The Nifty hit an all time high edging past 6400 and Sensex jumped nearly 500 points in early trade as a BJP momentum swept Dalal Street. But is this just short-lived 'Modiphoria' glossing over weak fundamentals that will soon fizzle out?
A spate of sanguine calls from foreign brokerages citing the Narendra Modi wave had visibly riled the government not very long ago. Commerce Minister Anand Sharma had made his displeasure with Goldman Sachs very evident after it upgraded India on hopes of a NaMo led BJP forming the next government and asked the Wall Street bank to focus on its job rather than on politics. That didn't stop CLSA from suggesting in a report just two days later that a rally in stocks and the rupee was to be attributed to expectations of a Modi emergence. Credit Suisse too agreed that hopes of a Modi win had indeed spurred the market up move.
After yesterday's debacle, the present day government has little standing left to dispute such fervour from global analysts. But as we inch closer to the main elections, despite the BJP sweeping the state polls and a swing in the Sensex, the irrational exuberance about Modi seems to be wearing out.Market men are getting back to focusing on economic fundamentals rather than on the political euphoria that's gripped the street currently. Writing in his column last week (Read here) Abheek Barua – Chief Economist with HDFC Bank listed four questions investors must ask on the effectiveness of "Modinomics" before placing their bets. In a gist, they read something like this -
First, to what extent is the Gujarat model replicable for the rest of the country?
Second, what sort of allies will Modi be flanked by, and will they, with their own demands and agendas let him function as effectively as he does in Gujarat?
Third, with the Centre's fiscal woes unlikely to disappear with a change of government, can Modi defer big expenditure? If not, can he escape the ire of ratings agencies?
Finally, wouldn't a polarizing figure like Modi face unprecedented backlash from a Congress in opposition benches and other ideological groups making consensus building even tougher than it already is?
Barua's questions are pertinent to what's happening in the present context. The Centre's limited effectiveness in kick-starting stalled projects for instance through the CCI has been challenged by last mile state level clearances being held up. The government of the day has had to pay a heavy price to keep allies in check not only in its first term where it didn't enjoy a majority, but even during UPA II where the government had a bigger mandate. This as we all know has led to several key economic bills being stalled for years. The next government is unlikely to have a very big mandate and allies in all likelihood will play a big role.
On the fiscal front, aside of the load of implementing UPA's social programs that Barua talks of, reports have also suggested that the government could rollover $15 billion in subsidy costs to next year with Rs 45,000 Cr in oil subsidies itself likely to be pushed over according to Fitch. Where's the fiscal space left for Modi to stimulate the economy then?
"Even if Narendra Modi comes to power, I don't think he can achieve something significant in first year. Though Vajpayee was a better PM, his government couldn't do much in the first two years. All the major policies materialised only during his last year in office", Sukumar Rajah, MD & CIO, Franklin Asian Equities told the Economic Times, echoing Barua's views.
Others like Credit Suisse have also jumped on to the 'reality-is-more-complex' bandwagon and say central reforms will take at least 6-8 years to translate into meaningful growth.
"India has a federal constitution, and the role of the central government is limited mostly to policymaking. Critical growth drivers like law and order, state and local highways, rural roads and electrification are under state government control...That the growth of state GDPs relative to the overall Indian output is so sharply divergent over the past 20 years is proof enough that just central government policies do not really have that much of impact on growth" write Neelkanth Mishra and Ravi Shankar in their latest note (sourced from www.barrons.com).
Despite the immediate elation, the market also seems to be exercising caution."Playing on national elections with the market at 14.2 times forward P/E is just too much of a bet. We maintain our 12-month forward Nifty index target of 6,000" wrote CIMB in a note.
Rashesh Shah of Edelweiss meanwhile believes the positive impact of the state polls will not last long. "As with such events the impact will be short-lived and then global events - especially the Federal Reserve meeting in two weeks time and the decision on tapering - and the imminent RBI policy meeting will become centre-stage again" wrote Shah in a op-ed in the Economic Times.
But even as the markets bring some temperance to their view, India Inc continues to pin its hopes on a Modi flourish, more as a response to the present day disarray if nothing else.
A board member of a very large Indian conglomerate that Business Standard spoke to says that India has always flourished under a strong leadership. Business houses prefer to go to one or may be two individuals with their problems, but over the last 10 years, the political fabric has changed so much that the leadership at the centre has only gotten diluted. Multiple power equations have evolved and each one of these come with their own voice. Coalition partners are no longer just happy getting a share of the power, they demand equality in every decision that the government takes, which sometimes is just for the sake of nuisance value.
It not just the divergent forces within government that constantly seek to hijack policy making, but the unease between states and the Centre has also proved to be debilitating for business. A Corporate cites over a dozen cases where the government has overturned its own decisions after giving clearances to projects. Several global corporations have chosen to walk out of the country as they have found it impossible to navigate through the mire of central government, bureaucrats and state governments.
With things reaching a fever pitch, and a weakened almost lame-duck UPA unlikely to take any big decisions, much is being pegged on Modi as the perception is that he may give the central leadership the voice it desperately needs. Another CEO of another large conglomerate says he understands that Modi's autocracy may not work given India's diversity, but he's hoping that Modi manages to combine leadership strength with democratic principles.