WEBVTT - India's Election Shock Leaves Investors Guessing

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<v Speaker 1>You're listening to Asia Centric from Bloomberg Intelligence, the podcast

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<v Speaker 1>that pulls back the curtain on global business so you

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<v Speaker 1>can invest better across the Asia Pacific rim. I'm John

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<v Speaker 1>Lee in Hong Kong, and.

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<v Speaker 2>I'm Ishika Mukaji, reported for Bloomberg News. India's election came

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<v Speaker 2>as a shock to many observers. Prime ministern Arian Dromodi

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<v Speaker 2>was forecast to win by a landslide victory, but was

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<v Speaker 2>instead forced to form a coalition government and share power

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<v Speaker 2>with allies for the first time as prime minister.

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<v Speaker 1>What does India's election mean for its economic growth outlook

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<v Speaker 1>for the next five years and what does this mean

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<v Speaker 1>for India's red hot equity markets.

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<v Speaker 2>Here to discuss India is Abhishek Gupta, India economist at

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<v Speaker 2>Bloomberg Economics, and Nithan Chanduka, India Strategist at Bloomberg Intelligence.

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<v Speaker 2>Abhishik Nathan. Welcome to Asia Centric.

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<v Speaker 3>Hi John, Hiahika, Hi.

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<v Speaker 4>Hiachika, Abhishek.

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<v Speaker 1>Why is this election seen as a setback for Prime

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<v Speaker 1>Minister Modi and what went wrong?

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<v Speaker 3>This came as a big surprise to everybody. I guess

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<v Speaker 3>let's so for the government itself. Because if some accounts

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<v Speaker 3>that it believed the government had its internal estimates where

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<v Speaker 3>the party had its internal estimates where they were expecting

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<v Speaker 3>between two twenty to two forty seats. But again for

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<v Speaker 3>the wider market, even going by the exit Pole results,

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<v Speaker 3>it came as an absolute shocker. The BGP in its

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<v Speaker 3>third term now would have to depend on Alliance partners

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<v Speaker 3>to have majority in the lower house of the Parliament.

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<v Speaker 3>It only won two hundred and forty seats, so that

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<v Speaker 3>does reduce Prime Minister Moody's grip on the national politics

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<v Speaker 3>and reduces his grip within his own party. Our sense

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<v Speaker 3>is that as opposed to the previous two stints, where

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<v Speaker 3>the Prime Minister's office was considered to be very strong

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<v Speaker 3>and there were broad understanding that sometimes the PMO would

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<v Speaker 3>bypass ministers, I think it's going to be a slightly

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<v Speaker 3>different scenario this time around, where ministers, especially those from

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<v Speaker 3>the Alliance partners, would have a very independent operation of

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<v Speaker 3>those ministries. And I think that's going to be a

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<v Speaker 3>key difference from MODI one point zero and MODI two

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<v Speaker 3>point zero.

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<v Speaker 1>What's the key message that this election is sending to

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<v Speaker 1>Moody and the coalition partners is it telling them that

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<v Speaker 1>they have to focus more on wealth distribution.

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<v Speaker 3>Not really. I think the big takeaway for me, and

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<v Speaker 3>that's what I wrote as well after the election, was

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<v Speaker 3>that the voters have decisively said note to divisive and

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<v Speaker 3>negative political campaigning. In fact, I did a piece of

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<v Speaker 3>research which looked at the places where BGP and Prime

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<v Speaker 3>Minister Modi kind of ran and negative campaign and they

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<v Speaker 3>were like seven states which kind of came out in

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<v Speaker 3>that analysis. And in those seven states, the party seat

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<v Speaker 3>tally was reduced by seventy three seats relative to twenty nineteen,

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<v Speaker 3>which is more than the drop in their total seat

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<v Speaker 3>count in these twenty twenty four elections. For instance, Prime

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<v Speaker 3>Ministernarians Mo they sort of ratcheting up rhetoric against the

