Nifty surged on hopes of political & policy stability in Modi 3.0

·         But unlike earlier terms, PM Modi may be too preoccupied with politics (Operation Lotus) rather than economics to have the majority first

India’s benchmark stock index, Nifty closed around 23721.30 Tuesday, surged +0.78% on hopes of political & policy stability in NDA/Modi 3.0 after it became clear that the Modi-Shah duo will be able to choose/elect their preferred LS Speaker Birla despite stiff opposition by the opponent IND alliance. On Wednesday, Nifty further jumped to 23689 soon after Modi’s preferred candidate Birla was reelected as LS Speaker almost ‘unopposed’ and subsequently PM Modi and LOP Gandhi shook hands for a smooth Parliament session in a spirit of cooperation rather than continuous political confrontation. The market may be now anticipating political & policy stability under Modi 3.0, just like Modi 1.0 & 2.0.

The post of Speaker is important in any Democratic Electoral politics. An LS Speaker, usually from the Ruling Party/Alliance is not only important to conduct the business of the House (Lok Sabha-LS) smoothly and politically impartially in line with & spirit of the Constitution but is also vital to interpreting House-related rules & regulations, which may or may not keep all the stakeholders including ruling party happy.

In Modi 2.0, the LS Speaker Birla allegedly helped Modi-Shah to operate Operation Lotus successfully, so that Modi-Shah was able to break various regional parties in favor of themselves to consolidate power in not only various states but also at the Parliament to pass various political and economic (?) ‘reforms’ bills in the name of ‘finance bills’, often without any Parliamentary debate and opposition views.

In any way, unlike Modi 1.0 and 2.0, this time opposition is very strong not only in numbers, but also in leadership as Rahul Gandhi has been selected as LOP (Leader of Opposition) this time by the IND opposition alliance and thus opposition is also ready to fight back any attempt by the Modi-Shah duo to launch Operation Lotus 3.0 to consolidate political power/numbers not only in various states, but also in the Parliament. Minority Modi 3.0 government is short of 32 LS seats from the simple majority mark of a minimum of 272 seats of its own (BJP) and is now surviving on 52 alliance partners, most of whom are not natural allies of BJP, but rather than contextual allies.

Most of those 52 MPs from 3-4 political parties (NDA allies) are supporting the BJP to fulfill their interests and are also under some types of pressure from ED/CBI/CID cases/investigations. For example, the TDP party (Naidu) of AP is supporting BJP/Modi 3.0 with a total of 18 MPs (16+2) to not only safeguard himself from ED/CBI investigations but also to seek additional funds/grants/loans from the Federal government (Modi 3.0) for his nearly bankrupt state (AP special package). The same is also true for the other vital Modi 3.0 ally JDU in another bankrupt state Bihar; JDU has 12 MPs (Leader Nitish Kumar) and Modi 3.0 has also the support of another 6 MPs from Bihar.

Now Modi 3.0 may be aiming to poach at least 35-40 MPs from other parties/allies/independents/non-aligned through Operation Lotus 3.0 with the help of a proven puppet LS Speaker like Birla. Modi-Shah may be aiming not only at 10 non-aligned LS MPs like 4 from YSRCP from AP and others, totaling 10-13 through Operation Lotus 3.0. but also various allies having weak leaderships like JDU.

Thus the selection of a favorable LS Speaker may be the 1st step for Modi 3.0 to launch Operation Lotus 3.0 to ensure a minimum simple majority on the floor of the House (LS) so that Modi 3.0 may not be dependent on whims & fancies of allies instead of lifeline support; i.e. minority Modi 3.0 could be transformed into majority government of its own and could survive full 5-years till 2029 at least.

But this time Operation Lotus 3.0 may not be successful like Operation Lotus 1.0 and 2.0 (during 2014-24) as the opposition is now quite strong backed by public support/sentiment. Any such attempt by Modi 3.0 may be counterproductive this time as we have seen in MH. In any way, there is also plan B for Modi 3.0 for the passage of any hurdle in the Parliament by taking indirect ‘abstention’ support from known IND ally TMC of WB with 29 MPs instead of providing relief from ongoing ED/CBI investigations for various corruption cases.

Thus there may be various political permutations and combinations amid the same of politics/chess/IPL (Indian Political League) in Modi 3.0 unlike 1.0 and 2.0. In addition, there are internal issues in BJP/RSS, which PM Modi has to face in his 3rd term. In brief, Modi 3.0 starts with a lame duck majority, Modi may become a lame duck PM rather than the usual decisive and autocratic leader; it remains to be seen, whether Modi will be able to cope with such drastic change in Modi 3.0 and adapt himself with the compulsion of coalition politics in India.

