India on path of sustained higher economic growth and prosperity

In an unprecedented mandate, India re-elected NDA back to power with an overwhelming majority. NDA has won 340 seats, in-line with the higher end of the exit poll predictions. BJP on its own crossed the 272+ mark yet again and expanded its tally of 2014. This is the first time since 1971 that an incumbent is being voted back with full majority. The mandate of 2019 in some ways is bigger than even 2014 as this reflects pro-incumbency undercurrent, a phenomenon not so common in India. Secondly, BJP has managed to expand its national footprint and gained seats in states where it was traditionally weak – West Bengal, Odisha, Telangana. These results also underscore a very important shift in the Indian democracy – the new era of single party majority rule after 30 years of coalition governments. Near two-third majority for the NDA allows it space to implement bigger reforms mentioned in its manifesto. However, NDA is still not in majority in Rajya Sabha. 

As far as markets and economy are concerned, first and foremost, these results provide stability, decisive leadership and continuity in governance, reforms and policy agenda. Policy predictability will go up and ensure India continues to remain at the centre of global growth narrative. More importantly, this election result removes the key overhang of the markets i.e. fractured mandate and loss of momentum on structural reforms. Single-party majority will continue to facilitate decision making and structural reforms, unlike in a coalition where pulls and pressures of coalition arithmetic could have impeded the pace of policymaking. We expect equity markets to take this results positively. Improvement in sentiment post the formation of stable government should augur well for foreign institutional flows as well as domestic mutual fund inflows which has seen consistent scale up in Systematic Investment Plan (SIP) based investments. Stable macros are also positive for currency and bond markets in a volatile global market context.

One of the key achievement of Modi 1.0 regime was getting control on inflation and fiscal consolidation. Prior to 2014, inflation as well as fiscal consolidation were key macro challenges in India. Getting these two under control has clearly improved the attractiveness of India story. NDA implemented a host of structural economic reforms like GST, IBC, RERA, MPC, demonetisation & DBT. Infrastructure creation received emphasis and road construction doubled during the five years. The Modi 1.0 regime will also be characterised by the comprehensive clean-up of the banking system with the excesses of the past being recognised and provided for. This should pave the way for the emergence of new credit cycle, in our view. The government also targeted improvement in rankings in Ease of Doing Business and improved the rank. It pushed the social welfare agenda through its flagship schemes like PMAY, Ujjwala, Swachch Bharat, Ayushman Bharat, Saubhagya, PM Kisan, Mudra etc. DBT helped plug leakages in government subsidy transfer to beneficiaries and has created a new paradigm for subsidy transfers. 

We expect the larger economic reforms and social welfare agenda to continue with renewed emphasis on infrastructure development (roads, housing, waterways). GST seems to have stabilised and monthly revenue run-rate is on ascendance. Banking asset quality clean-up is largely done and should herald a new credit cycle as capacity utilisation in the industry picks up. In Modi 2.0, we expect the economy and markets to have a relatively smoother trajectory sans the disruptive and transformational macro reforms. We also expect the government to continue to opt for higher cash transfers in a targeted manner given the rich political dividends it has yielded. From the near-term perspective, the immediate focus of the government would be to revive the rural consumption engine, address the liquidity issues of debt markets in coordination with RBI and drive fiscal spending to revive the industrial growth (IIP growth has moderated significantly in the last two months). Real interest rates in the economy continue to remain high despite inflation having been largely in control and within the target band of RBI. Towards that effect, the next RBI policy in June and the first Budget of the new administration in July 2019 will be key policy events to watch out for.

And lastly, with politics behind, we expect the market's focus to revert to fundamentals and corporate earnings. Modi 1.0 regime saw corporate earnings growing at a sub-optimal rate given the backdrop of structural and disruptive macro reforms. India's corporate profit to GDP ratio has moderated from 5.5% in 2008 to 2.8% in 2018. However, now the corporate earnings cycle seems to be bottoming out and with revival in credit growth as well as asset quality of corporate banks, fiscal 2020 looks like be the first year of healthy 15%+ earnings growth. With this, we believe, India is on the path of a sustained higher economic growth and prosperity. 

The writer is chairman and managing director, Motilal Oswal Financial Services