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<v Speaker 3>Muslim minority. In Rajasthan, there was constituency called Banwara and

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<v Speaker 3>that did not pay off any dividends. The party lost

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<v Speaker 3>that seat. The party also lost the seat in Fazzabad,

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<v Speaker 3>which is where the Grand Ram Temple was built and

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<v Speaker 3>the party was hoping that it furthering its Hindu national

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<v Speaker 3>agenda might reap it big differdends in the state of

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<v Speaker 3>Uta Pradesh. That didn't happen, as well, there are other examples,

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<v Speaker 3>such as the party kind of ignoring accusations of sexual

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<v Speaker 3>misconduct against one of its members. So a lot of

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<v Speaker 3>policy missteps and I think divisive negative campaigning kind of

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<v Speaker 3>worked against the party, and I think that's the big

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<v Speaker 3>takeaway that in a way, maybe that's also good that

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<v Speaker 3>the party will now focus more on their pro growth

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<v Speaker 3>policies and economic agenda.

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<v Speaker 2>So how do you expect the government to respond to

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<v Speaker 2>the s wittle down mandate and being forced to work

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<v Speaker 2>with coalition partners? What are some of the populist spending

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<v Speaker 2>measures that we can expect and can India's coffers handle it?

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<v Speaker 3>So this is here where I slightly differ from the

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<v Speaker 3>broad consensus that's evolving on what this reduced mandate for

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<v Speaker 3>the government means. If you look at what the government

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<v Speaker 3>can cannot do in its upcoming budget, there really isn't

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<v Speaker 3>any provision for the government to increase welfare spending to

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<v Speaker 3>sort of target to specific states and in order to

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<v Speaker 3>support its alliance partners or to have a better wrapover

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<v Speaker 3>with them. The one thing that the government can do

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<v Speaker 3>is to give them portfolios in its cabinet, which they've

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<v Speaker 3>already announced. So I don't really see them as increasing

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<v Speaker 3>welfare spending right now because it's not going to result

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<v Speaker 3>in increased support for them because the looks of elections

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<v Speaker 3>are already over and the next elections aren't due until

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<v Speaker 3>twenty twenty nine, so they would probably be increasing welfare

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<v Speaker 3>spending but just ahead of the ne selections. So in

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<v Speaker 3>the new term, I see continued policies in terms of

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<v Speaker 3>increased cap expending and fiscal consolidation or fiscal belt tightening

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<v Speaker 3>is likely to go ahead.

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<v Speaker 2>What have BJP's coalition partners typically focused on in terms

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<v Speaker 2>of policies in the past, like what is the pound

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<v Speaker 2>of flesh they exact for sticking with the BJP this time?

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<v Speaker 3>I guess the two big coalition partners which really hold

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<v Speaker 3>the key this time around. One is Jhanta Dal United

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<v Speaker 3>in Bihar. Natishkomar leads that party and Chandra Babu Naidu

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<v Speaker 3>in Andrapadesh, and both of these are so far whatever

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<v Speaker 3>news coming up suggests that both of these would be

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<v Speaker 3>asking for a special package for their state governments. So

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<v Speaker 3>our senses that this special package would include more funding

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<v Speaker 3>which would be tuned to cap expending. For instance, the

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<v Speaker 3>state of Entrepadesh, there's likely to be demand for funds

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<v Speaker 3>to build a new capital city over there, which essentially

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<v Speaker 3>takes the form of more cap expending, and that is

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<v Speaker 3>not necessarily bad for growth. I mean, when the government

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<v Speaker 3>announces cap expending, it is in the end of the

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<v Speaker 3>day that cap expending happened in some state or the other.

