Investors cheer Modi push for reforms to propel growth

For the first time since 1991, analysts are praising the intent of the Budget rather than its fine print. By clearly outlining a reforms roadmap and eschewing populist measures, the Modi government may have set the stage for double-digit growth in the next 3-4 years. That is why the bulls are running riot over the Indian stock markets.

High on the prospects of sustained and high GDP growth and flush with cheap money flowing in from abroad, Indian stock prices are testing new highs every day, soaring 8.6 per cent in three trading sessions since Indian Finance Minister Nirmala Sitharaman presented her third Budget on February 1.

Reversing a six-day losing streak immediately preceding the Budget, when investors were feeling skittish about the possibility of the politics of optics – read: higher taxes to shore up falling government revenues – trumping good economics, the benchmark S&P BSE Sensex logged its biggest Budget day gains (in percentage terms) in 22 years, of 5 per cent, at the close of trading on February 1.

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Political messaging is clear

For the first time since Manmohan Singh’s path breaking Budget of 1991, which signalled the start of economic reforms in India, investors were looking more at the political message sent out by the Finance Minister than at the fine print of her speech.

For example, Sitharaman did not speak of “disinvestment” but of “privatisation” and “strategic sales of public assets” in a clear message that the government would now step on the reforms pedal to take the Indian economy into a higher growth trajectory.

Government will do what it takes

“This is not just a Budget but a clear political message… The government is signalling a clear shift. It is saying it will do what it takes to propel growth. And it is doing so after laying the base on which you can have growth, whether it is the Jan Dhan Yojana, the bankruptcy law, or the changes in the labour and farm laws. These are laying the ground for double-digit growth. I will not be surprised if India starts growing in double digits in the next 3-4 years,” billionaire investor Rakesh Jhunjhunwala, who is often referred to as “India’s Warren Buffet” told a leading media house immediately after the Budget.

Since then, stock prices have soared even higher over the next couple of days as investors, both domestic and foreign portfolio investors (FPIs), saluted the fact that the Finance Minister had refrained from adopting any of the economically suicidal but populist ideas that had been floating around in the run-up to the Budget.

No negative measures

Ramdeo Agrawal, Chairman of leading domestic brokerage and financial services firm Motilal Oswal Financial Services, said investors felt relieved that there were no major negatives in the budget. “There was fear about wealth tax or Covid tax, which did not come and that was a big relief,” he told the media.

The Sensex closed above the 50,000 mark for the first time in history on Wednesday and most experts and investors felt it would go even further north from there.

“This is typical of a bull market. There was a short, sharp correction (in the lead up to the Budget) followed by a smart recovery and rally,” Jhunjhunwala said.

Concerns of rating agencies ignored

This Budget also signals the first time that India is not bothered about what rating agencies think of it. By transparently declaring a fiscal deficit of 9.5 per cent for the current year and projecting a fiscal gap of 6.8 per cent for the coming year – both much higher than the figures projected by analysts and agencies – the Modi government signalled its intent to spur growth even at the risk of raising the ire of rating agencies such as S&P’s, Moody’s and Fitch.

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Jhunjhunwala, however, feels the deficits will be lower – in the region of 8.5-9.0 per cent for the current year and 6.0-6.5 per cent for 2021-22 as the government will collect much higher revenues than budgeted on the back of rising demand, consumption and growth.

Infra spending, vaccination pushes demand

Investors were particularly enthused by the bold measure to temporarily abandon fiscal prudence to bet on growth and wellbeing. The massive 34.5 per cent increase in infrastructure, which is expected to have a knock-on effect on more than 250 other sectors that depend on it and the laser focus on vaccinating 500 million people at government expense, are expected to help sustain the recent bounce in the consumption curve by removing fear from the minds of consumers and drive growth across several hundred sectors.

Mark Matthews, Head of Asia Research at Bank Julius Baer in Singapore told the media: “The Budget has put building blocks in place for strategic growth, much like what China has been doing for many years, which is positive in the long term.”

Many experts now feel the bull run will last for a while as the economy heads towards double-digit growth over the medium term. “It’s a buffet. Eat whatever you want. But don’t overeat,” is the advice Jhunjhunwala has for investors.