenario will improve for the real estate sector. We expect the Government to take cognizance of the long-pending demand of the real estate sector like industry status, incentive for affordable housing and enhanced tax reliefs for homebuyers.
We hope that the new government initiates steps that has the potential to reverse the current downturn into a growth momentum, which is really the need of the hour.
Chairman, JK Tyre
Market is already cheering and the trend of stock exchange shows, that the economic graph of India will take a new flight. We expect the government to put the stalled projects on a fast track mode, push for better investments and focus on manufacturing sector.
Chairman & MD, Bharat Forge