India’s strongman, Prime Minister Narendra Modi, is likely to engineer three critical resets over the next four years, namely: (1) shift India’s savings landscape away from physical assets towards the formal financial system, (2) disrupt the model of crony capitalism, and (3) redefine India’s subsidy mechanism.
Whilst it is widely believed that the macroeconomic outcomes under the UPA’s ten-year rule have been sub-optimal, the
UPA’s central macro failure has not been around economic growth but around the major upsurge in inflation in India. India’s inflation rate has increased distinctively over the past decade to such an extent that India’s inflation rates no longer move in line with the trends seen in other emerging markets. Interestingly, this surge in inflation that has materialised in India alone has been driven by increased corruption levels in India.
During the ten years of Congress rule, however, India’s core model of corruption shifted to a different level whereby various political-business cliques captures large sectors of the economy and then suppressed competition in the sector in a bid to maximise their gains. Hence, Modi, whose most defining character trait is his political ambition, is keen to disrupt the crony capitalist model in sectors ranging from food and real estate to improve the standard of living for the electorate.
Modi seems likely to change the face of the subsidy regime that propped up India’s rural economy under the former United Progressive Alliance (UPA) Government. The current Government’s explicit effort aimed at checking pilferage in the subsidy disbursement mechanism is also evident in the series of steps taken by the Government since May 2014. Modi seems to have cut these large-scale transfers radically; MSP hikes in July 2014 were only 3-4% and the FCI’s food grain stockpile has started coming down (it stands at 38mn tonnes as of 1 March 2015). As a result, the FCI’s transfer of resources from the Centre to the states has halted in large parts of the country
In the short term Modi’s resets will adversely impact crony capitalists and rural demand reliant companies in the cement, auto, electricals, paints, banking and NBFC sectors. The more interesting development will be the emergence of a new generation of structural winners. Our belief is that these winners will emerge from the Financial Services sector (midcap banks with CASA ratios in the mid-20s and stockbrokers), the agro chemicals sector, and the export-centric manufacturing sector.