This is an objective assessment of where the Modi government’s economic policies are steering our stock markets…
… and how we should keep up-to-speed with these policies
Here’s an analysis of the economic policies of the Modi government. This article gives a broad insight of the direction that India is headed, and the challenges. Of course, I’m assuming policy continuation by successive governments, and with that said, here is what we are looking at:
1. Import Substitution, Defence Manufacturing and Technology Absorption
The “Make in India” program (with a special focus on defence) involves inviting foreign companies to set up shop in India, collaborate with Indian companies and manufacture products for the local and export markets.
India’s defence budget is a huge — about INR 3,60,000 crores. If foreign companies set up local collaborations, we will benefit from the technology transfer and $$ savings.
These moves are clearly aimed at conserving foreign exchange, making India a manufacturing hub but it looks like a very long term plan and results should start trickling in only after 5-10 years. The good thing is action has started on the ground.
If successful, this program will turn our existing blue chips companies into global blue chips, and the rupee will dramatically appreciate in value.
Companies like BHEL, BEML, L&T, GMM Pfaudler and all those who can manage a foreign collaboration should grow phenomenally big.
But, like I said, this is a long term program, don’t expect miracles.
2. Electric Vehicles by 2030/ Renewables Thrust
If executed as per plan, the all electric vehicles policy could be a gamechanger.
The Modi government also has pledged at the Paris Climate Meeting that by 2030, 40% of power requirement will be fulfilled by renewable energy.
It will result in ZERO oil imports — massive savings on import bill (approx $120 billion per year).
We will witness a dramatic decrease in pollution.
Massive demand for power will result (great for power utilities, renewable power companies)
Massive demand for new vehicles and maybe for installing new electric engines in old cars
Massive generation of iron and steel scrap (lowering metal prices in the bargain)
Refining companies also will have to diversify majorly or face extinction.
3. Deregulation of petroleum products and fertilizer prices
This baby will not be easy to implement, and if implemented could plunge the government into political chaos. It also does not seem practical to implement it without raising farm incomes or by providing a minimum income at least to those in need. But this too does not seem doable at the moment.
4. Affordable Housing + Smart Cities + Village Networks
Work’s started on affordable housing already and you can expect a massive demand for cement, iron and other construction materials.
The smart cities are lagging behind though, and government watchers are wishing the government moves quickly.
The thing about this program is that the government has to lead the funding initiative because if private builders muscle into the space, the goals will not be fully met because it is natural that the private sector would like to profit handsomely.
The question then is how much can the government finance, and whether it has the resources to launch smart cities, road-network every village, create affordable housing?
This is a huge question mark and time will tell how this and successive governments implement these programs.
5. Digital Payments / Banking
Well, we all know that digital payments are fast catching up and that many folks have opened bank accounts, and that digital payments will keep increasing by the day.
The flipside of this is that banks have started charging on a host of transactions, and as transactions keep increasing, these banks will end up making super profits.
That is the banks that survive.
We also know that the current NPA mess is reflecting on banks’ efficiencies. Highly placed executives of the RBI, such as Viral Acharya, are of the opinion that inefficient banks that cannot manage their capital must be merged with stronger banks or hived off.
There’s truckloads of action expected in the banking space. Watch out for that and stay invested in banks.
6. Opening up of FDI in virtually all sectors
Check the BJP’s India reforms website and you will see that it intends to open up all most sectors to FDI.
This is contrary to what they were saying while in the opposition, but it is nevertheless beneficial for the country.
The government is also cutting down on red tape, permissions and though it has not been successful so far, is honest in its efforts to ease doing business in India.
As an example, China was mostly a “backwaters” nation once upon a time until it opened itself to FDI. Today it is a global manufacturing hub.
7. PSUs — Survival of the fittest
The NITI Aayog has started suggesting to the government to hive off unprofitable PSUs. And why not, why should people pay for unprofitable and unproductive businesses.
Going forward, I am sure we will witness an increased public-private participation in the running of state enterprises. Unprofitable and unviable PSUs will be either shut down or sold off.
In general, PSU stocks will continue to do well because the government wants to increase their dividend from viable PSUs and sell off an unviable PSU to a private player.
This is more or less the economic agenda that has been set by the Modi government…
BUT.. where will so much investment come from?
The answer is .. EQUITY MARKETS…
A good chunk of NPAs are getting converted into shares and banks will only recover the NPAs if the equity markets are buoyant
Investors are pouring money into mutual funds and SIPs because FD returns are not attractive. Real estate returns also have been subdued to negative for the past many years.
20% of the money lying in Provident fund accounts will find its way into the stock markets
DIIs are pumping money in the stock market and earning handsomely as well. FIIs are following suit.
The stock markets are rising like crazy and today it does seem that though the party may pause at some point in time, it will not stop.
.. BUT the social and cultural engineering can throw a spanner in the works..
Though the Modi’s government economic vision looks good on paper (demonetization set us back by 8 months, but it’s done with), the real bugbear can be the BJP’s pique with the minorities and the cultural engineering (eat this, worship that, etc.) that is being squeezed into the system.
If this gets out of hand, then the economic reforms can go for a toss. Modi would do well to curb the loose elements in his party that are running amok.
To sum up
Things look good on paper though the economic plans of the Modi government appear long term, and it does appear that public patience is wearing thin.
The social and cultural engineering also could play spoiler.
Let us hope the government can steer things right and take India forward.
As far as the stock markets go, it does seem like a good plan to stay invested and get into companies that will benefit from the reforms (as above) and from government spending. A black swan also could screw up the stock market.
Image credit: Business Standard