Do it yourself

Once the elections are over and the contours of the new government are clear in the first fortnight of June, the focus will shift to the presentation of a full budget for the current financial year. To keep the tradition, only an interim budget (vote on account) for FY25 was presented in February 2024 to run the government till a new government is formed for the next five years. A final budget is expected to be presented by the new government in the last week of July 2024.

Some media commentators and market experts have attempted to sketch the final budget based on the election speeches and media reporting of the party’s manifestos. Fears have been expressed that in the event of a non-BJP government assuming power at the center, the pace and direction of economic growth and development may slow down as resources are diverted to fulfill the populist agenda of opposition parties. In a non-BJP regime, the budget allocation for capital expenditure and infrastructure development may diminish materially.

I find that this narrative suffers excessively from an intrinsic fear of change. I could not find anything in the manifestos of opposition parties, mainly Congress, that would suggest any change in the focus on infrastructure development and faster economic growth. Most social welfare schemes promised in the manifesto aim to reduce poverty and achieve equitable growth. Almost all these schemes are in vogue in many states and at the central level. A set of similar schemes is also promised in the BJP manifesto also.

Technically speaking, market participants should rejoice the Congress manifesto, as it promises a much larger amount of cash in the hands of consumers. This could help put the missing piece of Indian growth, viz., consumption, in place. Provisions like statutory guarantee for MSP can also boost the farm input sector. Consumers and Chemicals are two major underperforming sectors of the market.

Besides, if a non-BJP government assumes power at the center, the market participants may again begin to speculate about tax exemption for the LTCG and dividends, etc. On the other hand, several BJP leaders and think tank members have spoken about the need for estate duty (inheritance tax) in the recent past. This has been a fear factor in pre-budget analysis since 2017. The finance ministers have defended LTCG taxation and dividend tax. In the past 10 years, effective personal taxation rates have remained high and the proposed Direct Tax Code is expected to remove more exemptions.

Insofar as fiscal profligacy is concerned, there is no evidence that the UPA government (2004-2014) indulged in fiscal indiscipline during their regime. Center’s fiscal deficit did jump from 2.54% in FY06 to 6.46% in FY09 due to the stimulus necessitated by the global financial crisis. However, it was gradually brought down to below 4% by FY15. This was despite welfare schemes like MNREGA, fuel subsidies, etc. Similarly, during the NDA regime, the center’s fiscal deficit jumped to 9.17% in FY20 and has been on the mend since then. This is despite the implementation of Food Security, cash payout to farmers, and many other welfare schemes.

There is no empirical evidence to support the fears of fiscal indiscipline by a non-BJP government.

I find that most schemes and programs promised by NDA and opposition INDIA groups would be implemented, if at all, gradually and mostly by merging and optimizing existing schemes at the state and center levels. The fiscal burden will come only incrementally with the equivalent or higher rise in nominal GDP. The fear of likely fiscal slippages may therefore be unfounded.

Logically, the analysts should be looking forward to a stock market rally in the short term if a non-BJP government is formed at the center. Though, it may not actually happen. We may see a knee-jerk reaction down and then a recovery, after the full budget is presented in July.

In case of a BJP victory, we may see a euphoric move up and then a corrective move down as the budget may not enthuse the market participants and earnings fail to justify some lofty valuations.

In either case, after July 2024, the markets shall be guided by the earnings, macro conditions, and global developments, rather than the outcome of elections.

So to answer What if? – I would say Nothing, just chill.

Also read

What if? - Part 1

What if? - Part 2

What if? - Part 3

Verdict 2024: Market Implications

An analysis of the past 30 years of market trends provides no evidence to suggest that elections, the form of government, or the strength of a particular party in the parliament impacts the market performance significantly. However, it is common to see higher volatility during or around elections.

Insofar as the fear of a multi-party coalition or a fractured mandate is concerned, I believe, the investors should be relieved by the prospects of a true coalition coming to power. Because, in the post-independence era, the best periods for the Indian economy have been those when a “coalition” government was in power.

It is however important to note that by “coalition” I do not mean just a multi-party government. In my view, coalition government means where people with diverging socio-economic policies jointly participate in a government. Empirical evidence suggests that such coalition governments in India have agreed on a common minimum agenda and focused on executing the same, avoiding conflicts and logjams.

