Speaker 1: You're listening to Asia Centric from Bloomberg Intelligence, the podcast
Speaker 1: that pulls back the curtain on global business so you
Speaker 1: can invest better across the Asia Pacific rim. I'm John
Speaker 1: Lee in Hong Kong, and.
Speaker 2: I'm Ishika Mukaji, reported for Bloomberg News. India's election came
Speaker 2: as a shock to many observers. Prime ministern Arian Dromodi
Speaker 2: was forecast to win by a landslide victory, but was
Speaker 2: instead forced to form a coalition government and share power
Speaker 2: with allies for the first time as prime minister.
Speaker 1: What does India's election mean for its economic growth outlook
Speaker 1: for the next five years and what does this mean
Speaker 1: for India's red hot equity markets.
Speaker 2: Here to discuss India is Abhishek Gupta, India economist at
Speaker 2: Bloomberg Economics, and Nithan Chanduka, India Strategist at Bloomberg Intelligence.
Speaker 2: Abhishik Nathan. Welcome to Asia Centric.
Speaker 3: Hi John, Hiahika, Hi.
Speaker 4: Hiachika, Abhishek.
Speaker 1: Why is this election seen as a setback for Prime
Speaker 1: Minister Modi and what went wrong?
Speaker 3: This came as a big surprise to everybody. I guess
Speaker 3: let's so for the government itself. Because if some accounts
Speaker 3: that it believed the government had its internal estimates where
Speaker 3: the party had its internal estimates where they were expecting
Speaker 3: between two twenty to two forty seats. But again for
Speaker 3: the wider market, even going by the exit Pole results,
Speaker 3: it came as an absolute shocker. The BGP in its
Speaker 3: third term now would have to depend on Alliance partners
Speaker 3: to have majority in the lower house of the Parliament.
Speaker 3: It only won two hundred and forty seats, so that
Speaker 3: does reduce Prime Minister Moody's grip on the national politics
Speaker 3: and reduces his grip within his own party. Our sense
Speaker 3: is that as opposed to the previous two stints, where
Speaker 3: the Prime Minister's office was considered to be very strong
Speaker 3: and there were broad understanding that sometimes the PMO would
Speaker 3: bypass ministers, I think it's going to be a slightly
Speaker 3: different scenario this time around, where ministers, especially those from
Speaker 3: the Alliance partners, would have a very independent operation of
Speaker 3: those ministries. And I think that's going to be a
Speaker 3: key difference from MODI one point zero and MODI two
Speaker 3: point zero.
Speaker 1: What's the key message that this election is sending to
Speaker 1: Moody and the coalition partners is it telling them that
Speaker 1: they have to focus more on wealth distribution.
Speaker 3: Not really. I think the big takeaway for me, and
Speaker 3: that's what I wrote as well after the election, was
Speaker 3: that the voters have decisively said note to divisive and
Speaker 3: negative political campaigning. In fact, I did a piece of
Speaker 3: research which looked at the places where BGP and Prime
Speaker 3: Minister Modi kind of ran and negative campaign and they
Speaker 3: were like seven states which kind of came out in
Speaker 3: that analysis. And in those seven states, the party seat
Speaker 3: tally was reduced by seventy three seats relative to twenty nineteen,
Speaker 3: which is more than the drop in their total seat
Speaker 3: count in these twenty twenty four elections. For instance, Prime
Speaker 3: Ministernarians Mo they sort of ratcheting up rhetoric against the
Speaker 3: Muslim minority. In Rajasthan, there was constituency called Banwara and
Speaker 3: that did not pay off any dividends. The party lost
Speaker 3: that seat. The party also lost the seat in Fazzabad,
Speaker 3: which is where the Grand Ram Temple was built and
Speaker 3: the party was hoping that it furthering its Hindu national
Speaker 3: agenda might reap it big differdends in the state of
Speaker 3: Uta Pradesh. That didn't happen, as well, there are other examples,
Speaker 3: such as the party kind of ignoring accusations of sexual
Speaker 3: misconduct against one of its members. So a lot of
Speaker 3: policy missteps and I think divisive negative campaigning kind of
Speaker 3: worked against the party, and I think that's the big
Speaker 3: takeaway that in a way, maybe that's also good that
Speaker 3: the party will now focus more on their pro growth
Speaker 3: policies and economic agenda.
Speaker 2: So how do you expect the government to respond to
Speaker 2: the s wittle down mandate and being forced to work
Speaker 2: with coalition partners? What are some of the populist spending
Speaker 2: measures that we can expect and can India's coffers handle it?
