Power shift from BJP to NDA – Will this change the policy mood?

June 13, 2024
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Greetings from Team Carnelian!

We have always maintained that risks often come from “unexpected sources”. The last few days have given us a slight glimpse of the same with the market reacting to extremes on both sides. People with a view on either side turned out to be right 😊. The largest festival of democracy on this planet has just concluded with the equity markets seeing a wild swing during the entire week – NIFTY hit a fresh high on Monday (3rdJune) followed by a ~9% correction on Tuesday (4th June), to recovering back completely by the end of the week! Thank God it is behind & settled.

For many it was one of the most watched out plausible risk for the Indian markets. Coalition parties have given their commitments and Mr. Narendra Modi has been sworn in as the Prime-Minister of India for the 3rd consecutive term (the only second person to get a 3rd term).

With no absolute majority for BJP, market participants are apprehensive about whether this government will be as strong as the previous two! Let’s break down our understanding of the situation.

NDA will be a stable government; in fact, historically some of the path breaking reforms have been undertaken during coalition governments periods
Irrespective of the political regime, Indian fundamentals are very solid
Reforms for Bharat Amritkaal have been laid out; mega trends cannot be reversed (read)
Our stance on portfolio construction.

NDA will be a stable government; in fact, historically some of the path breaking reforms have been undertaken during alliance governments

The magical number to form a Union Government in the Indian democracy is 272. NDA (as per the pre-poll alliance) has secured a total of 293 seats. Out of this, BJP has 240 seats, TDP (regional party – Andhra Pradesh state) 16 and JDU (regional party – Bihar state) 12. Both the key NDA allies have extended their support to BJP for making Mr. Narendra Modi as the Prime Minister. Interestingly, post-polls, some of the smaller parties and independent MPs have extended their support to NDA taking it to a total of 303 seats. Now even without the TDP and the JDU, the government continues to be meaningfully above the magical number of 272. All-important ministries – Finance, Home, Defence, Railways, Power, Road & Transport will continue to be run by the existing regime thereby reducing the ambiguity especially regarding continuity of policy. The Prime Minister in his victory speech re-iterated their renewed commitment towards taking tough/bold measures to make India a developed country, thus making it very encouraging and comforting.

We believe that the newly formed government will continue its focus on Atma Nirbhar Bharat and domestic capital formation.

Anti-incumbency creeps in especially when the same leaders continue for 10 long years (rare to get re-elected). However, the outcome of this election ensures that the democratic institutions rightly work for the vibrancy of the democracy. This mandate also puts a strong opposition in place – a vital pillar for any thriving democracy.

Nonetheless, historically, India has seen some of the major economic reforms undertaken during the coalition government periods. In the early 1990s, PV Narasimha Rao’s government was a minority government, which brought a host of reforms including abolishing license-permit raj, privatisation and a market-oriented economy. During HD Deve Gowda’s government, P Chidambaram the then Finance Minister brought in a ‘Dream Budget’ in 1996 that included lowering income tax rates, removal of surcharge and reduction in corporate taxes. The Voluntary Disclosure of Income Scheme (VDIS) introduced by P Chidambaram helped broaden the tax base and increase tax buoyancy over a period. The NDA coalition regime in early 2000’s framed the Fiscal Responsibility & Budget Management law for fiscal rectitude. It also unleashed the New Telecom Policy by replacing fixed licence fees for telecom firms with a revenue-sharing arrangement. It also brought in the Information Technology Act, in 2000, that laid the foundation for the e-commerce market as well as de-regulating oil subsidy and allowing OMCs to price petrol and diesel freely. This government further made India an official nuclear power by conducting nuclear tests. UPA -1, under the leadership of Prime Minister Mr. Manmohan Singh also carried out several progressive reforms too.

We believe that the current NDA government will be a stable government and given the vision of PM Modi, it is unlikely to shift its focus from faster sustainable growth. One could see some populism being adopted including higher spending for rural India – however, we do not see this to be alarming at all.

India’s fundamentals are very solid

Keeping the political talk on sidelines for a while, India is on a very strong fundamental footing. Historically, fault lines of Indian economy have generally come only from 5 factors – Current Account Deficit, Fiscal Deficit, Debt to GDP (leverage), Inflation & Weak banking system.

