NEW DELHI: The Modi government has a long list of achievements to flaunt and celebrate as it completes three years of winning powers at the Centre with an astounding poll verdict in May 2014.
But market mavens, who are otherwise gung-ho on the Modi regime, also cite five stark areas that blot Modi’s report card.
The Modi government has come out all guns blazing in last three years, with major initiatives such as Make in India, Housing for All, Swachh Bharat Abhiyan and Jan-Dhan Yojana, among others.
The passage of the GST bill and power and banking sector reforms have also been seen as big drivers of the economy, while the demonetisation drive was one of the boldest policy moves in Independent India.
Overseas portfolio investors, who had initially doubted Prime Minister Modi’s ability to deliver, have turned his approvers in no time. Marc Faber, renowned global investor and author of The Gloom, Boom & Doom report, gave thumbs up to the Modi government and appreciated his feats, even though he opposed the cash ban.
But five key issues stand out as eyesore in an otherwise impressive first three years.
Slow pickup in capital spending has been a big drag on the market. Deustche Bank in a research note said despite the government’s attempts to raise public spending “within the confines of conscious fiscal discipline”, investment formation has remained anaemic.
Private sector capital formation, which accounts for 75 per cent of total fixed capital formation, grew at a mere 2 per cent in FY17 over FY16.
“Stubborn growth in capital formation tends to put a ceiling on GDP growth and constrain employment creation. With urban employment growth stalling over the past few quarters due to slowing investments in e- commerce/internet startups and a slump in Indian IT services demand, job creation is likely to take on a critical status on the government’s economic agenda as it enters the last two years of its term,” the Deustche Bank note said.
The government has failed to earn a rating upgrade for the economy. Chief Economic Adviser Arvind Subramanian many a time slammed ratings agencies in the open and raised questions over their rating methodology, but India’s rating remains just above junk level.
In November last year, S&P Global Ratings ruled out an upgrade for India in next two years, even as it affirmed a stable outlook on the country’s ‘BBB-’ long-term and ‘A-3’ short-term sovereign credit ratings.
While the government initiated many steps to ease the difficulties one faces in setting up of a business in India, the ranking has not improved much. As per World Bank, India stood at 130th slot on ease of doing business, 155th at starting business, 185th in dealing with construction permits, 138th in registering property, 166th in enforcing contracts and 108th in trading across border. The ranking was benchmarked to June 2016.
“If you look at that (ease of doing business) indicator, India ranks as one of the lowest, if not the lowest, among the BBB-rated economies,” said Thomas Rookmaaker, Director at Sovereign Ratings.
Christopher Wood, CLSA’s Chief Equity Strategist, in his widely followed Greed and Fear weekly note said resolution of the NPA issue has been a big missing link in India’s macro story.
“Once resolved, the way will be clear for the public sector banks to raise capital, a process which should also lead, with encouragement of both RBI and the government, to the consolidation of the public sector banks,” Wood said.
He said there was scepticism among Indian fund managers, whether such resolutions will happen, given the previous failure to address the NPA problem.
The cabinet earlier this month cleared the nonperforming asset (NPA) resolution package, that includes an ordinance to authorise the Reserve Bank of India to issue directions to banks to initiate insolvency resolution process in the case of loan default.
“If the cynics are proved wrong and the bad debt issue starts to be resolved, it will be a positive for the major 'value' sector in the Indian stock market. That is, of course, the listed public sector banks,” said Wood.
Prasanth Prabhakaran, Senior President & CEO, YES Securities, said India could see traction in reforms related to power and PSU banks sectors, particularly with regard to issues like recapitalisation and further measures to improve asset quality and also mining in the remaining two years of this government.
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