TREND: Equities want decisive mandate to result in decisive measures

Friday, May 24


By Chiranjivi Chakraborty


MUMBAI – The equity market's agenda for the new government is straightforward –- be aggressive in dealing with the tight liquidity for non-bank lenders, stem the decline in domestic consumption demand, and recapitalise ailing public sector banks to boost private investment.


The market has been enthused by the better-than-expected mandate to the incumbent government and with Bharatiya Janata Party bettering its tally of 282 seats from the previous General Elections, the hope is that it will be easier to clear politically difficult reforms.


This time, the BJP is set to secure 303 seats in the Lok Sabha, with the National Democratic Alliance seen sweeping 352 of the 542 seats contested.


Analysts said that though the NDA has secured a more decisive mandate this time, the new government has its task cut out from Day One.


Given its focus on ensuring an electoral victory, the government has largely been focused on populist measures over the past year, while dragging its feet on the pressing issue of resolving the crisis triggered by debt defaults by Infrastructure Leasing & Financial Services since August.


The constrained lending power of non-bank lenders after a near meltdown in the short-term debt market has meant that capital for growth and consumption is in short supply. Moreover, key linkages in the financial system need fixing and so far, the government and the Reserve Bank of India have been found wanting.


"In the new term, we would expect a shift towards reviving the business cycle, unclogging the financial system and building risk and investment appetite in the broader ecosystem," brokerage house Edelweiss Securities said in a report.


It believes these measures are imperative as private investment demand is languid, asset quality in the financial sector is still a challenge, the short-term debt market is still lacklustre, and consumption has been declining.


The trouble for the government is that currently it lacks the ammunition to go for a multi-pronged approach to deal with the problems that ail the economy, given the lower-than-estimated tax collections.


Bank of America Merrill Lynch believes that some of the ammunition may come from the Reserve Bank of India. It claimed that the huge mandate for the BJP means it will be easier for the Bimal Jalan committee reviewing the central bank's capital framework to transfer the entire excess reserves to the government.


The reserves, estimated at 1-3 trln rupees, could be used to recapitalise ailing state-owned banks, which have held private capital expenditure hostage due to their incapacity to lend.


It is also important for the government to consider further capital infusion into public sector banks that are flush with deposits but constrained from lending due to high provisions, brokerage firm Morgan Stanley India said in a report.


Morgan Stanley expects the new government to increase cash transfers to the poor, which may help deal with a likely fall in farm income given forecasts of below-normal monsoon rains and depressed food prices.


UBS Securities, though, is keeping its expectations in check. Largely, it sees incremental reforms that build on past measures, though it doesn't rule out some big bang measures to boost long-term structural growth in the economy.


"If you can't do difficult reforms with this sort of mandate, then don't know when they will happen," said Pramod Gubbi, fund manager with Marcellus Investments.


Benchmark equity indices have rallied more than 8% in the past four months in anticipation that the NDA will retain power at Centre. But further gains hinge entirely on how decisively and swiftly the government moves to address the issues constraining economic growth.  End


Edited by Avishek Dutta


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