Speaker 3: So this is here where I slightly differ from the
Speaker 3: broad consensus that's evolving on what this reduced mandate for
Speaker 3: the government means. If you look at what the government
Speaker 3: can cannot do in its upcoming budget, there really isn't
Speaker 3: any provision for the government to increase welfare spending to
Speaker 3: sort of target to specific states and in order to
Speaker 3: support its alliance partners or to have a better wrapover
Speaker 3: with them. The one thing that the government can do
Speaker 3: is to give them portfolios in its cabinet, which they've
Speaker 3: already announced. So I don't really see them as increasing
Speaker 3: welfare spending right now because it's not going to result
Speaker 3: in increased support for them because the looks of elections
Speaker 3: are already over and the next elections aren't due until
Speaker 3: twenty twenty nine, so they would probably be increasing welfare
Speaker 3: spending but just ahead of the ne selections. So in
Speaker 3: the new term, I see continued policies in terms of
Speaker 3: increased cap expending and fiscal consolidation or fiscal belt tightening
Speaker 3: is likely to go ahead.
Speaker 2: What have BJP's coalition partners typically focused on in terms
Speaker 2: of policies in the past, like what is the pound
Speaker 2: of flesh they exact for sticking with the BJP this time?
Speaker 3: I guess the two big coalition partners which really hold
Speaker 3: the key this time around. One is Jhanta Dal United
Speaker 3: in Bihar. Natishkomar leads that party and Chandra Babu Naidu
Speaker 3: in Andrapadesh, and both of these are so far whatever
Speaker 3: news coming up suggests that both of these would be
Speaker 3: asking for a special package for their state governments. So
Speaker 3: our senses that this special package would include more funding
Speaker 3: which would be tuned to cap expending. For instance, the
Speaker 3: state of Entrepadesh, there's likely to be demand for funds
Speaker 3: to build a new capital city over there, which essentially
Speaker 3: takes the form of more cap expending, and that is
Speaker 3: not necessarily bad for growth. I mean, when the government
Speaker 3: announces cap expending, it is in the end of the
Speaker 3: day that cap expending happened in some state or the other.
Speaker 3: So now that more of that cap expending is likely
Speaker 3: to happen in these states if Biharre and Entrepredei, That's
Speaker 3: what my take is. Besides obviously kind of increase more
Speaker 3: births for cabinet ministers from these parties. Also, there's one
Speaker 3: more demand from Alliance partner more broadly, was a relook
Speaker 3: at government's UGNIVI scheme, which was to do with recruits
Speaker 3: for the military, and there seems to be a sense
Speaker 3: that that has kind of backfired in these elections because
Speaker 3: the government has now sort of reduced the term for
Speaker 3: military recruits, so they're now supposed to serve only four
Speaker 3: years in the military, after which they're supposed to go
Speaker 3: back to the job market, although the government will help
Speaker 3: them get jobs in other areas and state police forces
Speaker 3: and the like. But the Lance partners probably all life
Speaker 3: to ask BDP to take a relook at at that scheme.
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Speaker 1: India is one of the favorite equity markets for many
Speaker 1: foreign investors, especially those with an emerging markets mandate. Do
Speaker 1: you think this election will cause some foreign investors to
Speaker 1: rethink their India position?
Speaker 4: Yeah, so far, Like we have kind of witnessed a
Speaker 4: bearish to owned by foreign investors, so they have sold
Speaker 4: close to two billion dollars worth of equities after the
Speaker 4: election outcome. On a structural basis, I mean, India is
Speaker 4: one of the favorite destinations for them in the emerging
Speaker 4: market space, but given forty evaluations, it probably dissuades them
Speaker 4: to allocate to Indian equities at this juncture. And like
Speaker 4: if you look at the sector split also, they have
Speaker 4: kind of allocated more towards financials than the old kind
Speaker 4: of spaces and the money is rotating out of those
Speaker 4: spaces and moving towards domestic cyclical sectors such as industrials
Speaker 4: and consumer services and so on and so forth.
Speaker 2: So, Nathan, the Indian stock markets that record highs once again.
Speaker 2: It's bounced back from that election sell off. Do you
Speaker 2: think domestic investors are mispricing the risk to India's growth
Speaker 2: story At the.
Speaker 4: Stage, It's very difficult to say like they're mispricing the
Speaker 4: risk because so far they have been proven right. We
Speaker 4: are seeing kind of relentless buying by domestic investors. Just
Speaker 4: last month, the main numbers came out where the mutual
Speaker 4: funds nearly saw doubling off net inflows on a monthly basis,
Speaker 4: and this was the highest monthly inflow since the start
Speaker 4: of the pandemic. And this was like nearly thirty ninth
Speaker 4: consecutive month of buying by domestic investors. Because household savings
Speaker 4: towards equities are pretty low in India and it's probably
Speaker 4: the lowest across emerging markets, this trend is kind of
Speaker 4: a structural trend and that is why we are seeing
Speaker 4: like emergency of domestic buying on the buses So.