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<v Speaker 3>So now that more of that cap expending is likely

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<v Speaker 3>to happen in these states if Biharre and Entrepredei, That's

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<v Speaker 3>what my take is. Besides obviously kind of increase more

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<v Speaker 3>births for cabinet ministers from these parties. Also, there's one

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<v Speaker 3>more demand from Alliance partner more broadly, was a relook

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<v Speaker 3>at government's UGNIVI scheme, which was to do with recruits

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<v Speaker 3>for the military, and there seems to be a sense

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<v Speaker 3>that that has kind of backfired in these elections because

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<v Speaker 3>the government has now sort of reduced the term for

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<v Speaker 3>military recruits, so they're now supposed to serve only four

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<v Speaker 3>years in the military, after which they're supposed to go

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<v Speaker 3>back to the job market, although the government will help

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<v Speaker 3>them get jobs in other areas and state police forces

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<v Speaker 3>and the like. But the Lance partners probably all life

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<v Speaker 3>to ask BDP to take a relook at at that scheme.

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<v Speaker 1>India is one of the favorite equity markets for many

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<v Speaker 1>foreign investors, especially those with an emerging markets mandate. Do

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<v Speaker 1>you think this election will cause some foreign investors to

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<v Speaker 1>rethink their India position?

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<v Speaker 4>Yeah, so far, Like we have kind of witnessed a

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<v Speaker 4>bearish to owned by foreign investors, so they have sold

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<v Speaker 4>close to two billion dollars worth of equities after the

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<v Speaker 4>election outcome. On a structural basis, I mean, India is

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<v Speaker 4>one of the favorite destinations for them in the emerging

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<v Speaker 4>market space, but given forty evaluations, it probably dissuades them

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<v Speaker 4>to allocate to Indian equities at this juncture. And like

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<v Speaker 4>if you look at the sector split also, they have

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<v Speaker 4>kind of allocated more towards financials than the old kind

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<v Speaker 4>of spaces and the money is rotating out of those

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<v Speaker 4>spaces and moving towards domestic cyclical sectors such as industrials

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<v Speaker 4>and consumer services and so on and so forth.

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<v Speaker 2>So, Nathan, the Indian stock markets that record highs once again.

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<v Speaker 2>It's bounced back from that election sell off. Do you

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<v Speaker 2>think domestic investors are mispricing the risk to India's growth

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<v Speaker 2>story At the.

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<v Speaker 4>Stage, It's very difficult to say like they're mispricing the

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<v Speaker 4>risk because so far they have been proven right. We

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<v Speaker 4>are seeing kind of relentless buying by domestic investors. Just

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<v Speaker 4>last month, the main numbers came out where the mutual

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<v Speaker 4>funds nearly saw doubling off net inflows on a monthly basis,

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<v Speaker 4>and this was the highest monthly inflow since the start

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<v Speaker 4>of the pandemic. And this was like nearly thirty ninth

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<v Speaker 4>consecutive month of buying by domestic investors. Because household savings

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<v Speaker 4>towards equities are pretty low in India and it's probably

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<v Speaker 4>the lowest across emerging markets, this trend is kind of

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<v Speaker 4>a structural trend and that is why we are seeing

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<v Speaker 4>like emergency of domestic buying on the buses So.

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<v Speaker 2>Abishik, what's your take on the upcoming budget in July.

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<v Speaker 2>What will be some key missing points now that India

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<v Speaker 2>has a coalition government.

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<v Speaker 3>I don't really think much is going to change in

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<v Speaker 3>terms of what the interim budget suggested in February. Since then,

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<v Speaker 3>there's been a big development that the RB has transferred

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<v Speaker 3>to two point one trillion to the peace to the

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<v Speaker 3>government and the new government Modi point Oh is likely

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<v Speaker 3>to make use of that come July, and we essentially

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<v Speaker 3>expect the government to continue expand its cap expending. But

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<v Speaker 3>I think this time around, as I said earlier, some

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<v Speaker 3>of that tap ex spending is likely to be allocated

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<v Speaker 3>specifically to Entrepladesh and the state of Bhr to get

