Nifty set to soar after blockbuster Modi win in key states

India’s benchmark stock index Nifty (Future)-India 50 closed around 20362 Friday, at a fresh lifetime high after exit polls for recent state elections showed the increasing possibility of a BJP/Modi win in three big states compared to earlier odds of a defeat. Nifty also got a boost on hopes of a US pension fund flow of around $3.6B (around Rs.300B) in 2024. Earlier, Nifty was almost flat on muted global cues amid lingering uncertainty about the Gaza war extended/permanent pause; Nifty was also under stress on RBI regulatory tightening on unsecured retail lending and RBI warning about exorbitant interest rates being charged by various MFI/NBFCs for priority sector lending, especially farm/agricultural loan to poor villagers, who has no alternative route for financing rather than private lenders.

But by mid-Tuesday, Nifty surged from around 19800 to almost 19917 on hopes of US pension fund flow in the Indian market. There was also a report about increasing odds of a clear win by BJP in Rajasthan (RJ). India’s Dalal Street was also buoyed by positive cues from Wall Street amid unconfirmed reports of an extension of the Gaza war pause till at least Sunday (3rd December) from the prior Thursday. Subsequently, Nifty scaled around 20104, before closing around 20096.60.

On Tuesday, there was a report that in 2024, India may receive a substantial fund of around $3.6B or around Rs.300B as a portfolio investment from the U.S. Pension Fund after its index switch. The U.S. Federal Retirement Thrift Investment Board has total assets of around $600B. The board has invested around $68 billion in the International Stock Index Investment Fund till Oct’23.

As per reports, the US federal government’s retirement fund has decided to change the benchmark equity index to expand international exposure. This move could lead to a churn of $28 billion across global stocks while India could see inflows of $3.6 billion (more than Rs.300B) from 2024. The Federal Retirement Thrift Investment Board, which is one of the major US pension funds, recently decided to switch from the MSCI EAFE index to MSCI ACWI ex-USA and ex-China.

In 2023, FPIs may invest more than Rs.1T in the Indian Equity market, which has now market capitalization worth around $4T, almost 100% of India’s reported (unofficial) nominal GDP (at current prices) by Dec’23-Mar’24. India now enjoys a scarcity premium among FPIs in the EM space (except China) due to the attraction of political/policy/currency/price/growth/financial stability coupled with Modinomics and 6D (development, deregulation, demand, demography, digitalization and democracy). Also, most of the Indian blue chip companies have good business models, earnings growth, deleveraging balance sheets, and trusted/impeccable management.

But on Thursday, the Indian market was also undercut by fresh diplomatic tension after U.S. authorities accused direct/indirect Indian spy agency (RAW) involvement in attempting to assassinate a U.S. citizen of Indian origin and a known ‘Sikh Activist’ in New City. This is similar to the recent accusation of Canada against India, which under strong political leadership of PM Modi and NSA Chief Doval may have changed (unofficially) the previous defensive strategy (under UPA/Cong Govt). India is now not hesitating to eliminate proven/known terrorists, even hiding on foreign soil and actively planning terrorist action against India.

Under the nationalist policy of the Modi admin, India is now playing on the front foot rather than the back foot to avert an offensive on the country, thanks to superior strategy, tech/AI, and an efficient set of official/unofficial mercenaries. But India will never acknowledge it. Also, most of the powerful countries like the U.S., Russia, China, the U.K. and Israel have strong spy networks and regularly do external surgical operations to eliminate threats against their national interests. India is also following the same strategy and being a big powerful country/democracy, India is now not shying away and such a surgical strike on foreign soil may not affect FPI flows and the Indian market significantly.

But the Indian market was also boosted by increasing odds of BJP winning in key state assembly elections like RJ, MP, and even Chhattisgarh (CG), although in MP and CH, it may be very close and even in RJ. In Telangana, the BJP has virtually no chance, while the Cong may have some advantage against the ruling BSR. In Meghalaya, there may be also a hung assembly. Overall, the BJP has the huge advantage of money, muscle and ED/CBI power in forming a ‘stable’ government over INC (Cong) in any state (Resort politics).

