Market Report

A stronger verdict for Modi

by Mahesh Nandurkar / May 24, 2019


Narendra Modi will remain prime minister with an absolute majority. Possible agenda items include land acquisition, labour laws, power distribution, privatisation, simplification and broadbasing of GST, and other tax reforms. Absolute majority reduces the need for competitive populism, though some near-term pro-farmer announcements are likely. We expect a further push to affordable housing, which should help the broader housing market. In a slowing world-trade, softer-commodity environment, India’s economy stands out among its Asian peers. Its trend growth is the highest of all the countries we forecast, as is its actual GDP growth for 2019 and 2020.

Even bigger mandate than 2014
With 98% of the votes counted, BJP on its own is leading in 302 seats. If this lead sustains, it will be the first time since 1984 that a party has been able to win a majority consecutively. With the BJP-led National Democratic Alliance at 348, or only 14 short of a two-thirds majority, the government can push constitutional amendment bills in Lok Sabha (lower house) if need be. In the Rajya Sabha (upper house), BJP and allies control 104 seats, or 43%. This number is likely to increase to 116 seats, or 47% by mid-2020. Therefore, passing regular bills in the upper house will become easier.

Macro stability should remain in focus
A key achievement of the Modi government had been bringing down the inflation rate substantially over the past five years. The government and RBI signed an inflation-targeting framework in August 2015 with 4.0% CPI as the benchmark. With inflation running below 4.0% for the past nine months, RBI has started cutting rates again. But even now, there is scope to cut rates further, as low inflation (2.9% in April), RBI’s own benign inflation projections, and slowing GDP growth present a good environment for lower rates for longer.

Boosting agri income is a key priority
A major promise and one of the most challenging objectives remains doubling of farm incomes by 2022. A multipronged approach is being followed here. The Rs750bn direct farm support scheme will be expanded to cover all farmers versus the80% that it covers currently. Pricing support has also been enhanced via higher procurement targets and increased minimum price support for crops. Nonetheless, weak agri pricing has been a problem nagging the government. Some structural solutions include reducing the many middle men in the supply chain. Government estimates have suggested that farmers barely receive 50-70% of the price they should, with the middle-men cornering the remainder. Reducing this gap is a challenge, but the rewards could be substantial. Government officials highlight that similar such moves in the milk and eggs supply chain have yielded some dividends.

For more insights, follow us on LinkedIn and click to subscribe to CLSA’s monthly newsletter.