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<v Speaker 3>more support from its alliance partners. Also, in terms of

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<v Speaker 3>fiscal deficit, we expect the government to in fact at

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<v Speaker 3>least stay put with its reduced target for this ear

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<v Speaker 3>of five point one percentage of GDP, down from five

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<v Speaker 3>point six percent fiscal year twenty twenty four, although there

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<v Speaker 3>is a chance that they might reduce the deficit even

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<v Speaker 3>further to maybe about four point nine or five percent,

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<v Speaker 3>but maybe given that the demands of the allies on

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<v Speaker 3>increased allocation for the relative state governments, they might not

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<v Speaker 3>be able to redace it further, but I think overall

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<v Speaker 3>the market is only going to take a much more

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<v Speaker 3>positive a signal once the budget is announced and any

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<v Speaker 3>apprehensions you've already seen that the market is largely recovered

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<v Speaker 3>after the big sell off post the results and going forward,

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<v Speaker 3>the fundamental drivers on the Indian economy are once again

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<v Speaker 3>going to get attention from investors going forward.

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<v Speaker 2>And what are some of the land and labor reforms

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<v Speaker 2>that are no longer expected to go through?

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<v Speaker 3>So Isshika. If you look at the last years when

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<v Speaker 3>the BGP had absolute majority in the Lok Sabah, they

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<v Speaker 3>also had towards the end of their second term together

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<v Speaker 3>with their alliance partners, good enough size in the upper

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<v Speaker 3>house of Parliament, so they could have passed these laws.

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<v Speaker 3>Then the fact that they could not pass those laws

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<v Speaker 3>at that time means it's going to be equally challenging

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<v Speaker 3>for them now when they have a reduced mandate in

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<v Speaker 3>the Lok saba Now they have more seats in the

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<v Speaker 3>upper house and they're close to the halfway mark in

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<v Speaker 3>the upper house, so it should be easy for them

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<v Speaker 3>to pass laws as long as Alliance partners give their

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<v Speaker 3>approval for a particular reform. But I guess these reforms

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<v Speaker 3>are challenging and they fall on the concurrent list of

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<v Speaker 3>the center and state governments. So my sense is that

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<v Speaker 3>in order to go forward with these reforms, the government's

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<v Speaker 3>likely to take the approach of moving forward with them

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<v Speaker 3>in respective state governments where they rule, rather than try

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<v Speaker 3>to have much broad praised umbrella kind of a policy

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<v Speaker 3>which they tried to push down the throats of the

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<v Speaker 3>state governments, and I think they would probably find that

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<v Speaker 3>kind of challenging.

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<v Speaker 2>Nathan So the Power Minister, Aschkamar Saying, lost his seat

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<v Speaker 2>and he's been replaced. There was quite a bubble in

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<v Speaker 2>the renewables sector within the stock market in India. What's

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<v Speaker 2>the outlook for energy transition in one of the world's

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<v Speaker 2>largest greenhouse gas emitters now? And do you think we're

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<v Speaker 2>going to see that bubble deflate?

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<v Speaker 4>I think the structural demand for energy remains quite buying

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<v Speaker 4>for India because as India grows, there'll be a natural

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<v Speaker 4>demand for energy. So far, the stock market is not

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<v Speaker 4>reflecting on any kind of like a derailment on that front.

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<v Speaker 4>And you can see like an the power sector is

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<v Speaker 4>the stocks have against bounce back, so I would not

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<v Speaker 4>see it as a derailment of the story at this juncture.

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<v Speaker 1>And Abashek, you're the senior economist covering India for Bloomberg Economics.

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<v Speaker 1>Does this election result cause you to question your GDP

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<v Speaker 1>forecasts of India over the next five years.