In a way, it has been proved time & time again, irrespective of state politics, incumbency wave issues, and state/regional political leaderships; Modi has no problem in general election because of his strong political leadership, everything being equal. BJP/Modi is set to win the 2024 general election with a very big margin; the question is whether it’s 300 or 350 seats in LS, not 250. The so-called united Opposition (I.N.D.I.A) is still unable to project an acceptable face of an opposition leader contending for the post of PM against Modi.

Although Rahul Gandhi of INC is the 2nd most popular candidate for PM after Modi (60% vs 20%), having an Indian political organization, it seems that the opposition is divided to announcing Gandhi as a PM candidate. In any case, India also needs a credible opposition party at the Federal level to compete with the BJP, ensuring all the balance & checks in a democracy.

On late Thursday, an average of exit polls showed the advantage of BJP (against INC) in MP (124 vs 102), and RJ (104 vs 85), while the advantage of INC (against BJP) in Chhattisgarh-CG (49 vs 38) and Telangana-TS-against BRS+AIMIM? (62 vs 44+5), while in Meghalaya (ML), regional party ZPM may win against MNF (17 vs 14), INC may get 7 seats and BJP only 1 seat.

Thus overall, BJP is at an advantage in MP, and two big and important states, while at a clear disadvantage in TS and ML; although INC has an advantage in TS and CG, the eventual result of CG may be very close to BJP. In this way, the BJP is gaining significantly in all important 4-big states (MP, RJ, TS, and CG) compared to the 2018 state elections (although Modi won/gained significantly in the 2019 general election). Thus overall state elections are also indicating another big win for PM Modi/BJP in the forthcoming 2024 general election. Subsequently, India’s Dalal Street was also boosted Friday on Modinomics optimism.

On Sunday, the actual state election result showed a blockbuster win for BJP in three key states, RJ, CG and only one state win for INC in TS; the result of ML will be announced Monday, in which neither BJP nor INC will be able to win, while regional party ZPM may win against MNF. Overall, BJP won the semifinal before the early 2024 general election convincingly and is on the way to winning the 2024 general (LS) election; the question is whether it will be 350+ or 400+, not 250. In 2019, BJP won 303 LS seats against INC’ 52 and TMC’ 22.

For this BJP has to win LS seats convincingly in WB and southern states in a big way. There are around 65 LS seats in all three states (RJ, MP, and CG) and BJP won 61 seats in the 2019 general election despite losing the 2018 state elections (in all these three states).In 2019, BJP won 303 seats in the 545 LS; the halfway mark: was 273 seats, while 365 seats are required for BJP for the 2/3rd absolute majority alone. Now BJP has a 2/3rd majority in LS through various allies under NDA ally. If BJP has to win a 2/3rd majority in LS alone, then it has to win big/many more seats than 2019 in WB, Odisha, MH, Bihar, TN, AP, and TS (Swing Seats). But considering the relatively higher Muslim and OBC voters in most of these states, it’s very difficult for BJP/Modi to win in these states in a big way despite the anti-corruption, development, and nationalist stance.

As of now, the BJP is not able to capitalize on Modi's popularity in Southern States as INC and other regional parties are quite strong in terms of both money & muscle power to compete with the BJP. But the growing popularity of BJP/Modi’s leadership, inclusive development, anti-corruption, and targeted social welfare model along with booth-level cadre-based party organization may pave the way for BJP to win an additional LS seat around 50 or even 100 in the 2024 general election for a convincing 2/3rd LS as-well-as RS majority alone.

But even under the hypothetical situation of a 2/3rd majority in both LS and RS, there may not be any significant policy change, although more states will be able to implement federal policies more coherently and there will be additional infra/social development in some states, having presently opposition political parties. At present, Modi admin/BJP has no issue with the passage of vital legislation in LS/RS as some so-called opposition parties like TMC (WB) usually help BJP directly/indirectly (through abstentions). And currently, BJP/Modi admin is also not very keen to bring any controversial/big reform bill, which may pose heavy political costs (despite huge economic benefits).

