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What does the stock market want? Here's a wishlist, Mr Modi!

Aprajita Sharma     May 24, 2019

Prime Minister Narendra Modi has bagged a second term with thumping majority as the BJP improved its 2014 tally of 282 to 303. Verdict day pulled the plug on political uncertainty, pushing benchmarks Sensex and Nifty to record highs of 40,124 and 12,041, respectively. However, the euphoria fizzled out shortly as concerns over expensive valuations amid no material rebound in earnings triggered a reality check.

Experts say the macro environment is unfavourable, and the rally seen in the run-up to the election outcome has factored in most positives. They feel that the government has limited fiscal means to fix slowing consumption, tackle rural distress and revive private investments. Generating employment is another headache, they say, while hoping the government may soon take steps to address pain points.

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"Markets prefer continuity. Economic policies of this government are fairly well known to us. While one can argue that their implementation has not been as good as one would like, we know it is a step in right direction. Big reforms like GST and IBC have happened. We don't expect new reforms, but how well the new government ensures ease in already implemented reforms holds the key," said Tushar Pradhan, chief investment officer of HSBC Global AMC.

The last one year of PM Modi saw the NBFC crisis, and problems with big corporate houses such as Essel Group, Reliance Anil Ambani Group and Jet Airways. Automobiles sales hit an eight-year low. FMCG players sounded caution in their commentaries. Growth in gross domestic product (GDP) also hit a five-quarter low of 6.6 per cent in the December quarter. The factory output growth slipped steadily in the three months since. IIP contracted by 0.1 per cent year-on-year in March, lowest in 21 months.

Dalal Street expects FY18-19 GDP growth to come in at 7 per cent - only marginally better than 6.7 per cent in the previous year.

"Changing the orbit of Indian GDP growth from current 7 per cent level to higher level (eventually to aspirational double-digit growth) is what markets are expecting from the second term of the government," says Nilesh Shah, MD & CEO, Kotak Mutual Fund.

Besides, tackling liquidity challenges that has slowed credit disbursement, especially for MSMEs should be the top agenda of the government. "Money market is in bad shape. The new government will have to take urgent remedial measures to ensure that HFCs and NBFCs don't run asset liability mismatches," said Saurabh Mukherjea, Founder, Marcellus Investment Managers. Brokerage JM Financial in a report pointed out that the formalisation of the economy post demonetisation and the implementation of GST have impacted MSME segment's cash flow that got further aggravated by NBFC crisis. "The government needs to take immediate steps to improve the liquidity situation through increasing disbursement to MSME segment," it says.

The government will also have to raise resources to implement various poll promises it made in last few months - assured income support of Rs 6,000 a year for farmers, affordable housing, electricity for all and Ayushman Bharat Yojana that will provide health insurance to over 10 crore poor and vulnerable families. "To spend resources while adhering to the fiscal discipline of the FRBM Act will be a major challenge," observes VK Sharma, Head -PCG & Capital Market Strategy, HDFC securities.

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Taxation and divestment

Experts although agree that between LTCG and STT, one should be abolished, they are clear the government will maintain a status quo. "Taxation is a fiscal issue. There is not much on the revenue side that the government tinkers with LTCG or STT. I don't see any strategic thrust there," says Pradhan. However, Dalal Street will prefer if the government reduces corporate tax. "Indian corporate taxes are high compared to many parts of the world. Markets will be enthused if the new government takes steps towards reduction in tax rates," says Sharma of HDFC Securities.

Joseph Thomas, Head Research- Emkay Wealth Management hopes for a further rationalisation of the slabs of the GST but doesn't see it happening. When the GST Council brought down rates last, the tax collections went up. So, while more rationalisation is needed, this will affect revenue collection. They may not do it in the first year of five-year term. Markets expect the government to change the gear of divestment policy. "Strategic sales of PSUs rather than piecemeal divestment will attract a lot of interest and help garner resources. Widening and deepening the retail market for government securities and corporate bond markets will help reduce the overall cost of capital," suggests Sharma.

Proactive steps on recapitalisation and reorganisation of the PSU Banks and land and labour reforms should also hold priority. Thomas of Emkay expects the next Budget to have solid framework on reviving rural income and rural job growth. So far as foreign investors are concerned, they see Modi as a man with a vision. Now that US Federal Reserve has signalled that interest rates are not going to go up very sharply, global investors will hunt yields in emerging markets. "I believe money flow won't be country specific, but will be regional. So, EMs in general will be a preferred play, but of course India will get its share," says Pradhan.

With election fever now tapering off, corporate earnings, Budget and developments around US-China trade war are back in focus. More than anything, the chatter around who will be the next finance minister has gripped Dalal Street.

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