A compact Cabinet sends out good signals
Unlike in 1991, when it took a slew of reforms to get investors all enthused, this time around they are already prepped up. While FIIs have already pumped in $18.2 billion in both debt and equity markets since Modi was announced as the BJP’s prime ministerial candidate in September last year, around $2.6 billion of this has come in the fortnight since the exit poll results were out, and domestic investors seem to have joined the party as well—not surprising, since leading brokerages are upping their earnings estimates as well as projections for the market. As a result, the Sensex is up 5% since the day before the exit polls were announced and the PSU index is up nearly 22%. As in 1991, no one is expecting miracles, even optimists haven’t upped their FY15 GDP growth forecasts. Indeed the obstacles to higher growth are well known—our lead article highlights several of them, from low government savings to highly leveraged corporates and poorly capitalised banks.
Tackling all of this is going to take time; what investors are looking for right now is signals. So far, the Modi government has not disappointed—the decision to invite all SAARC leaders to the swearing-in, despite the opposition from various allies, signalled Modi’s ability to change the script. The absence of several of the BJP’s old guard in the Cabinet is reassuring and suggests Modi has got a relatively free hand, though the absence of a full-time defence minister indicates cabinet formation is still work in progress. Merging ministries is a new Modi theme that needs to be tested—minimum government, maximum governance—though it appears sound in principle. Some of the veteran ministers, industry would be pleased, have been kept away from key economic portfolios. And a large number of young, first-time ministers of state with independent charge suggests a brand new energy will be brought to bear on decision-making.
The choice of finance minister sends out a powerful signal as to what kind of policies to expect. Ditto for other important economic ministries. Choosing bureaucrats to steer key infrastructure ministries/projects, similarly, will send out positive messages to investors. If Japan is one of Modi’s first international ports of call, as looks likely, it will signal a renewed interest in building and financing infrastructure—the Japanese have been very keen to fund both the Western dedicated freight corridor as well as Delhi Mumbai Industrial Corridor Development Corporation (DMICDC), but have been very unhappy with the level of progress—it took the government more than a year to decide on, for instance, on whether Japan’s tied-aid loans were acceptable or not. Key signals, such as those on fixing the tax troubles of leading MNCs, correcting distortions in fuel pricing, and independence to PSUs among other measures, will help the Modi government harness the wave of support. Key players in both the oil and telecom sectors, for instance, have written in this newspaper on how relevant reforms would trigger an investment revival in very little time. It took one policy decision of the UPA, that on continuous exploration, for instance, to set off greater exploration efforts last year and resulted in several fresh oil/gas discoveries within a year—it took the fiasco over gas pricing to dampen sentiments. The investor appetite is there, it is up to Modi to harness the animal spirits. And India Inc would do well to also make the most of this opportunity to clean up its balance sheets—while investor appetite is hot, sell off assets at a discount and pay off the banks. Were the government to announce a plan to lower its stakes in PSU banks over a period of time—in the budget perhaps—that would really set the markets afire.