Despite the appeal of Modinomics, India’s Federal government (India) now still pays around 45% of revenue as interest on public debt, while various state governments also pay around 35% of revenue as interest on their public debt on average. Various states are now adopting increasing allocation for social welfare (grants/subsidies) under various schemes to get votes from poorer sections of society, which is a big vote bank for any political party in India.

Over the years, both BJP, INC, and other regional parties have been competing with each other and increasing various social welfare amounts to win votes and power in states. This is a growing red flag for overall Indian fiscal discipline despite higher/growing GST/tax collections. India should allocate much higher funds/resources for free (Govt/PPP) quality education (in English medium including higher educations), quality healthcare (fully functional hospitals) coupled with unemployment benefits for millions of unemployed persons as universal social welfare policy rather than present policy ‘Revdi/freebies/dole politics’ for a certain section of the society to win votes. India may follow the US/European/West/Chinese model of socialism or mixed socialism for inclusive growth of the society/country so that there will be a thrust on quality employment rather than the growing culture never-ending cycle of ‘Revdi/freebies/dole politics’ to win votes.

On Friday, the Indian market was also boosted by blockbuster GDP growth and upbeat S&P Global Manufacturing PMI data:

On Thursday, MOSPI flash data showed India’s real GDP for Q2FY24 was around Rs.41.74T vs 40.37T sequentially (+3.39%) and 38.78T yearly (+7.63%). The Indian economy has expanded in real terms (inflation-adjusted at FY12 constant prices) annually by +7.6% in Q2FY24 against +7.8% in Q1FY24 and higher than the market expectations of a +6.8% rise. But in our previous article, we projected around +7.2% real GDP growth for India in Q2FY24. In this way, the Q2FY24 real GDP growth was also much higher than the RBI forecast of +6.5%.

On the expenditure side, government spending rebounded sharply (+12.4% vs -0.7% in Q2) and gross fixed capital formation rose faster (+11% vs +8%), namely, infrastructure spending mostly financed by central and state governments. At the same time, exports recovered (+4.3% vs -7.7%) and imports increased more (+16.7% vs +10.1%). On the other hand, India’s private consumer spending was slowed (+3.1% vs +6%) in Q2FY24 (y/y).

Overall, India’s TTM real GDP reached Rs.165.96T in Q2FY24 against 163.00T sequentially, while in USD terms, considering average USDINR (YTD) around 82.50, India’s Real GDP reached around $2.01T vs 1.98T sequentially. At current run rate, India’s real GDP may scale around Rs.43.41T in Q3FY24 (+4.00% sequentially) and Rs.46.23T in Q4FY23 (+6.50% sequentially), which will translate FY24 real GDP at around Rs.171.75T against Rs.150.07T in FY23 (+6.80%); i.e. Indian economy may grow by around +6.80% in FY24 in real terms (INR-local currency).

But if we consider gradual but steady depreciation of INR against USD and current average rate of USDINR at around 82.50, India’s real GDP may be around $2.01T in Q2FY24 against $1.98T sequentially and FY23-22 levels of $2.00-2.02T (average USDINR 80.00-74.00); i.e. India’s real GDP growth is almost flat from FY22 till Q2FY24 due to steady appreciation in USDINR by around +11.50% in the same period. Looking ahead, USDINR may reach/appreciate further to around 85.00-90.00 by FY: 24-25.

Again, if we consider India’s nominal GDP (at current prices-inflation not adjusted) was around Rs.272.41T in FY23 against Rs.234.71T in FY22 and Rs.198.30 in FY21. In that scenario, considering average USDINR (80.00-74.00), India’s nominal GDP was around $3.41T in FY23 vs $3.17T in FY22 (+7.6%) and $2.85T in FY21 (+11.23%).

