Modi term money report card: Who won, who lost

  • Stay with your goal-based investments and don’t get swayed by policy decisions
  • The manner in which policies work their way through the system to impact your money is difficult to predict

Investment returns are affected by a host of factors. They may be local, such as a particular fund manager’s skill, or global, such as international oil prices. However, one major factor is government policies, particularly in a country like India where government intervention is significant.

As we approach the end of the Prime Minister Narendra Modi-led Bharatiya Janata Party (BJP) government’s term, we look at why some investments performed well during Modi’s era, while others didn’t. The takeaways may help us understand what will work in the years to come. We try and map the impact of policy decisions, external factors and new laws on various investments.

Demonetization, black money crackdown

Demonetization, or the cancellation of 500 and 1,000 banknotes, led to a huge amount of cash coming into India’s banking system. Coupled with Jan Dhan, the government’s push to open a no-frills bank account for every Indian family, demonetization gave a strong push to India’s banking stocks and mutual funds which had invested into them.

But not all banks benefitted equally. Public sector banks continued to reel under pressure from non-performing assets (NPAs) and frauds such as the one involving diamantaire Nirav Modi. As a result, returns from private banks and public sector banks significantly diverged with the former rising to the top of the table and the latter moving to the bottom. Real estate and gold also gave poor returns in this period since these assets traditionally accounted for a large share of “black money" investment.

“The financial sector benefited rather than banks per se," said Rajat Sharma, founder, Sana Securities, a financial advisory firm, talking about the impact of demonetization. “This (financial sector) included asset management companies, insurance companies and brokerages. A lot of money that came into banks got invested in the formal financial system and hence paid out fees and commissions," he added.

Demonetization had a cascading impact on real estate and related sectors. Prakash Praharaj, founder, Max Secure Financial Planners, a financial planning firm, traced back some of today’s debt troubles with non-banking financial companies (NBFCs) to demonetization. “Demonetization put pressure on builders, who in turn borrowed heavily from NBFCs. However, demonetization also caused a slump in real estate demand. Builders were unable to pay back lenders and this aggravated the debt crisis," he said.

The resulting downgrades or defaults in groups such as IL&FS, Essel or DHFL or Reliance ADAG have led to drops in the net asset values (NAVs) of debt funds. Some of the downgraded companies like DHFL and Reliance Home Finance work in the housing finance sector.

Stable rupee, low inflation

Two things kept inflation in check and the rupee stable: inflation targeting by the central bank and the low fiscal deficit maintained by the Modi government.

The rupee traded at roughly 80 to a euro in May 2014 compared to around 78 in mid-May 2019. It traded at 100 to a British pound around May 2014 and is around 90 at present. It has depreciated against the US dollar, moving from 60 to around 70. However, this translates to a depreciation of roughly 3% per year which is modest by historical standards. This has moderated the tail wind that international funds receive when the rupee depreciates.

International funds are denominated in foreign currency and, hence, automatically rise when the rupee falls against the US dollar. Funds that invest in export-oriented sectors such as IT and pharma invest in companies which earn in foreign currencies. Such funds also benefit when fall in the rupee against the US dollar and vice-versa. Unlike 2009-14, pharma and IT funds found no place in the top 10 performing schemes in the last five years despite the rupee depreciation.

Amol Joshi, founder, Plan Rupee Investment Services, a Mumbai-based financial advisory firm, also noted the under-performance of pharma and IT but attributed it to the protectionist atmosphere in the US, its biggest market. “Pharma and IT have been losers in the past five years but due to reasons unrelated to the policies of the Modi government," he said.

Low inflation also protected the real returns of fixed deposits and small savings schemes such as Public Provident Fund (PPF) and Senior Citizen Savings Scheme (SCSS). The average Consumer Price Index (CPI) inflation during 2009-14 was 8.42% with inflation hitting a high of 11.17% in 2012. It averaged 4.44% in the 2015-18 period under Modi. Given a long-term average interest rate of 8% on instruments like PPF, the real return for investors was -0.42% from 2009-14 against 3.56% from 2015-18.

Oil price bonanza

Modi’s election victory was shortly followed by a dramatic collapse in international crude oil prices. WTI crude, which was around $100 a barrel in May 2014, came down to roughly $60 in December 2014 and dropped to $26 a barrel in February 2016. Prices have recovered since then but stayed in the $50-75 range.

The Modi government chose not to pass on the entirety of this windfall to consumers. Instead it raised excise duties on diesel and petrol multiple times, pushing up the centre’s revenue from these products from 99,000 crore in FY15 to 2.29 trillion in FY18.

To get an idea of how big this factor is, note that roughly half of the price of a litre of petrol at the pump is made up of central and state taxes. This helped the government contain its fiscal deficit which was brought down from 4.1% of the gross domestic product (GDP) in FY14 to 3.4% in FY19.

This political choice of the government affected the returns of different investments. “Stocks or funds which might have gained from higher consumer spending due to lower petrol bills didn’t experience that boom. On the other hand, a lower fiscal deficit protected the returns on gilt funds," said Lovaii Navlakhi, founder and chief executive officer, International Money Matters Pvt. Ltd, a financial planning firm. This is because lower fiscal deficit means lower interest rates. Gilts (government bonds) tend to rise when interest rates fall. The resultant interest rate cuts also helped mutual funds that invest in banking stocks.

Companies with high leverage such as infrastructure firms tend to benefit from lower interest rates as well. However, this did not play out during the Modi years. “Private infrastructure companies and funds investing in them have been major losers over the past five years. The infrastructure spending of the government was largely cornered by public sector enterprises. The balance sheets of private infrastructure companies simply haven’t been repaired since the 2008 recession," said Shyam Sekhar, founder, iThought, an investment advisory firm.

Remember that the manner in which policy or external factors work their way through the system to finally impact your money is difficult to predict. Retail investors should stay with a good fund manager or an index fund rather than predict which government will come to power and how they will think about policy and growth.

Reliance Group companies have sued HT Media Ltd, Mint’s publisher, and nine others in the Bombay high court over a 2 October 2014 front-page story that they have disputed. HT Media is contesting the case

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