Reform hopes spur bulls after Modi’s decisive victory

ecord-setting Indian stocks rally after Prime Minister Narendra Modi scored a stunning victory for his party in provincial elections is drawing droves of foreign funds back into the subcontinent, raising hopes for a sustained bull run. Domestic equity funds have been receiving greater slice of household savings for months in the wake of falling bank deposit rates.

The upbeat mood, which took the 50-share Nifty index to a series of all-time highs last week, is being driven by heightened expectations that New Delhi would embark on tougher reforms needed to generate jobs for millions of people pouring into the workforce every year. Unlike China where communist diktats rule without any opposition, in India’s chaotic democracy the mantra of consensus holds sway to carry through policy initiatives.

The process is painstakingly slow and impedes growth. It took 16 years for the central legislation for a Good and Services Tax (GST) to be passed in 2016; the reform was mooted in 2000. Despite winning a two-thirds majority in national elections in 2014 — and the first single-party majority in three decades — Modi faced obstacles to carry through reforms.

The GST, which replaces multitude central, state and municipal levies and will help convert the subcontinent into a common market, is now expected to roll out from July 1.

Foreign funds have scooped up shares worth $2.9 billion (Dh10.6 billion) this year, most of it in February and March, after pulling out $4.6 billion between October and December last year.

“The key driver is that the Modi administration is seen as getting a second term in 2019 and some more reforms can be expected. His hand was greatly strengthened by the outcome of the recent state elections where his party did so well,” Cameron Brandt, senior global analyst at Boston-based fund tracker EPFR Global, told ET Now television channel.

“It does not hurt that a lot of the other standard matrix for India look pretty good — from growth rate to declining inflation. I definitely think that the perception of the economic reform stories were the key driver of the flows.”

Reforms faith

The biggest message that warmed the hearts of money managers and businesses alike was the vote of approval for Modi’s hard-nosed decision making, specifically his penchant to focus on the bigger picture.

Last November, he stunned the nation by announcing a plan to suck out 86 per cent of the currency in circulation, causing havoc to cash supply and consumer spending.

Amid restrictions on cash withdrawals, long winding queues, particularly of the middle and lower class, at bank counters hogged the limelight on TV channels for about 50 days. Opposition lawmakers and talking heads had a field day, cherishing the unpopular move would prove to be Modi’s Waterloo.

The election to five state assemblies and municipal polls elsewhere were seen as a midterm referendum of the central administration. Modi’s Bharatiya Janata Party (BJP) grabbed four-fifths of the legislature seats in Uttar Pradesh, the country’s most populous and impoverished state, indicating that people — particularly the poor and marginalised, cutting across religious and caste divides — believed the government’s explanation that demonetisation was necessary to combat tax dodgers and terror funding.

Two steep increases in the price of non-subsidised cooking gas prices — by Rs65.50 per cylinder on February 1 just a few days before voting began and by another Rs86 on March 2 with two rounds of voting to go in Uttar Pradesh — underscored Modi’s leadership qualities to pursue sound economics over political compulsions.

In contrast, the previous government of Manmohan Singh’s inaction sent the fiscal deficit soaring, spurred production of more polluting diesel vehicles and hurt the economy severely.

Noted political commentator Ashok Malik pointed out in an article in the Times of India that Modi’s decision to raise prices of cooking gas negated “the lazy assumption that the electorate rewards only populism and punishes a government taking hard decision”.

“Despite the price rise, UP renewed its faith in Modi — not because it was happy to pay more [nobody ever is] but because it trusted Modi with doing the right thing,” he wrote.

In a bid to create more jobs, New Delhi is considering easing rules for foreign retailers who are willing to sell more goods produced locally.

Under the proposal companies with a permit to sell local food items such as Amazon.com Inc that has applied for a licence, may be allowed to offer India-made stuff like toothpaste, soaps, cosmetics and so on for up to a quarter of their total sales. Also on the table is a proposal to allow more foreign direct investment in multibrand retail such as Wal-Mart if they market local products.

Campaign

The underlying push behind the proposals is to provide a thrust to Modi’s “Make-in-India” campaign, which aims to make the country a manufacturing hub.

The top-30 Sensex and the broader Nifty surged 2.5 per cent each, their seventh weekly rise in eight weeks, and are poised to surpass their record highs, market participants say.

While the Nifty hit an all-time high of 9,218.40 before closing at 9,160.05, the Sensex ended at 29,648.99 after touching 29,824.62 — within sight of its March 4, 2015, record of 30,024.74.

“This rally has legs,” said equity strategist V. Venugopal.

The election results were a mandate in favour of transforming India, and is a positive trigger that will take the current rally forward, he told BloombergQuint.

Veliyath, whose stock picks have won laurels, is upbeat on Transport Corporation India, Tata Global Beverages and HSIL.

“They are very unlikely to be disrupted by the world. Considering the structure of India’s demography and how these companies are big brands; they are the frontrunners in many segments,” he told the financial news provider.

“These companies have not really moved in the last few years, so they are safe bets.”