The first cabinet of India post-independence had R. K. Shanmukham Shetty (Finance), Shyama Prasad Mukherjee (Industries) B. R. Ambedkar (Law) and Jagjiwan Ram (Labor). These people did not subscribe to the Nehruvian socio-economic agenda, but we got a robust socio-economic framework. The singular governments of Nehru (post BRA, RML, SPM - 1956 and 1961), Indira Gandhi (1971, 1980), Rajiv Gandhi (1984) are not known for good governance or transformative socio-economic reforms.

Morarji Desai (1977 – FERA dilution, Gandhian socialism), V. P. Singh (1989 – tax reforms, social justice), Chandershekhar (1990 – disinvestment, fiscal reforms), PV Narsingh Rao (1991 - liberalization, delicensing), Devegoda/IK Gujaral (1996 – dream budget), Vajpayee (1998, 1999 – divestment, infra development) and Manmohan Singh (2004 – RTI, RTE, UIDAI, Right to Food, Right to Healthcare, MNREGA, Civil Nuclear Deal, FDI in retail & pension etc.) were all coalition governments. These governments are all remembered for socio-economic reforms causing fundamental changes in the socio-economic milieu of the country. None of these governments is remembered for non-governance, anti-market policies or anti-business stance.

The incumbent government has taken three major initiatives in the past 10 years, that have helped Indian equity markets:

(a)   Abolition of 86% of currency notes in circulation in November 2016. This measure is popularly believed to have benefitted the large organized sector businesses (mostly listed) at the cost of smaller and marginal businesses (mostly unlisted).

(b)   Implementation of GST from July 2017. This is also popularly believed to have enhanced the competitiveness of large businesses (mostly listed) at the cost of smaller unorganized and non-compliant businesses.

(c)    Promoting local manufacturing through production-linked incentive (PLI) schemes for a variety of sectors.

However, the gains from these initiatives have not been true to the expectations due to the unpredictability that crept into the policy framework and sub-optimal execution.

Thus, in my view, the policy risks in India from the political side are low and not to be much bothered about. The key risk is execution and this risk has little to do with the form and constitution of the government of the day.

Insofar as the market performance during coalition or minority governments is concerned, there is no evidence that markets have performed poorly due to the form or constitution of government.

2024: Market after elections

Regardless of election results, the markets may remain volatile and directionless until a government is formed.

Bonds: The bond market will be guided by the full budget for FY25 that may be presented in the last week of July 2024. A significant violation of fiscal discipline, and disappointment in the inclusion of Indian bonds in global indices may lead to a sell-off. Else, we may see a stable bond market. A good monsoon, as forecasted by IMD and other agencies, may brighten the outlook on inflation, and a softer RBI monetary policy stance.

Equity: The corporate earnings for 4QFY24 have been below the consensus estimates. This has resulted in downgrades in FY25 and FY26 earnings forecasts. If the trend continues in 1QFY25, we may see further earnings downgrades and de-rating of the market in general.

A BJP victory, as widely expected, may extend the rally till mid-July. After that, the market direction would be determined by the budget proposals and earnings outlook.

In a less likely situation of an INDIA government, we may see a knee-jerk move downward that may get reversed in the next few weeks. After that, the market direction would be determined by budget proposals and earnings outlook. In this case, however, we may see a material sectoral rotation towards consumption, given the INDIA promise to afford significant cash in the hands of consumers.

In any case, the impact of election results may not last beyond July 2024. The strategy should therefore be to actively look for opportunities (to buy or sell) in case of any material rise or fall in prices on or after 4^th June.

Also read

What if? – Part 1

What if? – Part 2

In the past two months, many readers have asked about my expectations of the outcome of the ongoing general elections and the likely impact of it on the Indian economy and financial markets. I am glad to offer my opinion, with the rider that I am an independent observer of Indian politics and have no affiliation or inclination towards any particular political party or group thereof.

Economic impact

I believe that in India economic policies, and therefore financial markets, are politics agnostic. I do not see the outcome of general elections impacting the Indian economy in any significant manner.

