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BW Businessworld

Modi Govt: On Top Of The Global Map

Indian markets are tuning in to a future never seen before, and the world is listening

Photo Credit : Subhabrata Das

Looking merely at the returns the market has delivered in the past three years of the Modi government, you might be justified in thinking it has not moved much. The frontline BSE Sensex has delivered just 23 per cent growth since 22 May, 2014. That works out to only 7.3 per cent CAGR, just about the average return from a fixed deposit.

Though it’s not been a runaway bull market because of the global situation, India is in a far better position than it was a few years ago. One therefore, needs to look beyond returns, since the returns are not narrating the entire story. Says Manish Chokani, director of Enam Holdings: “If you take the rate of change from where we were three years ago — completely despondent — to now, there’s a complete change.” This new-found confidence stems from the many reforms the government has pushed through in the past three years, including laws that have been in limbo for a long time now. Says Andrew Holland, CEO, Avendus Alternative Strategies: “The GST has been passed. The bankruptcy law is in the right direction. You have seen the FDI programme spike. He (Modi) has really put India on the global map.”

Sure enough, the Modi government has done a great job of showcasing the hidden prowess of India — and now it’s one of the most favoured destinations in global markets. Domestic and local investors are participating in Indian markets more than ever before.

The Rs 4,400 crore that is coming into Indian markets every month solely through mutual fund SIPs are expected to swell to Rs 6,000 crore in two years. That would mean the stock market will be receiving about $1 billion in domestic money every month.

Foreign investors are also increasingly looking pleasingly at India; it received record FDI inflows last year. “When you look at investing with anybody, you look for ability, energy and integrity. With India, you can tick all three boxes,” says Chokani.

Another turning point for the Indian markets has been the low oil prices coinciding with the reform process, and the ample supply of cheap money due to very low global interest rates.

“Fortune favours the brave. So, we got this big windfall of lower oil prices, which keeps the rupee balanced, the current-account deficit in check, and cheap money all over the world looking for an investment avenue,” says Chokani.

What the stock market clearly likes is that the government is working on several problems to address the economy. There’s confidence that issues are being systematically addressed. It is helping to turn the economy around and spurring growth rates of companies.

Besides, stock markets approve some of the ground-breaking reforms such as the bankruptcy law, which would help banks recover some of their loans. Markets have also taken note of the fact that the new laws regarding infrastructure investment trusts or InvITs will unlock the potential of the infra industry, as it will now find fresh sources of funding. Some of the latest InvITs have met with a resounding success.

Surely, the stock market is reacting positively. When the Modi government took over, it raced to around 30,000 within a year till March 2015. Then, it went into a tailspin for a year as all the promised reforms were taking shape.

Since February 2016 though, when the government signaled a water-tight budget that increased spending on infrastructure, the market has been looking like a runaway bull, and is now charting fresh highs almost daily.

Markets expect earnings growth to surpass 15 per cent within two years, driven as always by consumption, and now infrastructure.

For now, the India market is tuning in to the future and ignoring present valuations, which, judging by past standards, seem to be on the higher side. It is trading at PE levels of around 23 times, higher than past valuations of 17-18 times. This, though, is also because there’s plenty of liquidity. “Valuations certainly aren’t cheap, but the cost of money too has never been cheaper in the world. In India, the cost of capital is 10-12 per cent;therefore, the PE multiple would be around 10-15. But the cost of money coming into India is at 3 per cent. This is keeping many stocks at a 30 PE multiple,” says Chokani.

But for India, the higher PE seems justified. The new Indian and global investors are giving a big thumbs-up to the Modi government. And judging by the way things are going, the re-rating is also set to continue. So, expect time corrections. And, expect the great Indian market story to continue. Says Chokani: “India is the last large consumer economy left in the world. People aren’t going to give it up in a hurry.”