A transformational budget needed

In eight key sectors in the job market, there has been a net fall of 43,000 jobs for quar-ter ending June 2015.

Soon after the Lok Sabha election victory in 2014, the trio of Prime Minister Narendra Modi, Finance Minister Arun Jaitley and Reserve Bank of India (RBI) Governor Raghuram Rajan was viewed by the markets as men who can transform India into a global economic giant.

The stock market soared, rupee strengthened and commodities market was upbeat. The labour market was gung ho while the market which the aam aadmi frequents on a daily basis – vegetables, fruit, groceries and petrol bunks – was sanguine.

Twenty months into the Modi government, the message from the markets is depressing. Exuberance has dissipated while hope has vanished. Despite the government’s tall claims of India being the fastest growing economy with highest ever Foreign Direct Investment (FDI), signals from markets are undeniably contradictory.

In yesteryears, “foreign hand” was blamed for all the political troubles afflicting our country. Today, the same “foreign hand” or “global forces” is a convenient excuse for the dwindling economic prospects and policy inaction. A cursory look at the current state of Indian markets suggests domestic politics and slow pace of reforms are at play more than the Chinese jitters and US interest rate hikes.

In the stock market, both benchmark indices - Sensex and Nifty- recently hit a 20-month low and so have several sectoral indices. Stock market rode on a wave of optimism for almost nine months reaching record highs in January of 2015. Participants read the election promise of “Minimum Government, Maximum Governance” as a prelude to privatisation of PSUs including banks.

Following pussyfooting by the government, markets reversed course over the last 12 months. Other than the IT sector which is benefitting from a falling rupee, most sectoral indices are either in bear market territory or staring at one. Despite a high GDP number, revenue growth and profitability of companies in the last eight quarters has been muted resulting in multi-year share price lows for many of them.

In the forex market, the rupee has slumped to a new low. With oil and gold imports down and current account deficit well below 2% of the GDP, the Indian currency was expected to be strong and stable during the five year term. The rupee was hovering around 59 to a US dollar when the Modi government assumed office. It has been on a downward slide since and has depreciated 15% suggesting a lack of confidence in the current government’s handling of the economy. Market participants expect further devaluation if the government continues to run high fiscal deficits.

In the commodities market, the country is experiencing relentless inflation while the rest of the world is struggling with deflation. The people now pay more for a litre of petrol than an American pays for a gallon in many states. When the dal prices went through the roof, the Modi government exacerbated the situation by bringing back Indira Gandhi’s playbook and launched raids on traders.

No fresh thinking

On precious metals, the gold monetisation scheme was re-launched with much fanfare but the outcome is no different from the past. Lacking in fresh thinking, markets are disillusioned by the fact that the government has indeed chosen to mimic the Congress government on petroleum prices and most other commodities.

The above three markets would not matter much in politics and elections if the job market was booming along with a semblance of respite for the aam aadmi in the daily market. In the job market, according to the 26th quarterly survey of eight key sectors, there has been a net fall of 43,000 jobs for the quarter ending June 2015.

Job creation over the last two years has been sluggish and ghosts of the past decade – dismal job growth in rural India, minimal opportunities in the service sector, no rise in manufacturing jobs– have not yet been buried. Wage stagnation lingers and prospects for the semi-skil-led and unskilled remains bleak.

In the Daily Market, retail inflation refuses to subside. Prices of daily groceries along with rising housing and transportation costs continue to be major cost burden on lower and middle income households. Vegetables and fruits are getting pricier by the day while pulses and other essential food items witness wild fluctuations.

Markets in a way foretell the future. Its message is an ominous warning for the nearly two year old Modi government. Image makeover and cheerleading is delusional and will neither result in double digit economic growth nor job creation. Persisting with policies of a bygone era with better implementation is not the answer to deliver on electoral promises.

Markets would like to see quick and persistent action on policies that negate Nehurvian socialism and embark on what can be truly deemed transformational – shrink ministries, privatise PSUs, simplify tax laws, enhance tax net, reduce tax burden, liberalise trade, reform education, fund healthcare and build infrastructure.

Tomorrow’s budget must present a vision to transform the country as well as act on many of the electoral promises. Failing to do so will soon puncture GDP growth, embolden the opposition and weaken its own re-election prospects.

(The writer is a Bengaluru-based money manager)

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