A 30 day report card of the Modi government - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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A 30 day report card of the Modi government 

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In this issue:
» Government mulls floating financing arm for road projects
» Modi govt plans to unveil a new skill development plan
» PSU banks are facing talent crunch
» This is why Dubai stock markets crashed...
» ...and more!


00:00
 
Being long term investors we assess performance, over 2-3 years. Hence, a 30 day report card for a government which has a 5 year term may seem a bit odd. But since Narendra Modi assumed office on 26th May 2014, we have had an action packed month. Hence, we thought it would be worthwhile to scan through the performance over the last 30 days. And assess how it has fared when it comes to taking decisions, especially the non-populist but fiscally prudent ones.

Swift decision making was expected from the new government. At least it has not disappointed on this front. The government cleared Rs 210 bn worth of projects that were in limbo since ages some time back. To top this, ministry of road transport recently cleared Rs 400 bn worth of road projects. The fact that various ministerial groups were abolished to fast track decision making suggests that a lot of red tapism that one associated with the previous Government will be done away with. And that the NDA is committed to rolling out red carpet for India Inc.

Further, in order to curb the black money menace, SIT was established. This is certainly a noteworthy step for a country like India which is notorious for its black economy. Also, in order to curb food inflation, fruits and vegetables were finally delisted from the draconian Agricultural Produce Market Committee (APMC) act. Delisting fruits and veggies from APMC will allow farmers to sell their produce in open market. This shall bring down prices and farmers will no longer be at the mercy of the middleman.

Lastly, foreign diplomacy gained traction and government indicated that it is against tax terrorism (read retrospective taxation). The latter was a measure to please foreign investors and encourage more investment from offshore.

All these measures highlight the efficacy of governance. However, the fact that railway fares were raised after almost a decade suggests that the new government is not afraid to bite the bullet when it comes to taking non-populist but economically sound decisions as well.

All in all, the new government has made its intentions clear. It will function on two pillars. The first being efficient governance and second prudent economic decision making even if it means that citizens have to swallow bitter pills in the near term.

While the Modi government has managed to do well so far, it would be interesting to see how it performs over the long term considering external challenges like weak monsoon and Iraqi crisis loom large.

The people of India have high hopes and are eagerly waiting for achhe din. And the scorecard of first 30 days certainly gives an indication that the Modi administration is committed to fulfilling its promises.

From the investors' perspective, while the first 30 days were indicative of a good start, there is no reason to get complacent about stock picking. This is because businesses that are vulnerable to economic shocks may continue to throw up negative surprises despite the government's best efforts.

How do you think the Modi government has performed in its first 30 days of being in power? Let us know in the Equitymaster Club or share your comments below.

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01:50
 
So far they were largely associated with the technological aspect of India's infrastructure plans. However, the Japanese are now set to play a much bigger role. As per Business Standard, the NDA government has plans to set up a finance entity with a corpus of Rs 1 trillion. Now, one would recall that even the UPA government had planned ambitious infra outlay of over trillion rupees in its 12th 5 year plan. However the public private partnerships never took off. Primarily because given the policy bottlenecks, private sector enterprises showed no interest in investing in infra projects. As a result, just 15% and 5% of the targeted road building projects were actually awarded in FY13 and FY14 respectively.

Hence the government has decided to rope in Japanese investors to fund projects in the road sector. This time however the investment comes with promise of attractive and assured returns. The Japanese partners are likely to have a 26% stake in the entity. Moreover, the government will offer assured returns of 9%. Given that the Japanese are keen to park their funds in non dollar denominated assets; this may be a lucrative opportunity to them. Moreover, the pace of completion of build-operate-transfer (BOT) projects may also improve.

02:25
 
One of the many problems plaguing the West is a gradually ageing population which is expected to put pressure on government finances going forward. But as younger population enters its workforce in the coming years, India has an advantage because of its demographic dividend. However, quantity is not the only thing that matters. Quality of workforce is important as well. And many articles have been written on how the education system in India is out of sync with actual requirements in companies.

In other words, most people graduating do not have the requisite skill sets to land jobs. The Modi government intends to set this right. And so it has created a five year old plan which was initiated during his tenure as the CM of Gujarat. This skill development plan is called NETAP and will focus on on-the-job training so that the skills of the workforce and the needs of the industry get aligned. The plan is to enroll two lakh apprentices annually into real time training at the workplace, with an assurance of gaining a recognised skill certificate at the end of two years. The idea is to ramp up apprentices in India which significantly lag that of Germany, Japan and China for that matter. Whether this will go a long way in bolstering job creation in the country remains to be seen. But the intention is certainly a step in the right direction.

02:45  Chart of the day
 
As positive sentiments rule Indian stock markets, corporate fund raising activity is gaining momentum. The current scenario is starkly in contrast with situation some time back when capital markets were almost closed to these companies. However, with Modi Government at the centre, tide has turned in favour of India Inc. And the latter seems set to make the most of it. As an article in Business Standard suggests, the amount of money estimated to be raised over next two years stands at Rs 1,200 bn. In fact, around 59% of this amount is likely to be raised by end of this calendar year. Further, as the chart suggests, the top five firms will be raising 50% of the estimated amount, led by Hindustan Zinc Ltd and Tata Steel Ltd. India Inc is approaching investors both at home and abroad through foreign currency bonds, offer for sale and qualified institutional placements (QIPs). Even the Government that has been struggling with disinvestment targets for PSUs has big plans to sell stakes and raise money. Further, merger and acquisition space is likely to see a lot of action.

