Don’t count on euphoria alone

The stock markets, already riding high on an unprecedented euphoria, simply zoomed on Friday with the main stock indices climbing to record highs. Weeks before the elections, the markets seemed convinced of an NDA win. Each opinion poll, every exit poll projected a victory for the NDA. The very large win for the Narendra Modi-led National Democratic Alliance, which exceeded even the most optimistic projections, pushed the markets up even further.

The odds have favoured an NDA win. The issue really had been whether it will be a comprehensive win (as it turned out to be) or a partial win, which will require some amount of manoeuvring by the BJP as the leader of the NDA alliance to form a government.

Now that the verdict has been so decisive Mr. Modi and the NDA get a chance to deliver on their promises of stable government and good governance sooner than they probably thought. Government decision-making, it is promised, will be much faster and infrastructure projects which have stalled for want of one clearance or another will be revived.

Some of these initiatives, especially those relating to mega projects, were initiated by the UPA-II but they came too late in the day and in any case the average voter does not appear to be aware.

What drives the markets? The stock markets are convinced that Mr. Modi has a magic wand and all the shortcomings in policy making and executive actions that have kept India down will be rectified in record time. That is the only way the surge in stock markets can be explained. An optimistic scenario will unfold like this:

A stable NDA government can be expected to unleash economic reforms and engineer a quick, sustainable turnaround of the economy. Kick-starting the economy will involve de-bottling the stalled infrastructure projects. The next capex cycle will start. The Reserve Bank of India (RBI) will cut rates, either on its own or through political pressures. With greater confidence on India, foreign investors, already a strong force, will come in a flood. In fact, there will be such an embarrassment of foreign dollar flows that the RBI will be hard pressed to check rupee appreciation.

However, the reality is likely to be very different. It is never easy to translate political promises into action points and that too in double quick time. One reason is that the Centre alone cannot do much by itself to accelerate the economy. It has been estimated that just one-fourth of the stalled projects can be revived by the Centre alone. The rest are with the States. Delayed environmental clearances and legal bottlenecks might be difficult to be “unlocked” not within the timeframe that stock markets think should happen. Land acquisition for projects has become so cumbersome and the eventual acquisition cost will be so high that very projects will afford. Yet, in this as well as in mining, political parties, including the BJP, do not want to “dispossess” the landless, tribals and other weaker sections. The policy vacuum during the UPA-II rule resulted in the judiciary poaching into the executive domain with disastrous results for the economy. For instance, even with very large reserves, India has to import coal for its power projects.

Correcting these and more will take time. A supercharged BJP has not exactly been reformist. It has formally opposed FDI in multi-brand retail and did not co-operate in hiking foreign direct investment in insurance. Its reluctance at that time might have to do with scoring brownie points but in power it will find it difficult to manoeuvre towards reform.

Talking specifically of stock markets, they are prone to exaggeration, both when the election outcomes have been most favourable as now and also when the chips are down. Consequently, for the government an unrealistically-valued stock markets pose special challenges. To start with expectations from the new government have been raised sky-high, especially because the NDA alliance has done much better with the BJP getting majority of its own. With that kind of political mandate, there will be few excuses not to deliver on the economic agenda. The average investor need to be extremely careful. He might be caught at the wrong end of the highly volatile stock markets buying when they have peaked and selling when they are down. On May 16, the Sensex, after touching another all time high of 25000 — a 1000 point plus gain over the previous close, ended at a more modest 216 plus points above.

All these suggest that with an extremely impressive win, the Modi-led NDA should give utmost priority to managing expectations.

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Printable version | Jan 29, 2022 3:57:38 AM |

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