Credit Suisse, Morgan Stanley and Nomura suggest moves to bring down inflation, kick start capex cycle and pass laws that are currently stuck
After 30 years, the Indian electorate has given a decisive outcome in general elections with a single party crossing the majority mark needed to form a government. The election results gave a clear and strong mandate for the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA), which should ensure faster decision-making and enable accelerated implementation of the economic reforms, feels research analysts.
According to analysts, the focus now shifts to the composition of key cabinet ministers that is likely to be announced by end-May and the upcoming budget, probably by end-June or early-July, even as the markets are looking forward to the reform agenda.
Nomura feels that with political clarity emerging, business and household confidence is likely to rise. Increased capital inflows and rising asset prices will likely enable firms to raise more equity capital and reduce their debt burdens. Faster execution will enable de-bottlenecking of investment projects and drive the capex cycle, albeit with a lag. Enhancing the supply side of the economy, coupled with continued prudent monetary policy, should encourage a steady improvement in India‘s macroeconomic fundamentals – namely gradual disinflation and smaller and more stable twin current account and fiscal deficits. Improving economic fundamentals should lead to an upgrade in India's sovereign credit rating outlook, says Nomura in a research note.
Similarly, Credit Suisse feels legislative reforms, including goods and services tax (GST) would be the key for the Narendra Modi government. "The government can move much faster on bills that have already been introduced into the Parliament. Of the 128 bills pending in the two houses of Parliament, the 68 that were with the Lok Sabha will lapse and need to be reintroduced but can be with low effort, and the 60 with the Rajya Sabha can continue. However, most have low economic impact. In our view, the ones with high impact are GST, the Mines and Minerals (Development and Regulation) Bill (MMDR Bill) and the Commercial Division of High Courts Bill. Of these, the GST bill is likely to be taken up first," it said in a research report.
According to Morgan Stanley, the electorate’s strong and high quality mandate is for development, which increases the chances that the Modi government focuses on accelerating growth and slowing inflation. "More importantly, we believe that the government could contain the less effective redistribution policies so that rural wage growth slows towards nominal rural gross domestic product (GDP) and the fiscal deficit is controlled. We now feel more confident that India will emerge from the stagflation type of environment over the next few quarters. While in our base case forecasts we had assumed an outcome of a stable political government the actual outcome has been stronger than expected. Reflecting this optimism, we now expect India’s GDP growth to accelerate from 4.7% in QE March 2014 to 6.8% in QE March 2016 compared to our previous estimate of 6.2%," it said.
Nomura, which sees India at an inflation point from a medium term perspective, however cautions about the time required for these reforms. It says, "Economic fundamentals always change slowly, but a combination of factors – growth bottoming out, increased inflation-fighting credibility of the Reserve Bank of India (RBI) and now a strong mandate for the BJP-led NDA government – suggest that economic fundamentals are likely to gradually improve in the coming years. Importantly, these reforms will take time, but as they progress they should feed off each other and unleash other positive indirect effects on the economy."
The priorities of new government
Credit Suisse feels that the Modi government should give highest priority to recapitalisation of public sector bank (PSBs), accelerate coal mining, power distribution reforms and agriculture reforms, especially for fruits and vegetables, eggs, milk and meat/fish to bring down food inflation.
"In the medium term, " Nomura says, "we expect reforms to focus on infrastructure development, boosting agriculture productivity, fiscal consolidation aided by tax reforms and urbanisation."
Morgan Stanley, on the other hand outlines a six key policy reforms for the new government. It includes, improvement in business environment, improving allocation of natural resources through transparent mechanisms, focus on urbanization, focus on improvement in infrastructure, reducing fiscal deficit and managing rural wages in line with productivity.
Bills currently pending in the Parliament
NDA still a minority in Rajya Sabha
One of the concerns emerging from the election results is that the NDA is a minority in the Upper House of the Parliament and, hence, will not be able to pass controversial laws. However, Credit Suisse feels that even though the NDA has only 26% of the seats in the Rajya Sabha currently (62/240), it may be difficult for the fragmented opposition to stall legislation permanently. "While improving performances in the forthcoming Assembly elections in Maharashtra, Delhi, Haryana and possibly Bihar may increase the BJP's seats in the Rajya Sabha by 2016, the BJP may still have to reach out to the principal opposition parties for effective floor management," it said.
In the event that a bill does not find acceptance in the either house, the President can call for a joint session of the Parliament and a simple majority in such a session is enough to pass the bill. The joint strength of the two houses is 790 and the halfway mark is 396. The NDA’s combined strength in the parliament is 395 (333 in the Lok Sabha and 62 in the Rajya Sabha). Indeed, one-third of the Rajya Sabha representatives rotate every two years so there will be fresh inductees in 2016 and likely greater representation of the NDA if it gains in subsequent state elections.
The election results underpin the rising aspirations of India's youth, desire for growth and development and strong leadership that is driving the political debate in the country. This increases the probability that the Modi government will focus on development and governance as its prime agenda. It also sets the stage for India’s structural story to unfold in the coming years, feel the analysts.