However, investors must be cautious and not get carried away by the market frenzy. One should not forget that in the past, a number of companies that had raised debt were caught on the wrong foot when economy did not grow as expected. Even now, Indian economy is yet to come out of the woods. It may take some time before reforms get implemented or they show impact on the respective sectors and economy. Hence investors would do well not to ignore the fundamentals in this sentiments based rally.

Fund raising plans of India Inc
HZL= Hindustan Zinc; IOC = Indian Oil Corporation; MS = Motherson Sumi


03:10
 
Public sector banks are not only facing pressures externally - NPAs concerns - but also are likely to have issues due to weak internal processes. We are talking about the manpower shortage issue that the public sector banks are likely to come across in the years to come. Here's a case in point: 40% of Bank of Baroda's senior management is likely to retire in less than a year. As reported in the Economic Times, the bank's management is worried about finding replacements to fill in the gaps. The same seems to be the case with India's largest bank State Bank of India. 35,000 to 40,000 employees of the bank are likely to retire in four years.

The lack of focus on HR practices & policies seems to be one of the key factors that has led to this situation. And given that this internal challenge is likely to impact the major public sector banks at a time when the management's focus should be at resolving external concerns, it does portray quite a scary picture. While the easiest way out would be lateral hiring i.e. hiring from outside the bank, this itself has its own set of challenges, including salary distortions when compared to their private peers.

03:45
 
Investment markets are governed by forces of demand and supply. But when demand outstrips supply for a long time, it can result in the build-up of bubbles that can be threatening. This is because unbridled appetite in investment markets results in the assets exchanging hands from rational to speculative investors. And in such a scenario, a negative event can snowball into a major panic. The Dubai stock markets are bearing the brunt of an overheated property market. The property market in Dubai has been a hotbed, attracting rich Arab investors. Torn by civil world and jihad, the Arab world hardly has any profitable avenues for investing the booty from crude oil. This has fuelled the real estate boom in Dubai.

But the property markets in Dubai have still not learnt a lesson. The earlier boom that saw the 'World Islands' built from dredged sand had ended in a debacle in 2008. This time the property boom is represented by an ambitious plan to build a complex in Dubai that houses the world's largest mall along with 100 hotels. Therefore it is hardly surprising that reports of firing at UAE's largest listed builder caused the Dubai markets to tumble to a level 25% lower than the May peak.

04:30
 
In the meanwhile, the Indian stock markets have been trading weak. At the time of writing, the benchmark BSE-Sensex was down by 54 points (down 0.2%). Among the sectoral indices, stocks from Oil and gas and capital goods sector were among the leading losers. While stocks from consumer durables and healthcare sector were witnessing maximum buying interest. Majority of the Asian markets too are trading weak today. Even European markets have opened the day on a negative note.

04:50  Today's investing mantra
"Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway." - Warren Buffett
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19 Responses to "A 30 day report card of the Modi government"

Ajit

Jun 30, 2014

Its rather too early to judge but he definitely seems to be very very focused and determined, promising the delivery.

Like (1)

ajit

Jun 29, 2014

not up to aam aadmi's satisfaction

Like (1)

Kicha Ramaiya

Jun 28, 2014

Modi's performance appears to be promising. We hope he would deliver what he had committed earlier.

Kicha Ramaiya

Like (1)

sateesh kanagotagi

Jun 27, 2014

The NAMO govt. has done what it needed to . Free 35 Kg rice to BPL ,only makes them lazy hence nonproductive. Provide jobs , not free food. Let the Ind Rlys become financially strong. Nemesis of black economy needs to go too.

Like (1)

Rammohanrao Gedela

Jun 26, 2014

Abolition of various speed breakers like EGOMS etc introduced by UPA are clear indication that NDA means BUSINESS GROWTH and that they are prepared to bite bullets to bring back the Economy on rails and instill confidence among Investors.At least decisions are being taken speedily.

Like (1)

G.P.SANGAL

Jun 26, 2014

Modi Govts. performance in the so far has been excellent. Some Opposition parties are creating unnecessary fuss for their narrow gains.

Like (1)

A K Singh

Jun 26, 2014

In its first 30 days, Modi govt. performed even better than expected.It enhanced decision making by removing some unnecessary steps like GOM etc.It is also creating a conducive environment for FDI. Takes bold but economically important decisions like hike of train fates. sachmuch achhe din aa rahe hain.

Like (1)

Ajay

Jun 25, 2014

I see that you have mentioned that recent train fare hike had been after a decade but i believe there was hike last year as well.

Like (1)

Ravi Kumar

Jun 25, 2014



I agree with your assessment that the Modi Sarkar is thinking right and acting right --- so far. If this approach continues for the next 4 years and 11 months, we are certain to see a significant change in the direction and growth of our economy. God bless the Modi Government.

Like (1)

Om Arora

Jun 25, 2014

Extremely well done by Modi and Co

Like (1)
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