Dear Investor, The 2014 verdict is out and has surpassed all expectations of even the most optimistic forecaster. The country has voted for as strong a mandate as any since 1984’s verdict. The verdict for BJP and the NDA is very decisive. First things first, this bodes stability from a variety of perspective for the next half a decade. On the flip side, the expectations will now run higher than ever, as this government will have no “coalition compulsion” excuse to take shelter in. Given this backdrop, from an economic perspective, we highlight some of the key reforms which the government must undertake to put the economy on the growth high-way. (And IF indeed, these reforms see the light of the day, the equity markets could not just continue on its upward trajectory, but could accelerate in quarters to come) Why Is This Verdict (Read: Change) Significant? India has seen more academically qualified men at the helm of the country, than the current designate, YET, it is significant to note that the kind of traits he offers are a series of “firsts”… Executive experience – He is the ONLYPrime Minister with more than 10 (uninterrupted) years of executive experience Business Acumen – One of the few Prime Ministers known for sharp business acumen, successful in turning around the state utilities and corporations and cutting red tape, almost SINGLE HANDEDLY in his state. There is a very high possibility of running India like India Inc. Centre-State Juglabandi – One of the key impediments to India’s economic progress has been the centre-state animosity that has amplified over the past decade. India has a federal structure and a lot of decision making power rests with the state (when it comes to state subjects). NarendraModi, having been a Chief Minister for than a decade, understands the aspirations of a state (and their agony too) and with his collaborative approach, can foster and lead to greater nation building. For instance, a rollout of GST alone (held back principally for centre-state disagreement), could add a percent to India’s GDP by some expert estimates. What Could Happen From Now On…. Vicious To Virtuous Cycle – The past five years of UPA-II rule has resulted in a great deal of trust deficit between the govt. and its people. The consequences of the rising mistrust have been hold-ups in implementation of projects and a creeping policy paralysis. These, in turn, have caused investments to slow down and growth to decline, further feeding the citizens misery index. Thus the country has got caught in a vicious cycle. With the trust deficit now EXPECTED TO REVERSE (and quite significantly, too), the vicious cycle could turn on its head and convert to a virtuous cycle of increased commitment to capital investment by industry, speedy project clearances, high un-employment, increasing disposable income leading to higher consumption and higher growth. Bringing India Back On The Global Map – India, once the “darling of global investors”, has completely gone off the radar of the global investor as it has steadily fallen from a 7%-9% growth regime to a sub 5% level. The only way to bring it back on the radar would be lift the growth trajectory back into the stratospheric terrain of 7%-9% growth. A $9tn dollar economy (China) growing at 4% - 6%, will attract a lot of eye balls, but for a $2tn dollar economy to be talked of in the same breathe, needs nothing short of exponential GDP growth rates. NarendraModi in his speeches has categorically stated on bringing India back in the limelight, and all efforts could be made in pursuance thereof. Team Modi – A diverse and complex nation like India cannot be run oligarchically, its complexities, pluralities and diversities will never allow for such a regime. It can only be run efficiently by a team. NarendraModi might optically appear to be a power centre within himself, but a closer look at his campaign (and now the results, too) will reveal that there is an extensive team, a think-tank, behind every single move made in the past one year. The use of social-media, constituency-viz micro strategies, candidate selection, etc. suggests tremendous analytical framework behind execution, which could not have been be accomplished without a competent team. The same architecture is likely to be replicated in government formation and a Team Modi of highly capable and pedigreed names (like JagdishBhagwati, ArvindPanagariya, etc) is likely to emerge in coming days, be it PM’s economic advisory panel, PM’s cabinet and other executive bodies. The Pecking Order, Indian Economy Needs! Infrastructure Development Infrastructure bottlenecks like increasing coal supply, environment clearancesshould be expedited. Road development contracts are likely to be awarded immediately, and corridors like the Mumbai-Delhi expanded and further developed. Labour Reform Government is likely torevisit the Trade Union Act and Industrial Dispute Act. Right now, complex regulations make it too difficult and costly to hire and fire workers, and that scares away factories and acts as a disincentive for businessmen to expand their operations. If NarendraModi makes the laws more flexible and less confusing, the benefits could be huge.However, this needs parliamentary approval and may take time. Tax Reforms The new government in all likelihood willimplement Direct Tax Code and Goods and Services Tax(GST). A revision of the “Land Acquisition Act” to make the process easier for corporates is also on the cards. However, these processes also require parliamentary approval. Bureaucratic Reforms India has a complex red-tape mechanism for project/investment approvals. Such a complex and multi-layered process hinders and delays economic traction. Such processes should be simplified, structured and policified (rather than arbitrary), possibly leading to single window clearances. Fiscal, Monetary & External Challenges India has run a high fiscal deficit and a high current account deficit for a long time now. This again is courtesy the dole-out policies followed by the out-going govt. A country with high level of poverty like India, can perhaps cannot do away with subsidies for a long long time. But as a former PM had said, that only 15% of the allocated subsidy reaches the pocket which needs it the most. India needs to target its subsidies better, thereby reducing the wasteful ones, and hence cutting down the fisc. On the monetary side, inflation has remained sticky ESSENTIALLY due to supply side reasons. India needs to free up its resources and increase capacity so as to curb the supply side menace, which sadly was tackled using demand side tools (i.e. interest rates) by the previous govt. Conclusion! A watershed moment has just occurred in Indian history, where, for the first time, a non-Congress party has got an absolute majority on its own.The country has gone through tough times over the past couple of years (scams, low growth, policy paralysis, high inflation, unemployment, etc). Coalition politics have often been used as a convenient excuse to defend govt. action. Now, with such a mandate, the ball is entirely in govt’s court, and there is nothing, absolutely nothing that can shelter the govt. But, given the track record of NarendraModi, his commitment to the economic cause, focus on “more governance with less government”, there is every reason to look to the future with great hope. The fixes may take some time, but are likely to get fixed none the less, and that alone should matter the most. From equity market’s and investor’s perspective, they must be (and indeed are) willing to give a long rope to this govt as investors realize the magnitude of the problem. With an inspiring leader at helm, a purebred gifted team around, and world renowned academic RaghuramRajan heading the Central Bank, equity markets are likely to live with hope for next few quarters and look out for short, medium and long term measures. The 2014 campaign started with hope, focused on hope and has ended too with creating another hope.
Posted on: Sun, 18 May 2014 01:35:38 +0000