A study of the history of Indian politics would suggest that, unlike the Western democracies, only an abysmal minority of Indian voters are strongly committed to a political or socio-economic ideology. Contemporary issues, personalities, and election promises usually dominate the political discourse in India. Economic issues raised during elections are mostly confined to the slogan of poverty alleviation and handouts to the voters. Unfortunately, no political party has taken the issue of poverty alleviation seriously. Therefore, no one has bothered even to outline a conceptual or ideological framework for solving this problem.

Ideologically, in the early days, the Congress Party abandoned the most acceptable and perhaps most suitable Gandhian Socialism in favor of Nehruvian Socialism - a poorly mixed concoction of Leninist central planning (central ownership and management of resources and businesses) and British colonial legacy (discretionary patronage to the faithful and loyal). The model was certainly at cross-purpose with the constitutional federal structure. Poverty, poor governance, and corruption were natural off-springs of this system.

BJP started with Deen Dayal Updhaya's Integral Humanism. However, in the 1990s it briefly adopted Gandhian Socialism (which is not too far moved from Integral Humanism) as the principal doctrine. The present leadership has, however, mostly followed a poorly mixed concoction of Leninist socialism and the Laissez-faire model used by some developed economies principally the USA.

Politically leadership preaches "Human Being" as the fulcrum of policy making. Whereas the executive is more focused on "Business" and "Macroeconomics" as the central theme. The conflict is for everyone to see. The consequence is slower and inequitable growth.

Until the mid-1980s, the people at the left end of the spectrum exercised significant sway at the bottom of the pyramid in Indian society since independence. They controlled most of the labor unions. Though divided between Marx, Lenin, and Mao they still were the preferred choice of landless, oppressed, and intelligentsia. There was a time when being poor, intelligent (economist, thinker, poet), or rebellious meant being communist.

Things however began to change in the late 1980s, after dismantling of the USSR and the German wall. The Lenin and Marx were relegated to the history lessons. The economic reforms initiated by Deng Xiaoping in China further pushed back the traditional Marxists.

Insofar as the socialist parties occupying the left of the center space in Indian politics are concerned, they deserted both Lohia and his ideologue Gandhi as soon as they came into power. Degenerated into motley feudal, they show little commitment or preference to any specific economic idea.

As I have been reiterating rather frequently, that the governments in the past 40 years have mostly adopted similar socio-economic policies consistently irrespective of their form or constitution.

The Ctrl C + Ctrl V has been the most preferred practice in the formulation of most government policies and programs, with some semantic changes to give it a different hue.

For example, consider the following:

1.    The process of meaningful tax reforms was started by the then finance minister V. P. Singh (Congress 1984-89) by rationalizing the tax slabs, lowering maximum marginal tax rates substantially, rationalizing wealth tax and introducing CENVAT. The recommendations of Raja J. Chelliah Committee (1991-93) on tax reforms constituted by the government (Congress 1991-96) have since formed the basis of tax reforms in India. All successive governments have implemented these recommendations. No government has sought to reverse or alter the process started by the Congress government (1984-89). These recommendations formed the core of the much awaited Direct Tax Code. The origin of the tax proposal like lower tax rate with lesser exemptions and no wealth tax could also be traced to that.

Committees formed under the chairmanship of other members of the Raja Chelliah Committee like Govinda Rao, Partha Shome and Vijay Kelkar, etc. subsequently updated the recommendations to provide further impetus to the entire process of tax reforms in the country.

It was the Finance Minister of H. D. Devegoda led United Front government who presented the most talked about "dream budget".

2.    The recommendations of the Narsimhan Committee (1991-92) appointed by Dr. Manmohan Singh, the then finance minister in the Congress government, have largely formed the basis of financial and banking sector reforms in the country. Most successive governments have implemented the recommendations consistently. P. Chidambram, the then finance minister in the United Front government (1998) had re-appointed the Narsimham Committee to make recommendations about the second-generation banking sector reforms. The report was submitted in 1999 to the NDA government which accepted the recommendations. However, almost all governments have failed to build a wider consensus on these recommendations and have only partially implemented them. But acceptance and rejection have been very consistent irrespective of the form and constitution of govt.

3.    The BJP led NDA government enacted the Fiscal Responsibility and Budget Management Act (FRBMA) in 2003. The arch-rival Congress led UPA-I government implemented the same in 2004 in letter and spirit. This still forms the basis of fiscal discipline at central and state levels, though implementation was suspended in 2009 in the wake of the global crisis and again in 2020 due to COVID-19 stimulus. The incumbent govt. has committed to achieving the targets in the next two years.

