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Business News/ Market / Mark-to-market/  Six charts on what Narendra Modi means to the markets
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Six charts on what Narendra Modi means to the markets

The charts, culled from market and economic data, provide snapshots of the government's performance

As the Narendra Modi government marks its first anniversary, the performance of the Indian markets is flagging. Photo: Abhijit Bhatlekar/MintPremium
As the Narendra Modi government marks its first anniversary, the performance of the Indian markets is flagging. Photo: Abhijit Bhatlekar/Mint

The following six charts, culled from market and economic data, provide snapshots of the government’s performance over the past one year:

The Modi premium fades in equity markets

As the Narendra Modi government marks its first anniversary, the performance of the Indian markets is flagging. The MSCI India index (in dollar terms) is up 5.8% in the past year, underperforming emerging and developed markets such as China, Japan, Hong Kong, the US and the Philippines, as you can see from the chart. But the chart also shows that Indian equities have done better than many other markets.

The problem with this mixed picture is that the election of the new government had generated a lot of euphoria, much of which has frittered away. Why else should a market such as the Philippines do so much better than India? The Modi premium is slowly fizzling away as investors reassess their hopes and assumptions and take a cold, hard look at the economy. Corporate earnings continue to disappoint, investment growth remains sluggish and the government appears to be struggling with its reform initiatives.

FIIs: losing patience?

Foreign institutional investors’ (FIIs) fascination with the Indian markets has ebbed. Since the election of the new government in May 2014, FIIs had apportioned an increasing proportion of their fund inflows into the Asian region (ex Japan) to India. As the chart alongside shows, using trailing six-month inflows, allocation rose to 88% and 73%, respectively in January and February this year, from 37% in June 2014. But since then, it has steadily declined to 34-35%.

Kotak Institutional Equities says the allocation to India funds has dropped in recent weeks. Still, as analysts at DSP Merrill Lynch Ltd point out, global emerging market funds have a massive 510 basis points overweight position on India vis-a-vis its weight in the emerging markets’ index. This could limit future FII inflows.

In other words, the recent decline in FII flows may just be the beginning. After all, unlike earlier claims of bold reforms and a quick recovery in the domestic economy, most analysts have toned down expectations. To make matters worse, India’s tax department has shot off tax notices to a number of FIIs for payment of dues arising from the applicability of minimum alternate tax or MAT.

Rising confidence in Indian credit

Over the past year, Indian credit has turned less risky for foreign investors. One yardstick to gauge that is the premium on credit default swaps (CDS)—instruments used by bond buyers to insure against defaults. The bonds issued by State Bank of India (SBI) and Exim Bank are seen as quasi-sovereign and, as the chart shows, the risk of default for the former has come down over the past year-and-a-half. In January 2014, investors were paying 304.7 basis points (or $307,000 premium for protection worth $10 million.) This has halved to 156 basis points in May this year—pointing to rising confidence among foreign investors.

To be sure, CDS spreads on emerging market bonds as gauged by a Markit index have also come down but not by the same extent as SBI or Exim Bank bonds. This can be attributed to India’s current account deficit narrowing sharply over the past few quarters and the fall in its vulnerability to external shocks.

Consumption growth has been sluggish

After the Modi government came to power, inflation has come down sharply, interest rates have fallen a bit and the income tax burden on individuals has moderated. But excise duty on some products and the service tax rate has risen. On balance, consumers have gained.

However, the pickup in consumption growth has been very gradual and in pockets. Consumer goods companies say growth is recovering—although rural growth rates outstrip urban markets—but at a slower than expected pace. In urban markets, which matter for higher value purchases, growth has been sluggish.

Discretionary demand seems to be under pressure, especially for high-ticket items. Using the Index of Industrial Production, or IIP, for consumer products as a proxy for consumption growth, there is a small recovery visible in non-durable products. Growth in output of durables has worsened as people postpone discretionary purchases. But recent months have seen a bottoming out.

With a recovery in investment demand nowhere in sight, consumption demand holds the key to an economic recovery.

The elusive push to infrastructure

An “infrastructure push" was one of the avowed aims of the new government. But a year after they were elected to power, there’s hardly any visible change at the ground-level. Data from a Mumbai-based brokerage indicate low tendering activity—a decline of 23% in value terms through the 12 months until March 2015, across segments such as roads, ports, railways and power. Moreover, high competition has kept bid prices low—in some cases, 15-20% lower than the benchmark cost. This implies lower profitability.

True, the government is making attempts to improve matters. But the number of stalled projects, especially in the roads BOT (build-operate-transfer) segment, continues to be high. However, with the recent initiatives at fast-tracking clearances and with higher budgetary allocation increasing, the current year may be better for the infrastructure sector.

Government capital expenditure falls in 2014-15

One criticism of the UPA government was that it spent too much money on leaky welfare schemes and allocated too little to capital expenditure. Over the years, the proportion of the Union budget spent on subsidies went up, while the proportion spent on capital expenditure had been coming down. It was hoped the new government would reverse the process and kick-start investment demand and fund infrastructure. They certainly made the right noises.

But the provisional numbers for government spending in 2014-15 indicate that capital expenditure during the year actually fell, compared with the previous year. As the chart shows, this is the first time such a thing has happened since 2008-09. Yes, the 2015-16 budget has targeted high growth in capital expenditure. But then, that was true of the last budget as well. The proof of that pudding will lie in the eating.

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Published: 25 May 2015, 12:00 AM IST
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