What Modi 2.0 Means For The Capital Markets?
The BJP and the NDA not only bettered the number of seats in the Lok Sabha but also improved their vote share percentage over 2014. The BJP on its own improved its vote share from 31% to nearly 37% while the NDA vote share was closer to the 46% mark. That reaffirms the big wave which most of the exit polls were talking about. For investors, traders and businesses, the bigger question is what does Modi 2.0 mean for the capital markets?
Time to focus on reforms
This is something the markets have been asking for a long time now. To the credit of the Modi 1.0 government, it did make considerable progress in implementing GST and the Insolvency and Bankruptcy Code (IBC). One can argue about the modalities but the initiative itself is laudable. With an undisputed mandate, it is time for the government to usher in the next round of sensitive reforms. Land reforms have been politically sensitive but that is a must if infrastructure projects have to be completed on time. Similarly, labour reforms with respect to hiring and exits would go a long way. Finally, entrepreneurs need an honourable exit when businesses fail. The need of the hour is a sound exit policy.
Debt markets have to become more robust
In his previous budget speeches, Arun Jaitley had underscored the need to expedite investments into infrastructure. It is estimated that India will need to invest USD2 trillion over the next 10 years to bring Indian infrastructure to South East Asian levels. For funding projects of such magnitude, what India requires is a robust debt market. Currently, the debt market is too limited in breadth and depth to really fund such volumes. Measures like market making and government guarantees will go a long way in building a robust debt market. Globally, it is a vibrant bond market that has managed to finance infrastructure investments in a big way. Implementation has been good but what India needs is the next big push and funds are the key.
Use disinvestments to supply quality paper
When disinvestment was initiated by the Vajpayee government in 2001, it was a game changer in two ways. Firstly, it allowed the government to raise resources by monetizing assets. Secondly, it ensured the flow of quality paper into the stock markets. Hence, markets did not face the risk of asset inflation; i.e. too much money chasing too few stocks. The disinvestment exercise in the last two years has been making up for shortfalls in government revenues. Now the narrative has to shift to bringing quality paper into the market. That is why the government has to go beyond offers for sale (OFS) and focus on strategic sale.
Remove the chinks and irritants in capital market regulation
It is time for the government to do a genuine cost-benefit analysis of capital market regulation. Let us consider some instances. The tax on long term capital gains introduced in April 2018 may not have contributed significantly to revenues but has surely hit sentiments. STT continues to distort trading in equity and F&O just as the CTT distorts volumes in the commodity markets. The challenge is to get rid of such irritants so that Indian capital markets do not lose out. We have already lost Nifty volumes to SGX and rupee derivative volumes to off shore markets. These are not complex issues; just chinks that must be resolved to make the capital markets more vibrant.
Sustain the focus on financialization of savings and investments
The big shift in the last 5 years was towards financial assets. Demonetization and Aadhaar made it harder for people to hold assets in the form of real estate and gold. The choice was financial assets like equities, bonds and mutual funds. It is hardly surprising that Indian mutual funds saw their AUMs going up from Rs.8 trillion in 2014 to Rs.23 trillion in 2019. With 8 crore mutual fund folios and over 2 crore SIP accounts, financialization of savings is surely taking off in a big way. This is what can really drive the capital markets from these levels. Sustained financialization of savings is essential to ensure that this wealth creation continues.
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