No one can prove it, but the recent uptick in the Indian stock markets is widely suspected to be the NaMo bounce. NaMo, as in Narendra Modi, the Bharatiya Janata Party (BJP) candidate for prime minister in case the party wins enough seats to form the next government. Goldman Sachs, Nomura and CLSA, among others, claim to have spotted the NaMo effect and have begun factoring in a stock market rise following a possible BJP victory in the Lok Sabha polls of April-May 2014.
In short, the market mavens are saying that despite depressing economic news—weak industrial output growth, a stagnant GDP, double-digit inflation, and a slippery fiscal situation—a change in the political dispensation will be enough to drive stock prices. They are also penciling in the hope that good politics will henceforth drive good economics.
Will it? Will the NaMo bounce play out even if he comes to power? It would be good to look at the factors that favour a continuation of the bounce, and those that don’t.
The things that won’t change even if Modi is the next prime minister—unless we are expecting a clear BJP majority on its own—is that many bad laws will remain on the statute book. The Food Security Bill cannot be scrapped—and it will be a permanent drain on the central exchequer. The Land Acquisition Bill will make all projects more expensive, and infrastructure will become less viable without huge subsidies. Energy pricing—oil, coal, gas—will be difficult to free if we have a minority government, and subsidy cuts—in fertiliser, for example—will be tough to negotiate with allies, especially with a farmer-friendly Akali Dal as coalition partner.
Labour laws that need wholesale dumping will not be easy to tinker with. And the structural rigidities in agriculture—which hinder interstate movement of farm produce and keep prices at the retail end high—are not something the centre can do anything about.
Why then is the market running ahead of reality? There could be two reasons. One is about sentiment. The one thing a BJP victory would change is the negativity now floating like smog above the Indian economy. Widely seen as business-friendly, a Modi-led government would certainly not do anything to worsen the gloom. It may come as a breath of fresh air.
Though bad laws—like the Food and Land Bills—cannot be easily de-legislated, in India laws can be made to atrophy by any political dispensation that is disinclined to implement them. Since many of the reforms needed to move the economy forward can be executed without major legislative effort, one can assume that NaMo will make a difference in hidden ways even without fooling around with laws.
The second reason why the market is feeling more cheerful than it should is its growing impatience with zero returns. The fact is no one—barring a few punters—has really made money in the stock market for the last five years, and the Sensex is really no higher than what it was in 2008 despite an average growth of over 6 percent a year, during the same period.
If you were to look at the numbers that relate growth to market, each one of them shows that the indices have nowhere to go but up. The Sensex’s price-to-earnings ratio is barely 17—which makes it attractive. This ratio moves in the range of 11 to 27, and 27 is clearly further off from the index right now than 11. In short, one should bet on the upward trajectory, assuming the sky is not going to fall on our heads.
(This story appears in the 24 January, 2014 issue of Forbes India. To visit our Archives, click here.)