Modi 3.0 has to face scrutiny pressure from not only BJP/RSS but also in the Parliament by united opposition parties over various issues on the economy, inflation, unemployment, NEET exam scam, frequent railway accidents, etc. Also, there will be crucial state elections in Maharashtra (MH), Delhi (DL), Haryana (HR), and Bihar (BR) by late 2024 and Modi has to win in these elections at least in MH, HR and BR as BJP is the incumbent party to consolidate his position in the party (BJP/RSS).

But considering very poor performances in the recent LS elections and the fading Modi wave, it would be very difficult for Modi this time to win in these state elections. In that scenario, PM Modi may have to exit electoral politics by late 2025 ‘gracefully’ on BJP’s 75-year ‘Retirement’ policy and RSS may back moderate Nitin Gadkari as the next PM Candidate of the ruling party BJP (face-saving exit for Modi). Thus Modi 3.0 may be too pre-occupied with politics rather than economics unlike in Modi 1.0 & 2.0 and we may not see the much-awaited ‘AI-backed big bang reforms’ (plans for the next 100 days/5-years/25 years) to convert India into a developed economy from current developing by 2047-50.

By Sep-Dec’24, there will be state elections in Haryana (HR) and Maharashtra (MH) followed by Jharkhand (JH), Delhi (DL), and also Bihar (BR). As per current and overall political trends, BJP may lose badly in all these five state elections. But if the BJP can manage some surprise under the leadership of PM Modi, then he will be able to consolidate his position within his party (BJP/RSS) and may continue till 2026-27 (WB and UP election) or even full term 2029. But if Modi lost badly in the 2024-25 five state elections, then he may have no option but to take a graceful/face-saving early exit/retirement from active politics by Dec’25 on an aging clause in BJP in an orderly manner (retirement from active electoral politics after 75-years of age; but godfather PM Modi may be also an exception).

Overall, considering the overall RSS/BJP narrative which does not support Modi behind the scenes/camera, and also Modi & Co.’s body language indicates the ‘Marg Darshan’ option for PM Modi to take early retirement by Dec’25 (if not by Dec’24 due to various reasons including loss of state elections). By Sep’25, Modi will be turned 75 years of age, while RSS will also celebrate its 100 years. If Modi indeed took an early face-saving exit from active politics by 2025 or even by 2026-27, then Gadkari or Rajnath Singh or even Shah may be in the race for the next PM post within BJP/NDA; Gadkari may be the preferred PM candidate by RSS Nagpur/MH business lobby.

But Modi alone was adding around 100-150 more seats to BJP’s normal seat share R/R of around 150 all over India (over the last few decades). Modi is also bringing critical political funding from big corporations (Adani-Ambani) to the BJP and RSS. Thus even RSS top leadership (Nagpur lobby) will hesitate to take any harsh real action all of a sudden against Modi & Co (Gujrat lobby). Thus there is a need for gradual preparation by both sides in their interest to prepare the country and economy (stock market) for an eventual graceful/face-saving exit of Modi (Modexit) by 2025 or even by 2027-29 in an orderly manner.

Thus after Modi in 2029 and in the absence of any credible successor in BJP who can match Modi’s popularity and so-called godfather-like political leadership, BJP may again come down to around the normal 150 seats base across India along with Cong/INC’s equivalent 150 seats. In that scenario, almost 250 seats may be controlled by strong regional parties across various states of India. Thus there is a need for political/economic consensus among not only the two main political parties in India (BJP-INC) but also among various regional parties in various states across India, as India is a union of states and states have to push/implement various policies and reforms designed by the Federal government.

So, coalition government/politics will be more prominent and the reality in the coming days/years in the absence of Modi/under weak Modi, a decisive autocratic leader. Also, BJP’s parent organization RSS does not want any person/leader’s image bigger than the party and thus is not backing Modi now actively due to his apparent arrogant and autocratic nature. Thus moderate Gadkari may be an ideal person for RSS/BJP to be the next PM candidate.

The Indian market has enjoyed the ‘Modi’ premium for the last 10 years due to political and policy stability, although despite a brutal majority/huge political mandate, Modi was only able to bring incremental rather than monumental policy reforms on the economy and some other aspects. Also, the pace of PSU disinvestments has slowed significantly in recent years, while India desperately needs additional fund support for growing deficit spending, especially for traditional infra and social infra. Modi was unable to bring any monumental real policy reform required for the economy like land and labor reform.

