BJP govts are fiscal hawks: Morgan Stanley's Ridham Desai

Desai expects the government to continue on its path of fiscal consolidation in Budget 2017

The Bharatiya Janata Party-led (BJP) governments have been hawkish as far as fiscal policy is concerned, said Ridham Desai, head of India research and India equity strategies, Morgan Stanley. 

He expects the government to continue on its path of fiscal consolidation in this Budget too, and said the consolidated fiscal deficit, which is at a high of about 6 per cent, has room to fall. 

“If you look at what the Modi government has done in the past Budgets, or the National Democratic Alliance’s Budgets in the 1999-2004 period, or even those of states where BJP has been in power, you will see that they don’t believe in spending money just because the economy has to be revived,” he said. 

“BJP-led governments have historically seen a contraction in deficits and that’s the right policy for the government to have,” he added. Growth, he said, was slowly recovering and coming out of the dull phase of the last five to seven years.

Exports growth was accelerating, industrial production growth was at a five-year high and consumption was strong, he explained.  

As far as the markets are concerned, Desai doesn’t put much weight on the Budget or on the outcome of state elections.  “For markets, the Budget had become a highly overrated document,” he said. 

The current rally in the markets has more to do with global stock markets and a lesser-than-anticipated impact of demonetisation than with Budget expectations. “The intra-day volatility on Budget day has halved in the last 20 years,” he adds. He puts a caveat that only an extreme Budget would have an impact on the market trend. 

According to Morgan Stanley’s analysis, state elections too aren’t consequential to markets. They matter only if there is a shift in the political landscape like it happened in the 2013 state elections which gave a clear indication of a shift in favour of the BJP. 

“Hypothetically, if the BJP were to lose all five states, there could be some short-term decline, but it won’t change the market outlook for the next six months,” he added. 

“The market ultimately cares about what happens to growth,” said Desai. He is bullish on stocks and says valuations are attractive, both relative to emerging markets and to bonds. So on a relative basis, India is attractive; we are seeing growth. 

“Corporate earnings in the September quarter had been the best in five years. Had demonetisation not happened, the December quarter could have been the best earnings quarter since 2011. That gets deferred by three months,” said he. Only a global sell-off or a big upswing in commodity prices could put the India story at risk.