Posted On Monday, May 19, 2014
A decisive mandate for the BJP came as a surprise. Most exit polls predicted a coalition led by BJP. Whether the party in power is a coalition led government or a single party government, does not matter, as long as it’s reasonably efficient. The growth rate for Indian GDP has averaged at 6.3% over the last 30+ years and it included periods of coalition government.
The Congress led UPA which lost power in this election, was an ineffective coalition. Corruption scandals and high inflation nailed them.
Solid GDP growth... despite coalition governments
Source: Various Government website
Data Compiled by Quantum AMC
Reacting to the news, the stock market went up strongly in the initial few hours (around >5%), before it settled down with an increase of around <1%. Profit booking by short term investors who invested in the last few days was the reason cited for the flattish performance, despite the surprise mandate. It may be a cliche to say this but it was a case of “buy on rumors and sell on news". For the short term investors when a rumor becomes news, there is no charm in holding to stocks. The focus then shifts to the next big event and that could be the budget by the new government.
Meanwhile, the media will try to speculate on what the government could do in the first 100 days and what it should focus on etc… but life goes on as usual. While India has many problems to face, it would be good if the new government focuses on the following issues, at the least;
1. Bring down corruption levels. A slow growth of GDP in a clean environment is better than a high growth in a corrupt environment.
2. Address the supply side dynamics of the inflation equation. While rural India benefited from the policies of the UPA government, the transfer of income from urban to rural India reduced due to inflation. Many rural families have some member of the family working in urban cities and sending them money. High inflation reduced the ability of the member to send income home. This could have been one of the reasons for the Congress to have fared poorly in Rural India, despite their rural friendly policies. Since the RBI focuses on monetary tools to address the inflation, it would be good if the government addresses the supply side.
3. Having focused on the youth in its campaigns, hope and aspirations of economic well-being runs high. Therefore a focus on education and skill development is necessary and sought for.
The country's expectation from the BJP and Narendra Modi is high. Time will tell, if they will deliver. In the meanwhile, if the focus of the stock markets till now was on prices, it would now turn to earnings and on Global risks. Even as India is excited with the election and its outcome, data coming out from elsewhere in the globe is not very encouraging. At Quantum, the fund managers will focus on company research and it's risk and return matrix. Our predictable process allows them to do so, without being distracted by the election or the ever zooming stock prices.
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