4.    The minority government of Chandrashekhar introduced a disinvestment policy in 1991. Every successive government since then has accepted the policy in principle. They have tried to incorporate disinvestment policy into the evolving economic model. However, they have consistently failed to implement the policy in the right spirit. None has achieved the disinvestment targets set in the respective budgets.

Prime Minister A. B. Vajpayee took it further by divesting many government monopolies like coal, power, roads, ports, airports, telecommunication, insurance, etc. Subsequent governments added to it by allowing private players in sectors like pension, defense production, etc. No government has sought to reverse the decisions of the earlier governments.

5.    A single national market (GST), as a desirable idea, was conceived long ago. Many governments deliberated and developed the idea. The incumbent government finally implemented it in 2017, when the infrastructure and logistics considered necessary for rolling out GST reached a reasonable stage.

6.    Programs such as cleaning the holy rivers of Ganga & Yamuna and provision of toilets in every home have been accorded priority by all successive governments.

7.    One of the key areas of corruption in public life has been the executive's right to allocate natural resources for commercial exploitation. The Supreme Court effectively curbed that right in its judgment in the allotment of 2G spectrum case.

An auction-based transparent regime is the outcome of the court-directed process, which is mostly irreversible and therefore party agnostic.

8.    The UPA government created enabling infrastructure for the digitalization of the economy through UIDAI, NPCI, etc. The subsequent NDA governments used this enabling infrastructure for the massive development of the digital transaction ecosystem.

9.    The NDA-1 government started the ambitious National High Development Program (NHDP) in 1998. The UPA government removed the obstacles in the implementation of this program through a remunerative and widely acceptable compensation and execution policy. The NDA-2 used it for accelerated construction of roads and highways, without seeking to change anything in UPA policy.

10.  The UPA government started a new practice of lateral appointment of professionals by appointing Nandan Nilekani to head UIDAI. The later governments continued with this practice and appointed many professionals to head the NITI Aayog.

From the above-cited example, it is evident that the direction of policy-making has been mostly the same on most accounts during the past three decades. The difference lies in the execution.

It is pertinent to note that the governments led by P. V. Narasimha Rao’s and Atal Bihari Vajpayee made many historic departures from the past and took many new policy initiatives.

The end of the Nehru era's license, quota & permit raj, abolition of capital controls and introduction of LERMS, entry of private players in civil aviation, opening of the financial sector, etc. were some major path-breaking reforms introduced by P. V. Narasimha Rao government.

Divestment of major government monopolies like power, roads, wireless communication, ports, airports, insurance & hydrocarbons, focus on rural connectivity, deregulation of fuel pricing, and liberal FDI regime, etc., were the key new policy initiatives during the Vajpayee led NDA regime.

The 10 years of the UPA regime introduced a new paradigm in the Indian socio-economic milieu, viz., the Right-based Socio-Economic regime. Right to Work, Right to Food, Right to Education, Right to Information, Right to Health, etc. some of the ideas propagated in their regime.

Implementation of right-based entitlement has been patchy and questionable, but no one has so far challenged the approach. The incumbent government has sought to partly implement the Right to Health that was promised by UPA in the last few weeks of its regime, through a universal health insurance scheme in the union budget for FY19. The current government has also enhanced the Right to Food program.

The UPA government signed a civil nuclear deal with the US. This started a new era of India’s strategic partnerships with developed countries like the US, France, Germany, Japan, and Australia, etc. The incumbent NDA government has taken this further through multiple bilateral agreements for Free Trade and movement of capital and labor with many of these countries.

The change that we have seen in the past ten years of the incumbent government's regime is the dominance of market economists (against development & social economists before) in the consultative bodies of the incumbent government. This change in my view is the outcome of the change in the global positioning of the Indian economy and markets. There is nothing to suggest that a change in the government at the center would materially change this position in the near-term, unless international developments completely change the global balance of power and global market paradigm.

In short, the economic policy of India is still a work in progress. all governments in India in the past 40 years have made incremental improvements in the policy framework to make it congruent with the scale of economic development and changes in India's position in the global economic and strategic order.

…to continue tomorrow

Also read

What if? Part 1