Home >Elections 2019 >Opinion >Opinion | With clear mandate, the pressure is on NDA 2.0 to get radical with reforms

In the five years since the National Democratic Alliance (NDA) was elected with a resounding majority, the Nifty 50 index has delivered average annual returns of only 9.4%. Actually, even those returns were riding on hope, because annual earnings growth between 2014 and 2019 was only around 5%. But investors’ hopes are still running high, with equity indices trading near record highs.

The high hopes should, hopefully, increase the pressure on the NDA 2.0 government to deliver the goods on reforms. While the NDA 1.0 government can take credit for reforms such as the bankruptcy code and the goods and services tax (GST), which finally saw the light of day under its rule, clearly a lot more needs to be done. “The outgoing NDA government…has rarely attempted to champion radical new initiatives or ideas that could have a transformative impact, in our opinion," analysts at Jefferies India Pvt. Ltd said in a recent note to clients.

Analysts at Kotak Institutional Equites said: “In our view, the next government would have to implement certain reforms to further improve ‘ease of doing business’, with the ultimate objective of increasing India’s investment rate and creating jobs. The central government may want to focus on (1) reforms in factors of production, including labour and land, and (2) the role of government in business, including privatization of PSUs and review of extant ownership and pricing policies to encourage greater FDI and private investment in the critical infrastructure sector. However, these reforms may not be easy to implement politically."

A number of market participants are gung-ho about the scope for reforms, despite the poor track record of successive governments. Every now and then, India has some state elections, where populist measures such as farm loan waivers rear their ugly heads. Late last year, when oil prices had peaked, the government even gave up its resolve on market-determined fuel prices, and asked oil marketing companies to bear a part of the burden. The issue of privatization of banks hasn’t gained much traction as well, despite the huge strain bank recapitalization proved to be on the government’s finances. As such, it’s naïve to take radical reforms as a foregone conclusion.

To this, some might argue that all India needs is continuity in policy, and that things will soon be fine in the economy even without radical reforms. But we’re well past that point. “Reeling under a consumption slowdown amid the liquidity crisis in the NBFC sector and lower terms of trade in the agriculture sector, optimism around India’s economic growth has come to a grinding halt. With limited fiscal space amid compelling priorities and electoral promises, the Modi government’s second term in office is likely to be more challenging than the first," said Garima Kapoor, an economist at Elara Capital. Analysts at Kotak said India will have to implement the difficult reforms mentioned above, apart from a directed fiscal stimulus, a broad monetary stimulus, given that the macroeconomic set-up is not very favourable.

To be sure, there is a need to follow-up on the reform measures of the previous term as well. Both the bankruptcy code and the GST reforms haven’t been as effective as policymakers had hoped. These new laws need streamlining and more teeth to make them the breakthrough reforms they were meant to be.

In the above backdrop, the last thing the markets should do is get carried away by the narrative that bold reforms will drive equities to new highs. Since the proof of the pudding is in its eating, it’s best to wait and see whether radical reforms actually take place, and how soon these measures are taken. “Given incremental rather than radical reforms that most ruling dispensations appear to favour, underlying fundamentals appear to matter more for economic performance and for the equity markets," added analysts at Jefferies India.

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