Fairly valued

If equity market is the yardstick, the three years of the Modi government have been rewarding, with upside potential

While campaigning for the Lok Sabha polls, prime-minister candidate Narendra Modi would urge the audience to give him a chance after 60 years of Congress reign. Implicit in the appeal was a hint of a different style of governance and a confidence that his five-year stint will be a striking contrast against six decades of a legacy spanning post Independence to post liberalization in spite of the fact that most structural reorganizations take years to produce benefits. The electorate will of course pass its verdict at the end of the term, most probably after answering the question how better off it is compared with pre-May 2014.Nonetheless, an assessment at mid-point is useful to notice the style and substance of policy making: populist with an eye to winning the next election around the corner or thoughtfully crafted to push towards a desired aim. The ability to inspire despite short-term discomfort needs to be scrutinized to distinguish the quality of leadership. Importantly, efforts taken to implement the platform that propelled Modi to lead the nation should get the highest weight. The exercise is, however, fraught with risk. Governments are not held up or run down solely based on comparison of the track record with the earlier regimes. Often, casting of ballots is swayed by sentiments as in the trading ring.

The stock market supposedly reacts after absorbing all tangible and intangible information. The number of times an issue gets subscription is a reflection on the promoter, the business model and outlook. For the first in nearly 30 years, a political party could form government without coalition partners. After moving sideways, the market has picked up speed, mimicking the behavior of a stock that investors realize is undervalued. The momentum could be in response to some of the measures being taken to drain out a system clogged by subsidies, corruption and cronyism starting to show results. The broad market is perfectly poised: not expensive based on historical averages. For the critics, absence of a hefty premium might signal uncertainty about the government’s capability to introduce and execute reforms. The rulers might see in it validation of the actions taken. The initial hesitation and then acceptance by the market of the progress on the three promises of development, minimum-government-maximum-governance and corruption eradication seem to have stemmed from the realization that the outcome cannot be captured in a time-bound and traditional manner. For instance, the premise that the organized sector has the responsibility of job creation, ironically being propounded by those who till a few months ago were emphasizing the importance of the informal sector in the economy, is being vigorously challenged, by noting the fund disbursals by venture capitalists, private equity and Start-up India. Auctioning of government resources has eliminated the discretionary power of ministers and bureaucrats. Though not a perfect method for price discovery, it is at the moment the only practical solution to let market forces prevail. The satisfying aspect is the breaking of quid pro quo sought by influencers. Linking Aadhaar to receiving benefits including tax rebates and subsidies is a bold attempt to plug benefit leakages and the opposition to it from the privileged class has enhanced rather than diminished its indispensability.

An important metric to judge a company is the variance between guidance and performance. The rollout of GST has been missed by a quarter or so. The progress of the development agenda includes bounce-back of the foreign portfolio and direct fund inflows, stabilization of the fiscal health, softening of inflation, elimination of power deficit and expansion of the electrification program, spread of cooking gas connections, easy availability of urea for farm use, constructing highways on war footing, scrapping of the FIPB and putting FDI in most sectors on auto pilot. A government can afford to remain a benign shadow only if laws are respected. As persuasion and repeated amnesty schemes have met with lukewarm response, the DeMo treatment was necessary to change the habit. The bad-loan legacy and the tepid risk-taking by the private sector are overhangs similar to an enterprise that is seeking debt to grow and resorting to reducing weights to maintain volumes and protect the margins during challenging times. India absorbed the pain of high-value note recall just as long-term investors with faith in the management stay put during a company’s travails due to external conditions. Peer comparison, too, helps. The surge of equities in the run-up to completion of three years is understandable when there-is-no-alternative Modi is pitted against India’s entitled dynast and coalition of corrupt.

Mohan Sule