First 100 days of Modi 2.0 and the stock markets

Frankly, 100 days is too short in the tenure of a government and much shorter for the economy. But the last 100 days have certainly been eventful; and how!

Sep 11, 2019 01:09 IST India Infoline News Service

BSE Modi
What is the difference between majority governments and minority coalition governments? A minority coalition government is judged based on what they delivered while the majority government will be judged on what they did not deliver. Like Modi 1.0, that is the essential disadvantage Modi 2.0 started off with. That has been the narrative in the last 100 days too.
 
After the euphoria came the stock market reaction
 
Take a quick look at the performance of key indices during the 100 days of Modi 2.0
Key Indices (Since May 23rd 2019) May 23 (Val) Sep 06 (Val) P2P Returns (%)
Nifty 50 11,657 10,946 -6.10%
Nifty Mid Cap 4,789 4,255 -11.15%
Nifty Small Cap 3,078 2,621 -14.85%
Nifty Auto 8,217 7,102 -13.57%
Nifty Private Bank 16,988 15,161 -10.75%
Nifty PSU Bank 3,151 2,381 -24.44%
Nifty FMCG 29,724 28,650 -3.61%
Nifty IT 15,539 16,035 3.19%
Nifty Metals 2,822 2,358 -16.44%
Nifty Pharma 8,498 8,069 -5.05%
Nifty Realty 268 254 -5.22%
Nifty CPSE 2,266 1,938 -14.47%
Nifty Consumption 4,768 4,604 -3.44%
Nifty Commodities 3,592 3,127 -12.95%
Nifty Energy 16,129 14,591 -9.54%
Nifty Infra 3,211 3,025 -5.79%
Nifty MNC 12,831 12,268 -4.39%
 
Barring the IT index which gave positive returns (largely due to the weak rupee), all other indices have given negative returns in the first 100 days of Modi 2.0. Of course, the correction was more pronounced in sectors like PSU Banks, metals, commodities and CPSEs which corrected for more sector-specific reasons.
 
Budget – That was the trigger for the fall
 
The sharp fall in the market was triggered by the Union Budget announced on July 05, 2019. On Budget day, the index again got close to its peak so the damage in the interim period was not really significant. However, the budget made some announcements like increase in public shareholding to 35%, buyback tax and higher surcharge for FPIs, which did not find favour with investors. FPIs have sold equities to the tune of $6.50 billion since the budget and that is what put pressure on the markets. Of course, the public shareholding proposal has been put off and FPI surcharge has been scrapped but the damage was already done to market sentiments. We are essentially seeing the lag effect.
 
Reforms in top gear: Merger of PSU banks
 
It is said that stock markets are a slotting machine in the short run but a weighing machine in the long run. 100 days is a short time for market evaluation, so we look at some significant macro steps taken. The government announced the merger of 10 PSU banks into four banks. This will help banks reduce their cost of operations, centralize the treasury functions and get access to a larger capital base. Also, it streamlines the capital infusion by the government into banks. That has already happened with two large merging banks; PNB and Union Bank getting 40% of the infusion. There will be union-related challenges but the merger was long overdue. India just did not require so many PSBs.
 
Boost to government revenues; thanks to RBI
 
One can argue about the merits of this move but having an overcapitalized RBI when the budget was running short of funds was really not worth it. The RBI transferred Rs176,000cr to the government during the year which included dividend payout of Rs123,000cr and Rs53,000cr return of excess capital. The government and RBI must ensure that other checks and balances proposed by Jalan Committee are adhered to.
 
But what about GDP growth and consumer demand?
 
GDP growth faltered to just 5% for June quarter leading to Moody’s lowering India’s full year growth target to 6.2%. That would be really inadequate considering India’s $5 trillion dreams but slowdown is a global reality that India needs to contend with. The focus should be on removing GST bottlenecks, regenerating consumption tax incentives and open up markets and FDI in a much bigger way.
 
Beyond economics; the politics of Article 370
 
Abrogation of Article 370 has been a long standing commitment of the BJP. In a brave move, the government abrogated the special status for J&K under Article 370 and made Jammu & Kashmir and Ladakh into two separate union territories. This effectively brings the entire state (up to the LOC) under direct central control. Of course, the real test will be how the government handles the situation once normalcy is restored and curfew is lifted.
 
Chandrayaan 2 – Moon is not the limit
 
Launching Chandrayaan 2 on a shoestring budget was a risk in itself. The government took a bigger risk by making the proposed landing on the moon a live affair. Although the landing was not as originally intended, it marked a big stride for Indian space research, which even NASA lauded. Above all, the government successfully showcased the skill sets of ISRO to the Indian people. Despite the landing not going through as expected, millions appreciated that India had come of age although space research was still work in progress.
 
The first 100 days of Modi 2.0 have been definitely eventful and action packed. While growth continues to be a concern, the efforts are discernible. As for the markets, we need to revisit the Nifty at the end of 200 days of Modi 2.0.

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