However, Modi was very successful in the implementation/execution of various policies that were already introduced by previous UPA/Cong admins. And Modi was also able to go for some ‘monumental’ political reforms like the abolition of Article 370 in line with the long-term agenda of RSS/BJP. This time, before the election, Modi also promised more such ‘big political reforms’ rather than monumental economic reforms, which is the need for the day to resolve the huge crisis of unemployment and inflation in the country.

The government should also actively think about population control policy for the next 75 years at least so that the growing demands of the economy may match with slowing supply capacity of the economy. The Government should also take appropriate long-term measures to create more traditional/transport and social infra (education and healthcare) with an appropriate policy for the requirement of huge deficit spending.

To support the requirement of a huge deficit spending without taking too much unsustainable debt, there is a need for bipartisan/multi-partisan political/economic consensus for higher revenue from the personal tax front (like minimum payroll/social medicare tax) and also from non-strategic PSUs disinvestments; over the last few years, especially in Modi 2.0, the pace of PSU disinvestments (non-strategic) has been reduced and it seems that the government/Modi admin is slowing down or even abandoning the path for a political reason; PM Modi is now batting for increasing/higher market capitalization of listed PSU companies as a result of upbeat Dalal Street.

For all these important policy reforms, there is a need for political bipartisan support not only between BJP and INC (two main national parties) but also among/with various big regional parties in various states as its states, which have to eventually implement these policies. Thus there is a need for a moderate PM, who can create such an atmosphere of cooperation on important economic/other issues despite political differences/fights.

The federal government should also share credits for all types of developments/projects with states including various Railway projects as without cooperation from states, proper implementation of such projects/social welfare schemes may be very difficult. India now has to increase its supply capacity of the economy multifold to match the increasing demand of the economy as a result of population explosion and growing middle class, almost equivalent to the entire US population.

In the coming days, the ‘Modi’ premium for the Indian market may reduce due to political and policy uncertainty amid the compulsion of coalition politics, but the EM scarcity premium may remain intact by & large due to India’s proven macro stability in the last two decades amid broader policy consensus, be it NDA or UPA in charge of the country. India’s attraction to 6D ((development, demand, democracy, demography, deregulation, and digitalization) is a prime driver of India’s EM scarcity premium. Even 20% of the Indian middle class (around 300M) is equivalent to the whole US middle-class population, having significant discretionary consumer spending capacities.

But ideally, both BJP and Cong, two major political parties in India should maintain a cohesive/bipartisan/multi-partisan economic policy (like Democrats and Republicans in the US) despite divergent political views/ideology. India is a big and lucrative market in the world, going for 3rd largest in the coming years irrespective of Modinomics, Gadkarinomics, or even Gandhinomics; it’s a simple arithmetic eventuality now irrespective of any political narrative.

The Indian economy grew incrementally from 1995-2000 after the monumental economic reform initiated by Narasimha Rao/Manmohan Singh (PM/FM) government (INC), which was subsequently carried forward by both BJP and CONG/INC governments (NDA-UPA) with varying political narratives; but there was a broad macro-stability over the last 25 years.

Talking about India’s macros, the MOSPI data shows India’s annual (y/y) total CPI (inflation) eased to +4.75% in May from +4.83% sequentially, below market consensus of +4.90% and the slowest increase in the last 12-months.

India’s food inflation has remained elevated near double digits on average for the last 10 years; i.e. almost 100% increase in the last decade despite India being one of the largest producers of food items in the world. The elevated/sticky CFPI (food inflation) is often a political issue in India, with potential for a change in the Federal government. The legacy issue of high food inflation may be because of inadequate supply for the huge and still growing population, adverse weather, poor infra/storage/cold storage facilities, and lack of adequate marketing strategy by corporates (formal all-weather proof marketing) of agri products, reducing seasonal wastages.

On a sequential (m/m) basis, India’s total CPI increased by +0.48% in May, unchanged in April after almost 0% in Q1CY24 mainly due to seasonal (winter) overproduction of vegetables.

Overall, India’s average CPI (y/y) is now around +5.05% (6M rolling average) against a yearly average of +5.66% in 2023, +6.70% in 2022, and +5.14% in 2021, while the long-term average rate for the last 12-years is now around +5.8%. India’s sequential CPI rate is now around +0.5% on average; i.e. an annualized rate of around +6.0%.

India’s annual core CPI also eased further to around +3.10% in May from +3.20% sequentially.

