Ignore the market rally; Modi has limited room to turn things around

Ignore the market rally; Modi has limited room to turn things around

By Sunil B.S. @sunilbs_tweets June 13, 2014

Not so fast, bull market.

Earlier this week, president Pranab Mukherjee laid out Narendra Modi’s plans to reignite investment into India. But it is easier said than done.

A recent report by Credit Suisse says that markets have overestimated the powers of the central government. It pointed out that of the projects worth $1,391 billion that are under implementation, only those worth $351 billion have reached the central government for approval. The rest are stuck because either there are problems within respective organizations or these projects come under purview of state governments.

India’s benchmark equity indices are rising every day on expectation that the new government will boost spending and accelerate approvals for various projects. The Sensex has gained 20.83% since beginning of this year. The rally seems to be based on the belief that change is coming. But is it? “Earlier government failed to convey the message properly to public that the reason why projects are stuck is not in their control,” says Daljeet Kohli, research head for IndiaNivesh Securities. “What Narendra Modi is saying now is no different from what UPA government was saying. Both have stressed the importance of cooperation of states to put growth back on track.”

Two-thirds of the projects that are awaiting approval from central government are in power and steel sectors. Credit Suisse says reforming state electricity boards (SEB) and making coal available is crucial or else these projects will remain stuck.

The report says that there is little the central government can actually do to force banks to lend more to SEBs or to the states to reform their electricity boards. Analysts hope Modi will empower states—especially those ruled by the Bharatiya Janata Party—to implement reforms and fast-track investment. Mukherjee also said on Monday that the government will pursue reforms in the coal sector “with urgency for attracting private investment in a transparent manner.” This refers to a proposal to allow private firms into mining. But an increase in coal production is unlikely to happen till data on reserves in these mines is updated.

Credit Suisse estimates it would take at least two years for that to happen and another three to five years for mining to begin once coal is auctioned. The other two areas where the central government’s hands are tied are roads and highways.They both come under the purview of states. Amid a slowdown in growth, developers are backing off previously scheduled projects. Kohli of India Nivesh says: “With banks lending recklessly, many of these developers bid everything that came in their way without analyzing.”

Funny, you could say the same of bull investors today.


Much ado about nothing: Analysts on economic impact of polls

PTI | Mar 28, 2014, 05.16 PM IST

NEW DELHI: There may be high hopes from the polls when it comes to economic momentum of the country, but economists are of the view that Indian economy is much more dependent on the global economic cycle than who rules in Delhi.
There is a growing perception that elections could kick- start the investment cycle with various leaders blaming the recent slowdown in growth momentum on policy inaction due to the upcoming Lok Sabha polls even as some others pin hopes on a regime change.
However, economists, including those at some large global financial conglomerates, believe that such high hopes may not come true, at least in entirety.
“We disagree with the consensus that elections can revive the investment cycle,” economists at Credit Suisse said, adding that “such misplaced optimism ignores the realities of the business cycle and overestimates the power of the central government”.
Echoing those sentiments, Bank of America Merrill Lynch analysts said, “We can only continue to emphasize that the global economic cycle drives India’s growth far more than who rules in Delhi.”
Credit Suisse as well as Bank of America Merrill Lynch have conveyed these views in the research notes prepared for their respective clients in India and abroad.
The Indian stock market had seen a massive 15.9 per cent sell-off in May 2004 after the surprise defeat of NDA, while a 15 per cent Sensex rally was witnessed after the emphatic re-election of UPA in May 2009.
On both occasions, the markets failed to get the poll outcomes correctly, experts opine.
According to analysts at BNP Paribas, the risk of political uncertainty after elections remains for India, notwithstanding the current opinion polls predicting a strong showing by BJP.
Economists have broadly listed four post-poll scenarios: Narendra Modi-led NDA government with two-three allies; Modi- led NDA government with five-six allies; other leader led-NDA government with 8-10 allies or a Third Front government supported by Congress


About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (, a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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