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<v Speaker 3>John, That's a very good question. I guess I would

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<v Speaker 3>not change my view on India over the next three

0:13:04.360 --> 0:13:08.560
<v Speaker 3>four years, but yes, it does raise a question mark

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<v Speaker 3>over my four coast of the like let's say the

0:13:10.880 --> 0:13:14.280
<v Speaker 3>full five year term or the ten year term, because

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<v Speaker 3>a lot of that kind of depends how the government

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<v Speaker 3>navigates its relationship with this alliance partners, whether it is

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<v Speaker 3>able to bring them up at the same level of

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<v Speaker 3>thinking in terms of the need to stick to pro

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<v Speaker 3>growth policies of increased capex, reduce welfare spending, so that

0:13:32.440 --> 0:13:35.199
<v Speaker 3>kins to be seen, although I think closer to the

0:13:35.280 --> 0:13:38.800
<v Speaker 3>twenty twenty nine elections there might be increased welfare spending,

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<v Speaker 3>but again that also comes at the realization that the

0:13:44.200 --> 0:13:47.079
<v Speaker 3>demand side has been lacking. And then Indian economy, the

0:13:47.120 --> 0:13:50.439
<v Speaker 3>government has been very good with the supply side measures

0:13:50.840 --> 0:13:56.560
<v Speaker 3>of removing bottlenecks, increasing CAPEX, boosting infrastructure creation, but they

0:13:56.600 --> 0:13:59.280
<v Speaker 3>also need to do something to prop up demand, and

0:13:59.320 --> 0:14:02.480
<v Speaker 3>from that person, re welface spending might not be such

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<v Speaker 3>a bad idea. Overall, the fundamental drivers of the Indian

0:14:06.520 --> 0:14:11.559
<v Speaker 3>economy over the next decades stay intact. Favorable demographics, more CAPEX,

0:14:11.720 --> 0:14:16.200
<v Speaker 3>GEO political tailwinds, and India trying to establish itself or

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<v Speaker 3>integrate itself into the global manufacturing supply chain. So I

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<v Speaker 3>would say only marginally negative. It's a risk at this point,

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<v Speaker 3>but I would not change my baseline forecasts and.

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<v Speaker 1>Ntin given Abershek's comments, how should we think about equity

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<v Speaker 1>sector allocation? There seems to be this narrative forming that

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<v Speaker 1>you know, Murdy's weakened positioning is negative for infrastructure plays capex,

0:14:39.360 --> 0:14:42.720
<v Speaker 1>but it could be positive for possibly consumption stocks. Do

0:14:42.760 --> 0:14:43.760
<v Speaker 1>you agree with this view?

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<v Speaker 4>I think it's not linked to was the election outcome before,

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<v Speaker 4>because if you'll see the Internet budget, the KPX spending

0:14:50.600 --> 0:14:53.720
<v Speaker 4>growth was stated to go down to eleven percent from

0:14:53.760 --> 0:14:56.760
<v Speaker 4>the Scotching thirty percent plus KIGER growth that we have

0:14:56.840 --> 0:15:01.080
<v Speaker 4>witnesses the pandemic and industrial tech is quite devered to

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<v Speaker 4>the government KPX growth and given very steep valuations, with

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<v Speaker 4>some of the stocks trading at even higher valuations than

0:15:08.640 --> 0:15:11.840
<v Speaker 4>FMCG firms, there could be a risk of derating in

0:15:11.880 --> 0:15:15.520
<v Speaker 4>those firms and consequently the sector. So the government KPX

0:15:15.680 --> 0:15:17.680
<v Speaker 4>is the number to be closely washed out for any

0:15:17.720 --> 0:15:20.800
<v Speaker 4>slowdown in the KPX road could actually result in derating

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<v Speaker 4>to some of these names. So that's why we have

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<v Speaker 4>kind of roundrated the outlook for this sector in our

0:15:26.680 --> 0:15:30.280
<v Speaker 4>sector's core card, and we find valuations in financials to

0:15:30.280 --> 0:15:33.000
<v Speaker 4>be more lucrative compared to this side of the market.