 

India’s core inflation data is not official, but derived; in any way, the current divergent trend between total CPI and core CPI may also indicate subdued core demand/discretionary consumer spending. Overall, India’s real GDP is now growing around pre-COVID trend levels of around +8.0%, while total/headline inflation (CPI) has been running around +5.50% and core inflation (core CPI) has been around +4.0% for the last two years on average

India’s core CPI is now running around +3.0% in 2024 from around +10.0% in 2012. Overall, the 6M rolling average of core CPI is now around +3.40% against +5.60% for the last 12 years, and headline/total CPI is around +5.80% and RBI target of +4.0% (CPI).

 

On 14th July, the OEA data shows India’s annual (y/y) WPI inflation increased by +2.61% in May from +1.26% sequentially, above market consensus of a +2.5% gain, 7th consecutive month of positive WPI after a series of negative WPI from Apr-Oct’23 (7-months) and sharpest increase since Feb’23 amid a rebound in manufacturing and faster rises in food prices and primary articles.

In May, India’s WPI was boosted by primary articles (7.20% vs 5.01% in April) and food index (7.40% vs 5.52%) amid higher onion (58.05%), potato (64.05%), and vegetables (32.42%) prices. At the same time, manufacturing prices recovered (0.78% vs -0.42%), the first increase in 15 months, mainly boosted by rebounds in basic metals (0.35% vs -3.65%) and leather and related products (0.32% vs -0.32%). Meanwhile, fuel and power prices slowed slightly (1.35% vs 1.38%), as rises in both LPG (2.48%) and petrol prices (0.51%) were offset by falls in HSD (-1.06%). Overall, WPI inflation has increased by around +32.15% in the last 70 months (Jan’18-May’24); i.e. an average sequential rate of around +0.46% (m/m) and annualized rate of +5.5% (y/y) against headline CPI average sequential rate around +0.53% (m/m) and annualized rate +6.4% (y/y).

Overall, India’s WPI and CPI may surge further in the coming months as producers of various goods & services have increased prices soon after the June’24 general election. Thus average CPI (inflation) may hover above 5.5% in H2CY24, making RBI’s job difficult for any rate cuts before at least Dec’24 (in line with Fed). Also, elevated inflation/cost of living over 50% every 10 years on average is a legacy issue in India due to the ever-increasing population, higher demand, and inadequate/ constrained supply capacity of the economy coupled with infra/rapid transport/storage/cold chain issues.

Also, structurally higher fiscal deficit, higher debt, higher money printing, and devaluation of currency are causing rampant inflation. Higher fiscal spending is also causing widespread corruption at almost all levels, especially in the political system as a recent Electoral Bond scam shows (cut money/donations to political parties/governments for getting contracts). India’s black money economy is huge and also causing widespread inflation through various demand channels despite elevated borrowing costs/higher RBI rates. At least 30% of India’s high-value consumer spending is backed by this black money, which does not require any borrowing at all. Thus RBI’s higher rate is largely unsuccessful in bringing down inflation unlike in AEs (US/EU). It’s also a common issue in most of the DE/EMs.

India’s unemployment rate has remained around 8.0% on average for the last 20 years and if we take into account under-employment, it should be in the high double digits, while the educated youth unemployment rate may be around 45-50%. India is primarily a service sector and also an import-oriented economy, especially for oil, various industrial commodities, raw materials, and finished products/consumer durable goods. India has immense potential in improving its manufacturing sector with the right policies in place to not only become less import-dependent but also become one of the largest exporters, competing with even mighty China and becoming a real alternative to China in terms of a global manufacturing hub. But for that, India also has to improve its mining & querying activities along with huge stress on innovation & productivity and lower cost of production.

India’s Real GDP trend indicates that the economy may grow by around +8.0% on average, but lower than the pre-COVID average run rate potential of 10-12%.

India’s real GVA growth trend may be indicating an underlying R/R of around +7.0% (y/y), lower than the real GDP R/R potential mainly due to comparatively higher taxes on products & services. India’s GST and other indirect taxes are now the highest contributor of Federal revenue around Rs.14.80T followed by corporate/business tax Rs.10.22T and personal tax Rs.9.23T in FY24.

India needs now GST tax reform without frequent changes in rates and multiple slabs. As revenue revenue-neutral strategy, India should apply a 15% or even 10% uniform GST rate across all products and services including petroleum products. India’s CII has prescribed three slabs/rates for GST with the inclusion of petroleum products.

