NDA 2.0: The new government has its task cut out

What a stunning mandate for the incumbent NDA! Despite the hardships faced after demonetisation and implementation of the goods and services tax (GST) along with the ongoing rural India farm stress, to return to power with an absolute majority, is symptomatic of the charisma of Prime Minister Narendra Modi, along with the absence of any coherent opposition.

Yes, there is euphoria as I write this piece in early afternoon even as data keeps pouring in on party-wise leads. It was extremely crucial from the country’s perspective, that there be a continuity of government, for the unfinished policy agenda of the NDA government to be taken to its logical conclusion. 

As usual, there will be a honeymoon period when everyone will expect the government to use a magic wand and relieve the country of all its challenges. The average man on the street will be expectantly waiting for election promises to be fulfilled, especially generating employment and relieving the deep seated rural and agriculture distress.  

That said, innovative thinking is a necessity now. Global investors and even Corporate India will be enthused of a stable and strong government at the Centre and we should expect robust foreign portfolio investor’s (FPI) and foreign direct investment (FDI) flows in the coming months. 

The task for the government is clearly set out. There is a massive slowdown in the domestic economy as can be seen from the dismal index of industrial production (IIP) numbers, as also the fourth quarter (Q4) earnings declared by many fast moving consumer goods (FMCG), automobiles , consumer durables companies.  

The government needs to think innovatively to relieve the country of the prevailing liquidity crisis in general, as also alleviating the distress prevalent in the real estate sector. Though capacity utilisation is inching upwards of 75 per cent, I believe revival in private sector capex cycle is still 12 – 18 months away. Post IBC, promoters will be very careful before committing to major capexes knowing fully well that Banks and the system will not bail them out if the revival takes longer than expected.  

Infrastructure and recapitalisation of banks are key areas the government must focus on. The government will have to step in and aggressively pursue various infrastructure projects in roads / power/airports / ports/ railways, which can jump-start the slowing domestic economy. Public sector banks, which have over 60 per cent market in the domestic credit dispensation need to be recapitalised to enable credit to flow to the credit starved SME/ MSME sectors, who can drive employment very quickly.

I hope the government uses this opportunity to go for massive privatisation of public sector enterprises, which will not only release resources, but send the right signal globally and bring in the much needed private sector efficiency in such enterprises. I believe the government should pursue judicial, direct tax and labour reforms to further improve our global ‘Ease of doing Business’ ranking.  

So, what’s in it for investors?

As far as capital market investors are concerned, I believe post the euphoria of a strong stable mandate at the centre, they would be keenly looking at the cabinet formation and whether the government is able to attract credible technocrats with specific domain knowledge in areas of finance / agriculture / social infrastructure etc, so that the execution of the PM’s vision is par excellence. Global headwinds in terms of US- China trade war, rising oil prices, slowdown in China will continue to haunt local and global investors. Strong messaging from the government in terms of key portfolio ministers and finance bill will be the key drivers in the short-run for increasing FPI flows, as also for revival of the slowing domestic inflows in the domestic mutual funds.

Krishna Kumar Karwa is managing director at Emkay Global. Views expressed are his own.