0:15:33.760 --> 0:15:37.040
<v Speaker 4>In terms of consumption. We think that discretionary side is

0:15:37.080 --> 0:15:41.360
<v Speaker 4>going to do better compared to the stable side because

0:15:41.400 --> 0:15:43.680
<v Speaker 4>of the price of premiumization trend and that is not

0:15:43.720 --> 0:15:45.600
<v Speaker 4>going to be derailed by this outcome.

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<v Speaker 2>Okay, and lastly, maybe a question for both of you,

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<v Speaker 2>whoever would like to weigh in what does this mean

0:15:51.040 --> 0:15:53.760
<v Speaker 2>for billionaires such as got the Madania and Location Barnie

0:15:53.760 --> 0:15:57.280
<v Speaker 2>who have been closely tied with India's growth story. What

0:15:57.320 --> 0:15:59.080
<v Speaker 2>does it mean for the links between the rich and

0:15:59.120 --> 0:16:00.800
<v Speaker 2>the government. Will any change?

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<v Speaker 3>So it's a very i would say, tricky question to answer,

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<v Speaker 3>but I think the stock markets kind of answered that

0:16:07.680 --> 0:16:12.560
<v Speaker 3>question on both the exit poll day and the results

0:16:12.560 --> 0:16:16.720
<v Speaker 3>on June fourth. I mean, Dannie, who's well perceived to

0:16:16.720 --> 0:16:20.000
<v Speaker 3>be very close to a Prime Minister Modi all his talks,

0:16:20.080 --> 0:16:23.640
<v Speaker 3>kind of saw like fifteen to twenty percent increment after

0:16:23.640 --> 0:16:26.760
<v Speaker 3>the exit poll results were announced, and those results also

0:16:26.840 --> 0:16:30.560
<v Speaker 3>took a big beating on the day actual election results

0:16:30.640 --> 0:16:33.240
<v Speaker 3>came on June fourth. But since then there's been a

0:16:33.280 --> 0:16:37.120
<v Speaker 3>lot of recovery as well. We've seen kind of corruption

0:16:37.440 --> 0:16:40.960
<v Speaker 3>at the level faced by individuals has kind of reduced,

0:16:41.280 --> 0:16:43.440
<v Speaker 3>but at the same time, broadly, I mean, if you

0:16:43.520 --> 0:16:46.840
<v Speaker 3>speak to ministers, everybody kind of agrees that corruption at

0:16:46.920 --> 0:16:49.120
<v Speaker 3>the highest level is still there. I mean, that's just

0:16:49.160 --> 0:16:52.680
<v Speaker 3>the part of politics which is there and it remains

0:16:52.680 --> 0:16:54.920
<v Speaker 3>to be seen. I mean, how these companies do, to

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<v Speaker 3>a large extent, the results of how their fortunes play

0:16:58.280 --> 0:17:00.760
<v Speaker 3>out will largely depend on what these companies do in

0:17:00.840 --> 0:17:04.200
<v Speaker 3>order to kind of expand their businesses. So let's see

0:17:04.240 --> 0:17:05.320
<v Speaker 3>what kind of course forward.

0:17:06.880 --> 0:17:10.919
<v Speaker 1>It's been a fascinating discussion on India its surprise election

0:17:11.040 --> 0:17:14.400
<v Speaker 1>results and its impact on its red hot equity markets.

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<v Speaker 1>Thank you Abhishek and Nitton for joining.

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<v Speaker 4>Thank you for having us, Thank you John, Thank you Sheik.

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<v Speaker 1>I'm John Lee calling in from Hong Kong and.

0:17:22.960 --> 0:17:25.399
<v Speaker 2>I'm Isham calling in from Singapore.

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<v Speaker 1>This podcast was produced by Klara Chen and you've been

0:17:28.720 --> 0:17:30.760
<v Speaker 1>listening to the Asia Centric podcast