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May 28, 2019

Impact of Modi 2.0 on Indian markets and IR

Anuj Sonpal assesses what Narendra Modi’s landslide re-election means for India

Last week, India, the world’s largest democracy, voted for Narendra Modi for a second straight term as its premier. The country saw the largest voter turnout in history, with 67 percent of its 900 mn eligible voters heading to the ballot. For the first time since 1984, the trend for a coalition-led government was reversed and a single political party won 55 percent of the electoral seats, paving the way for decisive reforms.

When Modi was elected India’s Prime Minister in 2014, the Indian economy was in the doldrums. The central government was plagued by a paralysis of policies, primarily due to corruption. Modi promised that acche din or ‘good days’ were ahead and expectations were high for the economy to do well under a pro-business political leader who was against corruption and known for acting firmly.

The Modi government’s 2014 manifesto pledged a slew of bold reforms and programs to address widespread issues. A few were successful and won accolades and appreciation from the majority of the population and also the world, while others missed the boat, and many are still a work in progress.

Some of the major reforms and programs were: The implementation of a uniform goods and services tax, demonetization, deregulation of petrol and diesel, the liberalization of foreign direct investments, Swachh Bharat mission – or Toilets for All – the Make in India program, aimed at turning the country into a global manufacturing hub, a Housing for all program and the much awaited Real Estate Regulatory Authority Act. And, although the effectiveness of these programs can be debated, we cannot take away credit from the Modi government for trying.

Accomplishments and disappointments    

Some of the major achievements in its previous term were: The implementation of fiscal discipline that led to a fall in fiscal deficit and brought inflation under control. Infrastructure development made significant headway as well. The ‘Ease of doing business’ ranking, published by the World Bank, saw India jump 23 positions to 77th place in 2018 and 65 positions since 2014.

During Modi’s first term, stock market performance saw the Bombay Stock Exchange’s SENSEX rise by 57 percent, the BSE mid-cap index by 82 percent and the BSE small-cap index by 67 percent. This was mainly driven by unprecedented inflows from domestic and foreign institutions, even though growth in corporate earnings remained subdued.

The number and value of IPOs also soared until 2018. Then, in 2018, the markets were impacted by bank fraud, a slowdown in the auto sector, and skepticism over the National Democratic Alliance government winning by a majority again.

But there were also major failures, including the government’s demonetization plans. Although a bold step was taken to eliminate the black money market, around 99 percent of the banned notes ultimately came back into the banking system. And the plan had an adverse impact on economic growth, causing the unemployment rate to rise.

What will Modi do next?

If the past five years have been any indication of what lies ahead, the wave of reforms would likely continue with the ruling party enjoying a smoother policy making process. A major focus will have to be on enhancing rural income, increasing employment and delivering on the Housing for all scheme, among many others.

Investments in infrastructure growth, coupled with fiscal discipline and further liberalization of foreign direct investment norms will remain a priority to pave the way for Modi’s Make in India dream and achieving its targeted top 50 rank in the Ease of doing business list.

With the government delivering on these aspects the growth cycle is bound to improve, resulting in improved corporate earnings, which in turn will result in higher capital inflows to the stock markets. One can’t predict whether achhe din are ahead or not, but Modi surely has an important task to learn from the mishaps of the past term to steer the country through these interesting, yet crucial times.

Work to do on the IR front

IR has gained significant importance in India. Although this is just the beginning, the adoption of investor relations as a function in Indian companies remains negligible compared to global markets and the existing IR standards still lack sophistication. With over 5,000 listed companies across India, the competition for investor and analyst attention will continue to remain strong.

The risk is that un-nurtured relationships and poor visibility will result in low stock valuations. Since all signs are pointing towards higher capital inflows in the stock markets from both domestic and foreign institutions, IR teams have an opportunity to diversify the investor base through proactive communication strategies, an area where external IR agencies can significantly help bridge the gap as well.

Lastly, and most importantly, the importance of corporate governance standards today is higher than ever. Recently, the Securities and Exchange Board of India accepted various recommendations made by the Kotak committee on ESG standards, which Indian companies are mandated to incorporate starting from the first quarter of financial year 2020.

The IR teams must do whatever it takes to align the management and board’s focus on the implementation of these ESG norms and also communicate the same to the investor community.

Anuj Sonpal is founder and CEO of Mumbai-based Valorem Advisors