Finnopinions July 2024
The election results in India proved that Democracy is still thriving and vibrant. The Indian public voted back the BJP but with coalition partners. The two main coalition partners are at the end of their political careers and more likely to look for benefits for their States and have a stable central government. Hence, policies are likely to be consistent but with more checks and balances.
India past
1947 - 1989 Stable Majority Government
The majority of Congress Governments are mainly dominated by one dynasty. The Governments were stable. The only period was the Emergency between 1975-77, after which Congress lost - but the Morarji Desai Janata Dal government only lasted a little over 2 years. The next Government of Charan Singh barely lasted 170 days, and he never faced Parliament as Congress withdrew its support from outside.
There were challenges during this period: the tragedy and chaos of Partition, the 1961 China war/liberation of Goa, the
1965 Pakistan war, and the 1971 liberation of Bangladesh, with its attendant refugee problem.
There were many years of drought and famine, and the Green Revolution only started in 1965, and it took years to reap the benefits.
Indira Gandhi carried out the first nuclear test in 1974 - Pokhran 1 - which she termed as a peaceful nuclear test - although Sanctions did follow.
It was a period of unsustainable personality cults from Nehru to Indira Gandhi to Rajiv Gandhi.
1989 - 2014 Coalition governments
In this period, there were 7 different Prime Ministers in 25 years.
India's average GDP growth in this period was 5.8%
There were 3 groundbreaking budgets during this period.
- Manmohan Singh's Budget of 1991 - the balance of payment situation forced the situation on the Narasimha Rao Government. The rupee was devalued by 20%, and the budget concentrated on liberalisation, privatisation, and globalisation.
- P Chidambaram's Dream Budget in 1997 under H.D. Deve Gowda. The government did not even have 100 seats and fell soon after. It was kept in power by support from the Congress from the outside. In the budget, he lowered corporate taxes, marginal individual taxes, customs duty, voluntary disclosure of income schemes, and set up the disinvestment panel.
- Although Atul Bihari Vajpayee was Prime Minister 3 times - and once for just 16 days, and another when the government fell by just 1 vote. However, between 1998 and 2004, he became the first non-Congress party to complete a full term with 182 members. In that period, he
came out with the National Telecommunications scheme, increased FDI limits in many areas, including banking and insurance, sold 11 profitable PSUs and 24 ITDC hotels, started value-added tax, and also the privatisation of airports.
The most unstable government was Chandrashekhar, which had just 50 M.P.s in 1990-91. To save India from default, he flew out India's gold to be kept overseas as a guarantee. He brought in Manmohan Singh as an advisor to attend cabinet meetings, so Manmohan was ready in 1991 for the liberalisation of the budget. He also allowed U.S. planes to fuel up in India during the Kuwait War.
In 1998 - Pokhran II - a sequence of 5 nuclear bomb tests to declare ourselves a Nuclear Weapon Nation was done under the coalition government of Vajpayee, and sanctions were declared on India again.
Other events faced by Coalition Governments are the Kargil war in 1999, the attack on Parliament in 2001, and the 26/11 Mumbai attack in 2008. The UPA signed the Nuclear Pact with the U.S.
2014 - 2024 Stable Majority Government
Stable majority Government of Narendra Modi
The GDP growth in this period was just 5.1%
The main reasons for the low growth in this period were:
- Ballooning Non-Performing Assets by the banks, which was a legacy from the UPA era, ending in the default of IL&FS and Yes Bank.
- Demonetisation did not have the intended results and stalled Economic Growth.
- Only able to sell Air India in this period.
- Covid, of course, stalled the economy.
Hence, history has shown that a coalition government can make bold decisions that do not really impact economic growth.
India map
With 7.8% GDP growth in Q4 of 2024, India is by far the fastest-growing country in the world.
Changing consumption patterns
- Consumption at 60% holds the largest share of the GDP.
- Urban consumption is robust, and rural consumption is picking up.
- Premierisation is becoming deeply ingrained in the Indian customer and is outpacing mass-consumption products. This is because the aspirational middle class is rising rapidly.
- Post-COVID-19 - demand is rising for luxury apartments.
Investment-led expansion
- Government capital formation remains steady, and private capex is showing a nascent stage of recovery.
- Currently Government Capex at Rs 15.7 tn is driving the growth engine of the economy. The emphasis on infrastructure is likely to unlock the virtual cycle of economic growth.
- Premierisation is becoming deeply ingrained in the Indian customer and is outpacing mass-consumption products. This is because the aspirational middle class is rising rapidly.
- Private Capex is likely to accelerate due to favourable government reforms, less leveraged corporate balance sheets, increased capacity utilisation, and increased end-use demand.
- Government initiatives to support manufacturing
i. Make in India - Vocal for Local
ii. PLI scheme - Incentives for key sectors
iii. National Logistics Policy - Plan to reduce logistic costs.
Rising exports
- Trends in exports tend to influence domestic consumption and capex cycles
- India is likely to gain export share as it benefits from China + 1 and the PLI scheme that supports manufacturing
- India achieved its highest-ever exports in 23-24, totalling US$777 bn, with electronics also growing fast.
- Global Capability Centres are rising rapidly in India. They are off-shore units set up in India and managed by the parent company to execute strategic services.
Macro stability
- Inflation is moderating and likely to continue with a normal monsoon
- Banks are well capitalised.
- External debt is in control. The balance of payments was actually positive in the last quarter, and forex reserves are rising.
- RBI is one of the few Central Bank actually making profits and has just issued its highest ever dividend to the Government of India of Rs 2.1 lakh crores.
After one day of uncertainty when the election results came in, the markets have just been moving one way - upwards. Today, the markets are pricing in terms of continuity of government and continuity of reforms, and the budget will reveal the blueprint for this government. For the equity market, the margin expansion story is more or less over, and valuations are on the higher side - hence, future market growth will depend upon earnings growth. Hence, we will look at earnings to continue growing at 15-20%. There have been many block deals with existing investors - and in some cases, promoters also selling some stake.
From Friday, June 28th, India has been included in the JP Morgan bond index, growing at 1% per month, up to a maximum of 10%. Bloomberg will also include India in their index starting from January 1st, 2025. Hence, there would be substantial inflows into the debt market, allowing for its deepening liquidity and likely lowering interest rates.
After a large run-up, there has been some profit booking. However, continue to hold precious metals as a hedge against possible rising inflation.
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