The euphoria in the stock market is attributed to the potential success of
Narendra Modi in Indian election. The BSE Sensex has surged 21% since September
2013 to scale a record high of 24,000. In September 2013, Modi was announced
BJP’s Prime Ministerial candidate. There has been a clamor for a ‘strong’
government in Delhi. However, the government does not have any magic wand. It
has to take some tough decisions.
Here are pointers that explain why stock markets want Narendra Modi so badly:
• Policy clarity: Stock markets hate uncertainty. They believe that Narendra Modi and the Prime Minister’s office would have more power than the incumbent Manmohan Singh’s PMO. This is critical for future investment plans in India. The new government is expected to create a more conducive climate for investment. “The market sentiments will be impacted based on their effectiveness in handling the key sensitive policies like foreign direct investment, foreign affairs, nuclear and defence policies and approach towards bringing in black money,” Karvy, a stock broking company said in a note.
• Investment and infrastructure: Due to uncertainty over policy and slow decision making, public and private investment in India fell to 15% of Gross Domestic Product in 2013-14 from a peak of 26.2% in 2008, according to CRISIL, a credit rating agency. This was the key reason for the slowdown in the economy. The stock market expects this trend to reverse. The new government is expected to clear large infrastructure and investment projects faster than the existing government.
• Fiscal deficit: When a government’s expenditure exceeds income, it has to borrow from the market to fund the additional expenditure. This borrowing is the fiscal deficit. The fiscal deficit has remained above 7.5% for the past four years. RBI is forced to provide money to fund the government expenditure and keep interest rates high. This hurts ordinary people and businesses alike. It adds to inflation and increases borrowing rates. To keep this in check, the government has to either cut expenditure or increase revenue. The stock market expects the new government to implement a nationwide goods and services tax (GST) and boost revenue as promised in the election manifesto. According to industry estimates, a rise in revenue could help the government boost overall economic growth to 7% from less than 5% now.
• Spending wise: The government spending on subsidies keeps prices of fuel, fertiliser and food artificially low. This means the government pays the market price or a high price to procure them and sell it at a low price to people. To continue to pay for subsidies as growth slowed, the UPA government cut productive expenditure on healthcare and education and other expenditure, according to CRISIL. “Productive expenditure by the government over a 2-year period – fiscals 2013 and 2014 – rose by a mere Rs 110 per person whereas spending in the remaining categories (subsidies) rose more than Rs 1,900 per person,” according to CRISIL, a rating agency. Lower productive spending by the government in the past couple of years added to an already slowing growth and discouraged private investment. As a result of this, businesses created fewer jobs.
The stock market expects the new government to reverse this trend. Job prospects for people could improve if the government spends money on creating new assets along with offering subsidies food and fuel to the poor. In short, the new government led by Narendra Modi is expected to spend the public money wisely instead of spending it largely on entitlements.
Here are pointers that explain why stock markets want Narendra Modi so badly:
• Policy clarity: Stock markets hate uncertainty. They believe that Narendra Modi and the Prime Minister’s office would have more power than the incumbent Manmohan Singh’s PMO. This is critical for future investment plans in India. The new government is expected to create a more conducive climate for investment. “The market sentiments will be impacted based on their effectiveness in handling the key sensitive policies like foreign direct investment, foreign affairs, nuclear and defence policies and approach towards bringing in black money,” Karvy, a stock broking company said in a note.
• Investment and infrastructure: Due to uncertainty over policy and slow decision making, public and private investment in India fell to 15% of Gross Domestic Product in 2013-14 from a peak of 26.2% in 2008, according to CRISIL, a credit rating agency. This was the key reason for the slowdown in the economy. The stock market expects this trend to reverse. The new government is expected to clear large infrastructure and investment projects faster than the existing government.
• Fiscal deficit: When a government’s expenditure exceeds income, it has to borrow from the market to fund the additional expenditure. This borrowing is the fiscal deficit. The fiscal deficit has remained above 7.5% for the past four years. RBI is forced to provide money to fund the government expenditure and keep interest rates high. This hurts ordinary people and businesses alike. It adds to inflation and increases borrowing rates. To keep this in check, the government has to either cut expenditure or increase revenue. The stock market expects the new government to implement a nationwide goods and services tax (GST) and boost revenue as promised in the election manifesto. According to industry estimates, a rise in revenue could help the government boost overall economic growth to 7% from less than 5% now.
• Spending wise: The government spending on subsidies keeps prices of fuel, fertiliser and food artificially low. This means the government pays the market price or a high price to procure them and sell it at a low price to people. To continue to pay for subsidies as growth slowed, the UPA government cut productive expenditure on healthcare and education and other expenditure, according to CRISIL. “Productive expenditure by the government over a 2-year period – fiscals 2013 and 2014 – rose by a mere Rs 110 per person whereas spending in the remaining categories (subsidies) rose more than Rs 1,900 per person,” according to CRISIL, a rating agency. Lower productive spending by the government in the past couple of years added to an already slowing growth and discouraged private investment. As a result of this, businesses created fewer jobs.
The stock market expects the new government to reverse this trend. Job prospects for people could improve if the government spends money on creating new assets along with offering subsidies food and fuel to the poor. In short, the new government led by Narendra Modi is expected to spend the public money wisely instead of spending it largely on entitlements.
