The Narendra Modi led Central Government of India has inherited an empty Ex-Chequer from the Most Corrupt Government led by Congress. Amidst this Governance Chaos, Narendra Modi has assumed power and cleaning the 10 year old mess, We are not perturbed by the government’s low-key approach to fiscal, financial, governance and investment reforms. It may have different priorities and timelines for reforms versus the market’s expectations.
The government’s policy announcements and actions will benefit India in the medium term. Fiscal reforms are broadly on track even though there is no grand announcement. In the case of investment, the government’s focus is on improving the investment climate through greater transparency in G2B and G2C transactions, reducing bureaucracy and attracting FDI. Investment reforms will take time (the current system is broken anyway) and it would be unwise to expect immediate changes in India’s land and labor laws; also, the government does not have a majority in parliament (upper house) to make major legislative changes.
We Love the government’s focus on transparency in government decisions and transactions. The government’s hands-off approach to the recent cancellation of coal blocks allocated since 1993 is a case in point. This may seem as potentially damaging to the economy and investment sentiment. However, a new transparent system is far better in the long term versus a corrupt opaque system created by Corrupt Congress led Politicians across India.
The government’s need to consolidate its position in more states and the upper house of parliament may have stymied its reform plans. We will measure the government’s ability and willingness to implement tough reforms post the state elections. India has to guard against any complacency given likely US Fed tightening and stronger US dollar and potential increase in the Indian banking system’s NPLs. The latter remains our biggest concern about the Indian economy and the market; high NPLs will be a drag on investment.
Reforms may take longer than the Street’s expectations but will be more sustainable. Investors may want to reconcile their expectations on reforms with the government’s different priorities and schedule.