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An Overwhelming Majority; But Work Still To Be Done Thursday, May 23, 2019

Narendra Modi of the BJP is on course to become the first Non-Congress Leader to become the Prime Minister of India for a second successive term.

His party, the Bharatiya Janata Party (BJP) and its allies the National Democratic Alliance (NDA), have seemingly bettered their humungous win of 2014.
In 2014, The NDA had won 334 seats out of 543 seats and the BJP on its own got 282 seats.

The 2014 campaign was fought in the back drop of high anti-incumbency, what with the ruling Congress party led alliance facing massive charges of corruption and the economy in shambles reeling with high inflation, high fiscal deficit, slowing growth and a weaker currency. Modi and the BJP offered hope, raised aspirations and promised decisiveness in shaping the country’s fortunes.
Although many called it a Modi Wave then, but the BJP vote share was around 32%, not resembling a wave.

This time in the back-drop of a slowing economy (hurt by demonetization and GST), high unemployment, farm distress and facing a united opposition in key large states, winning such a decisive mandate is truly a wave. The Indian voter, especially residing in the Northern half of the country, has overwhelmingly chosen their prime ministerial candidate.

This wasn’t expected and many didn’t trust the ‘EXIT POLLS’ which suggested this result over the last weekend. Although the NDA has lost some seats which they won in 2014, but they have gained in new seats, most pre-dominantly in eastern India, threatening the dominance of left and socialistic ideological parties in that region. India, like many other countries in the world, has no qualms in voting in a right wing, majoritarian party.

From the economy and markets point of view though, there is a lot in store and lot to be done. We lay down the immediate and medium term priorities for the government.

As a matter of immediate priority, we would expect the BJP to focus on:

• Arresting the slide in the GDP growth trajectory. There has been a visible drop in economic activity in the last one year and the twin impacts of demonetization and GST has continued to impact economic activity, consumption and the organized sector. The current freeze in lending by NBFCs could also be impacting consumption activity. There needs to be a consolidated and coordinated effort to increase confidence and boost economic activity.

•Farm Incomes and Farm prices remain low despite the MSP increases. Farm Incomes and Rural economy are heavily inter-linked and more comprehensive efforts, reforms and implementation is required to improve sentiment.

•The fiscal situation remains grim and looks good only on pure arithmetic jugglery. The new finance minister needs to set the fiscal house in order by being transparent and provide a fresh guidance on efforts of fiscal consolidation.

From a medium term roadmap perspective, we would expect the government to focus on the following:

•Identify and Launch 5-10 large scale Public Infrastructure investment program with a view to create jobs and economic activity at a large scale.

•Increase and widen the scope of Rural Development through its Rural Housing , Rural Roads, Rural Income and Farm Development programme.

•Focus on administrative reforms in easing the rules and regulations that hamper entrepreneurship and job creation.

•Simplify both the GST and the Direct Tax system by framing rules and regulations which focus on making it easier for those who are and want to be compliant as against framing complicated rules which try to catch the offender.

•India needs to attract long term capital from long term global investors. Create a positive environment of stability and confidence which will allow long term investors to participate in a bigger manner in the India growth story.

The reaction of the markets are suggestive of status-quo. With the result now confirmed, it is back to economic realities, fundamentals and global challenges.
The markets were kind of already priced in for a BJP win and the Equity and Currency markets actually ended negative at the end of the day, after an initial euphoric reaction in the morning trades.

Bond markets had rallied post the exit polls and continued a bit more today on the confirmation of the result. The markets will expect a 25-50 bps rate cut from the RBI in the coming meetings. More importantly, they would expect the RBI to increase and maintain surplus liquidity in the system which will further aid the bond markets and may lead to some more drop in bond yields.

The risk however remains on the fiscal front. Although the BJP has pushed and delivered some fiscal consolidation but it remains challenging and masked in off-balance sheet funding. Also, with the current economic slowdown, there will be a clamour from the government to loosen the purse strings and stimulate the economy.

The world is treading on trepidation on the overall US-China Trade war situation and that we believe will be the most challenging aspect on how the government and the RBI manage India from any adverse impacts of a global trade war.


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