Speaker 2: Abishik, what's your take on the upcoming budget in July.
Speaker 2: What will be some key missing points now that India
Speaker 2: has a coalition government.
Speaker 3: I don't really think much is going to change in
Speaker 3: terms of what the interim budget suggested in February. Since then,
Speaker 3: there's been a big development that the RB has transferred
Speaker 3: to two point one trillion to the peace to the
Speaker 3: government and the new government Modi point Oh is likely
Speaker 3: to make use of that come July, and we essentially
Speaker 3: expect the government to continue expand its cap expending. But
Speaker 3: I think this time around, as I said earlier, some
Speaker 3: of that tap ex spending is likely to be allocated
Speaker 3: specifically to Entrepladesh and the state of Bhr to get
Speaker 3: more support from its alliance partners. Also, in terms of
Speaker 3: fiscal deficit, we expect the government to in fact at
Speaker 3: least stay put with its reduced target for this ear
Speaker 3: of five point one percentage of GDP, down from five
Speaker 3: point six percent fiscal year twenty twenty four, although there
Speaker 3: is a chance that they might reduce the deficit even
Speaker 3: further to maybe about four point nine or five percent,
Speaker 3: but maybe given that the demands of the allies on
Speaker 3: increased allocation for the relative state governments, they might not
Speaker 3: be able to redace it further, but I think overall
Speaker 3: the market is only going to take a much more
Speaker 3: positive a signal once the budget is announced and any
Speaker 3: apprehensions you've already seen that the market is largely recovered
Speaker 3: after the big sell off post the results and going forward,
Speaker 3: the fundamental drivers on the Indian economy are once again
Speaker 3: going to get attention from investors going forward.
Speaker 2: And what are some of the land and labor reforms
Speaker 2: that are no longer expected to go through?
Speaker 3: So Isshika. If you look at the last years when
Speaker 3: the BGP had absolute majority in the Lok Sabah, they
Speaker 3: also had towards the end of their second term together
Speaker 3: with their alliance partners, good enough size in the upper
Speaker 3: house of Parliament, so they could have passed these laws.
Speaker 3: Then the fact that they could not pass those laws
Speaker 3: at that time means it's going to be equally challenging
Speaker 3: for them now when they have a reduced mandate in
Speaker 3: the Lok saba Now they have more seats in the
Speaker 3: upper house and they're close to the halfway mark in
Speaker 3: the upper house, so it should be easy for them
Speaker 3: to pass laws as long as Alliance partners give their
Speaker 3: approval for a particular reform. But I guess these reforms
Speaker 3: are challenging and they fall on the concurrent list of
Speaker 3: the center and state governments. So my sense is that
Speaker 3: in order to go forward with these reforms, the government's
Speaker 3: likely to take the approach of moving forward with them
Speaker 3: in respective state governments where they rule, rather than try
Speaker 3: to have much broad praised umbrella kind of a policy
Speaker 3: which they tried to push down the throats of the
Speaker 3: state governments, and I think they would probably find that
Speaker 3: kind of challenging.
Speaker 2: Nathan So the Power Minister, Aschkamar Saying, lost his seat
Speaker 2: and he's been replaced. There was quite a bubble in
Speaker 2: the renewables sector within the stock market in India. What's
Speaker 2: the outlook for energy transition in one of the world's
Speaker 2: largest greenhouse gas emitters now? And do you think we're
Speaker 2: going to see that bubble deflate?
Speaker 4: I think the structural demand for energy remains quite buying
Speaker 4: for India because as India grows, there'll be a natural
Speaker 4: demand for energy. So far, the stock market is not
Speaker 4: reflecting on any kind of like a derailment on that front.
Speaker 4: And you can see like an the power sector is
Speaker 4: the stocks have against bounce back, so I would not
Speaker 4: see it as a derailment of the story at this juncture.
Speaker 1: And Abashek, you're the senior economist covering India for Bloomberg Economics.
Speaker 1: Does this election result cause you to question your GDP
Speaker 1: forecasts of India over the next five years.