Although India’s nominal GDP may be now around $3.50T, at the 5th largest position in the world, in terms of nominal GDP/Capita, India may be now at the lowest in G20 simply because of its huge population. As per the UN estimate, India will now approach a huge population of almost 1.50B by 2030, surpassing even China. India's population is expected to continue to increase until 2064 when it will peak at 1.7. India's population is expected to grow by 15.5 million people each year. By 2030, India will have 1.04B people of working age (favorable demography, but needs quality employment).

 

It’s also a fact that due to the huge and growing population (no official Childbirth policy/effort), demand is always far above supply in India, resulting in both high inflation and high growth. Thus to cope with rapidly higher demand, the Indian economy has to grow at least +8.00% in real terms (if not +10.00%) to ensure proper price stability and quality employment.

India has to also create/produce foods in adequate quantities to ensure food price stability for the general public and thus needs higher productivity in the agriculture/farm sector. India also needs a quantum jump in public transportation infra, especially in railways (both normal/slow and high-speed railways) and also social infra like quality hospitals and schools to cater to its huge population. Despite there being a huge difference/gap between India and China (democracy & autocracy), India needs to compete/follow the Chinese model in public infra (traditional/transportation/social) and agriculture with a feasible PPP model.

For example, despite being the world’s 5th largest economy in nominal terms, with rapid growths in around last ten years under PM Modi (from 2014) coupled with political and policy stability at Federal levels and most state levels, the general public still faces huge problems in booking train tickets reservation at short notice, while the average speed of Indian passenger railway is still around 55 kmph, the same at around 1975 and also during 2000-2014 UPA/INC era (previous governments).

Although India has now semi-high speed trans (Vande Bharat), capable of running around 160 kmph and also normal trains at around 130-100 kmph, due to huge railway traffic congestion, lack of quality high-speed tracks at most of the routes, and old/manual signaling system at most of the railway track around 68000 km, India’s railway average speed is still very slow around 55 kmph, compared to China’s equivalent ‘slow/normal train’ speed of around 100-120 kmph (speed 140-160 kmph).

In other words, despite comparable capacity (speed, population, railway track length, etc), India’s functional railway speed is almost half that of China’s conventional/normal railway due to inadequate modernization of normal railway infra. Thus there is a huge scope for improvement in India’s railway infra and the Modi admin is also doing that, it should be more targeted in terms of railway tracks, signaling/safety system and quality of railway locos/coaches etc. and require much more investment/faster work to cope with growing population/demand.

Although India should have followed China's population control model (structural reform) from at least 1975, the reality of Democracy may not allow such policy, at least officially; otherwise who will fill up huge grounds in political/election rallies, and who will ensure assured/block voting box? In any way, most of the middle/lower middle-class families now prefer a child policy, considering the higher cost of living. But still, to cater to the huge population demand, India needs to grow at least +8.00% in real terms for the next 15 years to ensure proper price stability (by ensuring higher supply against higher demand) and quality employment.

Thus RBI will ensure lower borrowing costs to fund both public/government and private capex at affordable borrowing costs, ensuring price & financial stability. India is now already paying around 45% of its revenue as interest on public debt, which is a huge negative for its credit rating (despite negligible external borrowing in FX currency). India has also a huge scope to grow exponentially to improve its public and social infra in comparison to its neighbor and arch-rival China. Also, India has political, policy, and currency stability unlike most of the comparable big/small democracies.

Technical trading levels: Nifty Future

Whatever may be the narrative, technically Nifty Future (20375) now has to sustain over 20300-20500 for a further rally to 20650/20750-20850/21000 and further 21175/21425-/21725/22000 levels in the coming days; otherwise sustaining below 20250, may fall to 20100-20050/20000-19950/19900, Nifty Future may again fall to 19700/19600-19500/19380 and 19300/19150-19050/18950 and 18830/18750-18625/18490-18275/18075 in the coming days (in case of an adverse event such as wider Middle East conflict, etc).