Stock markets in India had a roller coaster ride on 18 December, the day the Gujarat election results came in. Initial trends suggested that the ruling BJP was going to lose the state which resulted in the Sensex opening with a cut of 98 points and went on to crash 866 points compared to the previous close.
However, the moment the trend changed in favour of the BJP, the Sensex started moving up and finally closed the day with a 139 points gain—up by more than 1,000 points from the day’s low.
The rally has since continued, and the Sensex has scaled an all-time high. Market experts feel the BJP victory in Gujarat, a business hub, is a victory for the government’s reforms measures. “The demonizing of major structural reforms like the GST and demonetization was squarely rejected by the electorate,” says Ajay Bodke, CEO and Chief Portfolio Manager, PMS, Prabhudas Lilladher.
Reforms to slowdown
The stock market is in a happy mood now and is hitting new highs as the BJP’s electoral performance is being seen as an endorsement for the government’s reform agenda. “Gujarat results will reinforce the government’s resolve to roll-on the reforms juggernaut benefiting the economy and markets. This would lead to an acceleration in foreign and domestic investments,” says Bodke.
However, some experts doubt the speed at which future reforms will be rolled out. “Economic reforms are a continuing process. However, after demonetization and GST, the appetite for taking hard decision is less,” says Tirthankar Patnaik, Chief Strategist and Head of Research, India, Mizuho Bank. So don’t be surprised if pending bigticket reforms—land, labour laws, etc.—get postponed to the next government
Increased rural focus
Though BJP finally won Gujarat, it lost a significant number of seats in rural areas. This has raised fears among some market participants that the government may not continue with structural reforms. The Budget will indicate if the government is getting into the populist mode. Increased focus on agriculture and the rural sector is a possibility because the upcoming Budget will be the last full Budget that will be presented by the government.
Should the market be worried about this possible shift? “The government was focused on agriculture even before the Gujarat elections, and it will be fine as long as it is done without impacting fiscal prudence,” says Patnaik. So what steps are expected in the upcoming Budget and the following months? The cost of farming has increased in recent years because fertilizer prices have gone up due to the removal of subsidies. If the efforts at doubling of the farm income lead to arbitrary increases in the minimum support price (MSP), they will be inflationary.
The government, on the other hand, can ensure a good price for the farmers and the consumers by reducing the number of middlemen in the system. Liberalising trade in agriculture commodities is another option and the government has already taken a step in this regard by scrapping stock limits for sugar traders. Sugar production this year is expected to rise 30% and steps like scrapping the stock limit will help keep the domestic sugar price steady.
Sugar companies will be able to earn a decent profit and in turn be able to pay sugarcane farmers on time. The likely possibility of supporting farmers through a farm loan waiver, however, will not be economically prudent and will compromise the loan repayment culture and have an adverse impact on the banking sector.
Rural-focused companies to benefit
Though the exact actions of the government may not be clear, its focus on the rural sector is not in doubt. This is why Gautam Duggad, Head of Research, Motilal Oswal Institutional Equities, recommends that investors concentrate on the consumption recovery theme, especially those with a rural focus.
The theme encompasses several sectors: Companies catering directly to agriculture like tractor manufacturers such as M&M, Escorts, etc.; fertilizer players such as UPL, among others. Improving farm productivity through efficient irrigation systems like micro irrigation is a possible step towards doubling farm incomes and this will benefit companies like Jain Irrigation, EPC Industries, among others. FMCG companies with a strong rural network like Dabur—rural sales contribute more than 50% to its top line— should also benefit from the rural revival. Two-wheeler makers like Hero Motocorp also stand to benefit from increased rural income.
Bear in mind, with several elections lined up, you should be ready to bear short term volatility. “Since 2018 has a busy political calendar, market volatility could be higher,” says Duggad. In particular, elections in big states, such as Karnataka, Rajasthan and Madhya Pradesh are likely to lead to heightened market volatility.