Speaker 3: John, That's a very good question. I guess I would
Speaker 3: not change my view on India over the next three
Speaker 3: four years, but yes, it does raise a question mark
Speaker 3: over my four coast of the like let's say the
Speaker 3: full five year term or the ten year term, because
Speaker 3: a lot of that kind of depends how the government
Speaker 3: navigates its relationship with this alliance partners, whether it is
Speaker 3: able to bring them up at the same level of
Speaker 3: thinking in terms of the need to stick to pro
Speaker 3: growth policies of increased capex, reduce welfare spending, so that
Speaker 3: kins to be seen, although I think closer to the
Speaker 3: twenty twenty nine elections there might be increased welfare spending,
Speaker 3: but again that also comes at the realization that the
Speaker 3: demand side has been lacking. And then Indian economy, the
Speaker 3: government has been very good with the supply side measures
Speaker 3: of removing bottlenecks, increasing CAPEX, boosting infrastructure creation, but they
Speaker 3: also need to do something to prop up demand, and
Speaker 3: from that person, re welface spending might not be such
Speaker 3: a bad idea. Overall, the fundamental drivers of the Indian
Speaker 3: economy over the next decades stay intact. Favorable demographics, more CAPEX,
Speaker 3: GEO political tailwinds, and India trying to establish itself or
Speaker 3: integrate itself into the global manufacturing supply chain. So I
Speaker 3: would say only marginally negative. It's a risk at this point,
Speaker 3: but I would not change my baseline forecasts and.
Speaker 1: Ntin given Abershek's comments, how should we think about equity
Speaker 1: sector allocation? There seems to be this narrative forming that
Speaker 1: you know, Murdy's weakened positioning is negative for infrastructure plays capex,
Speaker 1: but it could be positive for possibly consumption stocks. Do
Speaker 1: you agree with this view?
Speaker 4: I think it's not linked to was the election outcome before,
Speaker 4: because if you'll see the Internet budget, the KPX spending
Speaker 4: growth was stated to go down to eleven percent from
Speaker 4: the Scotching thirty percent plus KIGER growth that we have
Speaker 4: witnesses the pandemic and industrial tech is quite devered to
Speaker 4: the government KPX growth and given very steep valuations, with
Speaker 4: some of the stocks trading at even higher valuations than
Speaker 4: FMCG firms, there could be a risk of derating in
Speaker 4: those firms and consequently the sector. So the government KPX
Speaker 4: is the number to be closely washed out for any
Speaker 4: slowdown in the KPX road could actually result in derating
Speaker 4: to some of these names. So that's why we have
Speaker 4: kind of roundrated the outlook for this sector in our
Speaker 4: sector's core card, and we find valuations in financials to
Speaker 4: be more lucrative compared to this side of the market.
Speaker 4: In terms of consumption. We think that discretionary side is
Speaker 4: going to do better compared to the stable side because
Speaker 4: of the price of premiumization trend and that is not
Speaker 4: going to be derailed by this outcome.
Speaker 2: Okay, and lastly, maybe a question for both of you,
Speaker 2: whoever would like to weigh in what does this mean
Speaker 2: for billionaires such as got the Madania and Location Barnie
Speaker 2: who have been closely tied with India's growth story. What
Speaker 2: does it mean for the links between the rich and
Speaker 2: the government. Will any change?
Speaker 3: So it's a very i would say, tricky question to answer,
Speaker 3: but I think the stock markets kind of answered that
Speaker 3: question on both the exit poll day and the results
Speaker 3: on June fourth. I mean, Dannie, who's well perceived to
Speaker 3: be very close to a Prime Minister Modi all his talks,
Speaker 3: kind of saw like fifteen to twenty percent increment after
Speaker 3: the exit poll results were announced, and those results also
Speaker 3: took a big beating on the day actual election results
Speaker 3: came on June fourth. But since then there's been a
Speaker 3: lot of recovery as well. We've seen kind of corruption
Speaker 3: at the level faced by individuals has kind of reduced,
Speaker 3: but at the same time, broadly, I mean, if you
Speaker 3: speak to ministers, everybody kind of agrees that corruption at
Speaker 3: the highest level is still there. I mean, that's just
Speaker 3: the part of politics which is there and it remains
Speaker 3: to be seen. I mean, how these companies do, to
Speaker 3: a large extent, the results of how their fortunes play
Speaker 3: out will largely depend on what these companies do in
Speaker 3: order to kind of expand their businesses. So let's see
Speaker 3: what kind of course forward.
Speaker 1: It's been a fascinating discussion on India its surprise election
Speaker 1: results and its impact on its red hot equity markets.
Speaker 1: Thank you Abhishek and Nitton for joining.
Speaker 4: Thank you for having us, Thank you John, Thank you Sheik.
Speaker 1: I'm John Lee calling in from Hong Kong and.
Speaker 2: I'm Isham calling in from Singapore.
Speaker 1: This podcast was produced by Klara Chen and you've been
Speaker 1: listening to the Asia Centric podcast