However, GST reforms are a complex task now as there are interests of states and also there is immense political opposition. Thus any GST reform may take a longer time. But Federal Government/Modi 3.0 may provide some fiscal sops/stimulus to an urban middle class, a traditional vote bank of BJP ahead of Sep’24 state elections and after subdued report card in the recent general election. Modi 3.0 may cut some rates of income tax and may also reduce too many slabs in the personal income tax for higher compliance. Modi 3.0 may also increase the SD (Standard deduction) from present levels of Rs.50K to Rs.100K for the new tax regime (w/o any tax cut deductions) in line with higher cost of living in the last ten years, which almost doubled.

But India also needs out-of-the-box ideas or monumental reforms in various aspects (rather than a mere political narrative) for a developed economy by 2047-50 or even by 2100. India also has to strengthen institutional autonomy in the judiciary, press, election commission, competition commission, etc along with political funding and electoral process reform. India (Federal Government) now pays almost 45% of core tax revenue as interest on public debt and 35% on account of government salaries and pensions. Indian Federal public debt & liabilities (PDL) is now around INR 170T, almost equivalent to the country’s real GDP. If we add individual PDLs of various states, the combined PDL will be much higher than the real size of the economy.

Although most of the Indian PDL is in LCU (local currency units-INR), the cycle of higher deficits, debt devaluation and subsequent higher borrowing costs/higher inflation is making India a high-cost economy. This along with the lack of adequate employment opportunities for India’s huge pool of educated youths over the last few decades may create social unrest in the country, if not properly handled by the policymakers. Thus India needs to give RBI a dual mandate of maximum employment and price stability (like the US Fed).

Also, the Indian government may need a more personal tax collection system (like in the minimum payroll/social welfare taxes) along with non-strategic PSU disinvestments to fund modern social and traditional/transport infra in the country for ease of living. For this two main political parties (BJP and INC) should come into some bipartisan politics/economics supported by the corporate/business/ordinary public of the country.

Overall, despite incremental improvements in the last few decades, India is still far behind China in terms of infra (traditional, transport, and also social). Thus there is a huge scope for improvement for India’s ailing infra, especially railways and also education & healthcare to match with growing/huge demand for a huge/still growing population of almost 1.50B of the country. India’s long waiting lists (3-4 months) for train tickets in the busy traveling/holiday season has still been a big issue for the last few decades indicating that transport infra is still significantly inadequate to the growing demand of the population/economy; the same is now also almost true for airways.

India has now a natural economic growth of around 7-8% (real GDP) due to its large population and growing affluent middle class along with huge/growing government spending and service/IT/petroleum products exports. But India needs to grow in double digits (at least 10-12%) in real terms keeping USDINR and core inflation at manageable levels for the next 15 years to be able to become a true $5T economy with inclusive growths; not exclusive and jobless growths like at present. India needs to put proper tax and policy structures in place to encourage domestic manufacturing of quality goods for export so that it can compete with China and other Southeast Asian exports, which will eventually create mass employment (like in China).

Conclusions:

India’s PM Modi may not be comfortable with coalition politics, falling popularity, and internal conflict within BJP/RSS over his arrogance and autocratic behavior. Thus if Modi can’t consolidate his power after the recent election setback, he may have no other option but to opt for a face-saving early exit from active electoral politics by Dec’25 or even before on BJP’s 75-year mandatory retirement policy; in that scenario, RSS backed moderate Gadkari may be the next PM candidate for BJP and the original theme of so-called Modinomics (reform & perform) will continue, even may be in different form & style for the time being.

Bottom-line:

All is not good for Modi 3.0, which is now a minority government, potentially being controlled by the whims & fancies of two key regional political parties (TDP and JDU & Co). This along with internal tussle over power/control within RSS/BJP along with state election issues in the coming months and various ‘unfortunate’ scams like the NEET entrance test scam and the recent railway accident in NB/WB may keep Modi too much occupied with politics rather than economics. Thus, even if Nifty scales around 24K on hopes & hypes of a blockbuster budget and political/policy stability by Modi 3.0, Nifty may soon stumble amid the reality of political & policy paralysis.

Technical trading levels: Nifty Future

Whatever may be the narrative, technically Nifty Future/ India 50 CFD (23800) now has to sustain over 24250 for any further rally to 24400/24550-24650/24850*-25075 levels in the coming days/weeks (under strong Modi 3.0); otherwise sustaining below 24200/24150 and 24100/24000-23950/23800 levels, Nifty may again fall to 23700/23600-23300*/23000 and further to 22800/22600*-22300/21800/21300* and further to 21150/21000*-20400/20000* and even 19700/19400-19200/18800 and 18500*/17500-17300/15650 in the coming days (under weak Modi 3.0 or no Modi 3.0 scenario).