New govt should provide fiscal stimulus, with the very first budget

Elections are often checkpoints, in an economy and the market's long-term journey. This 2019 checkpoint is now past, and with no big surprises, should allow the government and the market to quickly focus on the road ahead.  One of the bigger positives of this election verdict is that the new government should have a fair idea of the road map, has the policymaking engine running, and can get to work immediately.  It also comes after a fairly bumpy economic ride over the last term — where a fair amount of economic reform (GST, IBC)  was initiated, and India’s corporate and small business sector has been restructuring, and taking fair pain. A lot of this readjustment and pain is now likely in their last legs, or behind — but has been showing in the last of investment or consumption measures.  The timing of the government's second term should, therefore, be a lot better than the first time around; and could well be the opportunity it did not have the last time around, or the time to bear the fruits of some hard work, the first time around.

So, what should the new government do now? We believe the need, and the path, is reasonably well laid out. The government has to get India’s subdued business cycle going, and it will not happen by itself, or only by the new government formation.  The government needs to make it happen. It should provide a fiscal stimulus to the economy, with the very first Budget. The government has shown such intent with its last budget — with its PM-KISAN programme, or the income support approach, and which it will likely build on it (already there in the manifesto).  We would also expect a further investment push, although the overall stimulus bias will likely be more consumption oriented.  This needs to be supported by a substantially aggressive monetary stimulus, and approach, from the RBI. Rates need to be lower, and liquidity needs to be enhanced, if banks, NBFCs and other intermediaries start lending again, to get the economic cycle back on track. While this approach will probably not find favour with fiscal conservatives — but if growth has to come back, this is the way to get a virtuous growth cycle back. This will also eventually flow through to the economy’s well being: On growth, savings and a reducing fiscal deficit.  

So what is in it for the markets. Relief to start with — though that’s largely reflected in the market’s performance over the last one week. But beyond that, it’s the business, earnings and investment outlook that will once again take over. That cycle is muted for now, and in the normal course of events, one should expect only moderate market returns over the next year.  The new government, however, does come with a long new term, a mandate to get growth back up.  If it were to embark on a fairly aggressive fiscal and monetary stimulus and have the backdrop of a relatively benign global environment, it would bring more cheer to the economy, and stronger returns for the market, and investors.

The writer is head-Research, Institutional Equities, Edelweiss Securities