Whenever India has faced any economic downturn, it has been a combination of one or more of the above factors. Whether it was the 1991 crisis, when India had a few weeks of forex reserves left or in 2013 when India’s current account deficit reached 4% following a sharp currency depreciation or the banking crisis from 2015-2018 post reckless lending or any other time of crisis – it has always been linked to these factors.

Today, India is one of the best placed on all of these counts.

India’s CAD has come down from 4% to around ~1% and looking to move towards becoming current account surplus in the next 4-5 years. This is a very big, structured repair.
India’s fiscal deficit has come down to 5.6% in FY24RE vs 6.7% in FY22. This was initially budgeted at 5.8% of GDP. Fiscal deficit is also on the path of consolidation.
Leverage is much better compared to other countries. Indian Government’s debt to GDP is at 83% vs 100%+ for developed nations
Inflation in India is much better managed now at mid-single digits vs high single digits/early double digits that used to be the case earlier.
The banking sector has also come out of the NPA woods. Net NPA levels have come down to <1% now vs +5% during FY17/18.

Reforms for Bharat Amritkaal have been laid out, mega trends cannot be reversed

From 2014 to 2024, a strong foundation for the Amritkaal period has been laid through a series of reforms on 3 major fronts.

Digital Transformation – Digital identity (Aadhar), Payment gateway (UPI), Open Credit Enablement Network (OCEN), ONDC, Aarogya Setu, Ayushman Bharat, CoWIN, DigiLocker, DigiYatra, Mpassport, FAStag etc.
Economic Reforms – Goods and Service Tax (GST), Insolvency and Bankruptcy Code (IBC), Real Estate Regulation Act (RERA), Jan Dhan, Production linked incentives (PLI), Atma Nirbhar Bharat. PLI schemes and Atma Nirbhar Bharat programme are increasing India’s appeal as a global manufacturing hub.
Infrastructure Reforms – Railways – high speed rail, Vande Bharat, DFC, Roads/Bridges – Bharat Mala, Atal Tunnel, Chenab River Bridge (world’s tallest railway bridge), Dhola Sadia bridge (India’s longest bridge), Airports – UDAN, Smart City Initiative, Others – Ports, Sagar Mala, Gati Shakti Yojana, Inland Waterways.

What is even more important is the change in the soft foundation (mental fabric) in the form of mindset and culture, the way we think. There are some big tectonic shifts which have happened/ happening across the country, which makes us believe Amritkaal is here to stay (read). India always had the potential but somehow always struggled to realise it. One always needs a catalyst to make it happen. Last ten years of work on changing the mindset & culture is what makes us believe “This time it’s different” and India will be able to achieve its goal of Viksit Bharat by the time she turns100.

All these structural reforms and the tectonic shifts in mindset are providing a firm and a stable foundation for the growth that will follow in India’s Amritkaal.

Several Mega trends which will unfold over next few decades will drive India’s growth during Amritkaal. (read)

Our stance on portfolio construction

Mr. Narendra Modi has been sworn-in as the Prime Minister of India for the third consecutive time. We believe the policy of capital formation, infrastructure creation and promotion towards domestic manufacturing will continue in its truest form. We are not making any material change to our investment hypothesis across any of our strategies.

We are getting positive on consumption and healthcare sectors now and have added a few names over here. Rural spending will pick up in the upcoming period. Many of the companies could report high single to low double digit volume growth for FY25/26E from the current muted volume growth of 1-3% YoY. We expect the Per Capita Income to grow 7x and urban population to grow 2x during India’s Amritkaal. India is the youngest country in the world and has significant under-penetration across categories of consumer durables, 4W auto, air passenger traffic, super-market stores, leisure, entertainment, etc. We believe India consumption story has a long runway in the Amritkaal period.

As the Indian economy transitions to a developed nation – Viksit Bharat by 2047 with a GDP of USD 29tn (~7x from today), investing in India today, is a once in a lifetime opportunity, like the Japanese Economic Miracle, leading to significant wealth creation during the Amritkaal period. India will continue to command a premium attracting massive flows both domestic & foreign. We also believe that INR will not depreciate further as we move from Current Account Deficit to Current Account Surplus country just like how China, Japan, Korea did. India will be one of the fastest growing large economies in the next 25 years. Whenever any large economy grows at a healthy pace, it opens opportunity for many more new sectors to emerge.

India is standing at an inflection point and is going to experience its “Amritkaal” period over the next 25 years. The underlying currents are very strong. We believe this is the ideal time to invest in India’s Amritkaal and reap the benefits of multi-year compounding.