Narendra Modi has been chosen as the leader of the NDA 3.0 and Delhi is abuzz with the permutation combination for the new Government that would be sworn in over the weekend. While the allies have put in their wishlist and the jury is out on who gets what portfolio, what does it all mean for the Indian economy? According to UBS, the government push towards supply-side reforms may continue but tougher reforms like UCC, land reforms and the like might hit a speed breaker.
Policy push- Will it face any hurdle?
According to Tanvee Gupta Jain, Chief Economist – UBS India, “We believe India’s growth over the past few years has benefitted from digitalisation adoption, higher services exports, credit expansion and reforms to boost manufacturing/exports amidst China+1 supply chain shifts. Indeed, the government initiatives to boost manufacturing are already showing progress in sectors including electronics.” For instance, India has become the second-largest mobile handset manufacturing nation in terms of volume globally. As a result she continues to , “expect a government push towards supply-side reforms including manufacturing, simplification of regulatory processes, labour law implementation, skill development and creating employment opportunities (especially blue-collar jobs in low-skilled labour-intensive manufacturing) amongst others. However, we think implementation of tougher reforms including land reforms, a big boost to infrastructure spending, divestment, farm bills, Uniform Civil Code, One Nation One Elections amongst others will be challenging. In our view, these will matter a lot for the overall narrative for investor sentiment.”
Recovery in capex cycle important
Though India’s growth remains resilient, the UBS report highlighted the “dichotomy between household consumption growth (below trend since the pandemic) and real GDP growth (holding up well).” According to Jain, “India is seeing a K-shaped consumption recovery with affluent/premium segment demand seemingly doing well, and demand for entry-level and mass-market goods has remained muted post the pandemic. This suggests that those at the lower end of the income pyramid, that were perhaps the most affected due to the pandemic, have still not seen their income levels recover to levels to regain their ability to spend.”
What does it indicate? Well according to them, limited fiscal support for vulnerable sections of society and weather anomalies affecting rural income have amplified the gap. Jain suggests that “to help broaden India’s growth, we believe India needs a broad-based recovery in capex cycle as construction is the largest generator of jobs outside of agriculture.”
What’s expected to focus in Budget?
Given the current mandate, UBS believes investors will focus on:
–Policy choices to support growth vis-à-vis ensuring macro stability,
-The reform narrative
All eyes would now be on the upcoming Union Budget announcement. “Our base case is for the government to stick to a medium-term fiscal consolidation roadmap but with a populist bias. The higher-than-expected RBI dividend transfer to the government (additional 0.3% of GDP in FY25) (Figure 4) would create fiscal leeway to increase populist spending to support consumption for lower income strata,” Jain added.
While UBS does not rule out the Govt continuing its thrust to boost public capex , the implementation of labour laws (the government has consolidated 29 central labour laws into four labour codes) could still take place as these are already cleared by both houses of the parliament, there might be some slowdown on the road top reforms. Jain said that “we think the next set of reforms in land and capital that markets were hoping for will likely disappoint as political capital is lower vis-à-vis 2019 and 2014 elections.”