In anticipation of major policy shift at the centre, investors have poured huge amount of capital in equity markets. They were patiently waiting at the bay till late December 2013 to see if there was a remote chance of improvement in business activities across the country. Elections results of Rajasthan, MP & Chhattisgarh gave investors a hope that the voters are likely to challenge the status quo and choose Modi’s vision of inclusive growth and development agenda at the central elections. The market rally began well before Modi’s rigorous national election campaign. Investors expected that the Modi government will do away with the policy gridlocks of the previous complacent government and dark clouds hovering over the companies would clear. However, growth agendas take time to materialize due to high public investments required at the initial stages.
We can experience a similar situation now. Extremely high optimism surrounds the Arun Jaitley led Budget 2015. How much of it will really translate into immediate capex pick up is debatable. Unless the concerns related to infrastructure development, bank re-capitalisation and tax structure rationalization are addressed, no company in or outside the country is going to commit capital layout. Looking at the performance of the current government over last 9 months, not a single rupee of expenditures is committed towards any of these causes. All that we see is the much hyped Swacch Bharat’s long term agenda, financial inclusion gimmick in the form of ‘Jan Dhan Yojgana’ and hyperbolic ‘Make in India’ campaign. These do not cater to current economic concerns by any means.
Additionally, fuel subsidies and rural development reforms are called off, which are hurting the sentiment in rural areas. The government was really very proactive in filling its treasuries by hiking excise duties on petrol, cutting stake in Coal India Ltd and auctioning of coal blocks. However, these revenues are non-recurring, which earn them no brownie points to improve their credit rating. Unless structural reforms are addressed by improvement of tax revenues as a % of GDP and reduction of gap between fiscal revenues & expenditures, the government will not enjoy any accolades from central banks, rating agencies and investors.
Lost in the noises, equity investors have been waiting patiently at the finish line wherein they have factored in all positives of the economy in market prices. Although there has been no uptick in earnings of the companies, the markets have gone gung ho in elevating stock prices. Surely, many are bound to burn their fingers as they will lose patience till the earnings catch up over next few years to justify the current stock prices.
With elections coming up in crucial states like Bihar (2015), West Bengal (2016) & UP (2017), it would be interesting to watch whether the government goes for a populist or a growth budget. It would be wise to watch from the sidelines till the expectations materialize. Caution is advised to the eager investor till the market rationalises.