Nifty surged on upbeat GDP and hopes of tax cuts by Modi 3.0

·         Modi 3.0 may cut/reform personal tax rates/slabs with stress on the new regime to keep the urban middle class in a good mood ahead of vital state elections

·         Positive global cues on less hawkish Fed talks; Fed may cut 11 times from Dec’24 to Dec’27

India’s benchmark stock index, Nifty (CFD: INDIA 50) closed around 23465.60 Friday, edged up +0.29% for the day, and surged +0.75% for the week on hopes of a continuation of Modinomics and a ‘blockbuster’ budget by Modi 3.0 late July. Nifty eventually surged over +2200 points or almost +10.50% in 9 days from election result day (4th June) panic low around 21268.95 and made a high around 23489.85 till 14th June); FIIs covered over 75% of their short positions; i.e. it’s largely a short covering rally.

But at the same time, overall optimism is quite reserved as the market is also watching politics rather than economics more closely as Modi 3.0 is now running a coalition government while BJP/PM Modi is a minority stakeholder with 240 seats, short of minimum 33, which is being fulfilled primarily by various small regional parties like TDP (Naidu-16 seats-AP), JDU (Nitish Kumar-12 seats-BR), LKJSP (Paswan-5 seats-BR) and Shiv Sena (Sindhe-7-MH), totaling 40 and other small parties/independents around 10 seats; total 290 seats.

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.

But shortly, apart from the whims & fancies of coalition partners, Modi is now facing immense opposition within BJP and its parent organization RSS, which is now publicly criticizing him for not only the subdued performance of Modi & Co in the recent election but also now raising open questions about Modi’s dictator like leadership and arrogant behavior with not only oppositions but also with his own BJP/RSS colleagues. Overall, RSS and a part of the BJP (anti-Gujrat lobby) had already abandoned the Modi-Shah poll strategy team even before the election, which cost Modi in the election dearly.

As per Social Media reports, after getting 240 seats for BJP and 50 odd seats of various NDA allies, most of which are not natural allies, but contextual allies, Modi first took the support of all allies in writing against some deals, but didn’t take the formal support of BJP MPs and eventually formed the Modi 3.0 government in haste without any formal meeting of newly elected BJP MPs for fear of any resentment against his leadership.

Although Modi 3.0 has to prove its majority on the floor of the Parliament formally under such coalition government formation, as per Social Media reports, India’s Presidential office may have still not formally asked PM Modi to prove his majority in the Parliament. However, the Indian Parliament session may start on 22nd July and the budget may be presented on 24th July; the 18th Parliament Session is scheduled to end on 9th August, and in between them Modi 3.0 has to face many unofficial floor tests even if gets passed the official test.

Also, Modi 3.0 has to face a formidable united opposition (IND) of around 240 MPs along with another 15 non-aligned MPs in the Parliament on various issues, and mainstream media as well as corporate houses may not extend the blind support that we have seen during Modi 1.0 and 2.0.

For example, Modi may face the backlash of not only the opposition but also of his supporters including the whole nation/students for the recent paper leak scam of the NEET Medical UG exam in the coming days after returning from the G7 meet in Italy and a flood of Modi-Meloni memes/selfies, while Indian NEET students/family members are on the street, protesting vigorously against the government.

In India, whether it’s BJP or opposition-ruled states, paper leaks/various other scams are very common for not only lucrative government jobs exams but also various entrance exams in medical, engineering or even in ordinary streams to get admission in government colleges, which have far lower cost than private colleges. The public/government education and health system in India is now too small to serve the huge population/students and the government is also not investing in the sector adequately, and the policy encourages a very expensive private education system (schools/colleges/hospitals) to flourish and promotes inequality as poorer/lower middle-class people will be not able to take the recourse of expensive private education and healthcare system in the country. In India, the education and healthcare mafia regime is rampant and a big business along with politics.

Thus PM Modi may be preoccupied most of the time with political games of chess rather than the economy and other important issues in Modi 3.0 until Modi gets a permanent simple majority in LS with some political permutation & combination (Operation Lotus). But even before the next Parliament session begins, Modi has to pass the acid test of RSS as RSS is not only now criticizing Modi publicly but also called an official ‘Chintan’ meeting on 30th June to review/discuss the election performance of BJP and various other issues.

As per reports, RSS may be now actively working to replace Modi as the PM of the country by the next few months or even by Dec’25 in an orderly way and promoting moderate Gadkari as he may be the best PM face suited for coalition politics/government.

After forming Modi 3.0, PM Modi announced his cabinet on 10th June. The most important four ministers are PM Modi; Defence Minister: Rajnath Singh; Transport/Road Minister: Gadkari and HM Shah. Gadkari is the new face, representing the RSS lobby in the new list of four top most important ministers (Cabinet Affairs-CCS). Modi kept all other ministers almost unchanged with Finance going to Sitharaman; Commerce to Goyal; External Affairs to Jaishankar and Railways to Vaishnav. The top three contending faces to replace Modi as the next PM may now be Nitin Gadkari (fully backed by RSS), Rajnath Singh (UP/Yogi lobby), and also Amit Shah (Gujrat lobby). Modi may be also now ‘grooming’ Gadkari for a smooth transition of power by Dec’25 (in an orderly face-saving manner for Modi/BJP/RSS).

Now the next focus will be on LS Speaker selection, which would be a key post considering it may influence likely BJP attempts of ‘Operation Lotus’ to break not only key allies or even opposition parties. Thus to keep safety, Modi 3.0 key ally TDP is now seeking the LS Speaker post. As per reports, Modi may agree to appoint Sister in Law of TDP Leader Naidu as the next LS Speaker, who is now serving as BJP Chief in AP and a long-time BJP leader of South India; i.e. loyal to Modi-Shah and also a close family member of Naidu, but may not be so for other allies/opposition parties.

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 (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 majority in the Parliament). 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 by 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 trusted/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.

INC/Congress has to also improve its real poll performance as recent election result shows INC/Cong may have won only around 40-50 seats all over India of its own without active alliance support in various states. Thus INC/Cong leader Rahul Gandhi nay not so much interested in toppling the Modi 3.0 government by any means to grab power by himself (Cong) at this moment, but he is open for a PM under the IND coalition government with Khagre as the Next PM. Rahul Gandhi may focus more on INC organizational matters in various states, so that INC may win at least 150-200 seats of its own, if not 273-300+.

So, coalition government/politics will be more prominent and the reality in the coming days/years in the absence of 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 demand 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.

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. 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.

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 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.

Talking about economics, on 31st May, the NSO/MOSPI preliminary data shows India’s real GDP for Q4FY24 was around INR 47.24T vs 43.81T sequentially (Q/Q) and 43.84 yearly (Y/Y); i.e. India’s real GDP has expended around +7.8% sequentially and also +7.8% yearly. The market was expecting the Q4FY24 real GDP slightly around INR 46.06T as per NSO’s provisional estimate for FY24 before the Feb’24 budget session. Subsequently, India’s real GDP for FY24 was preliminary estimated at around INR 173.82 vs 160.71 in FY23; i.e. a real GDP growth of around +8.2%, the fastest growing economy among major G20 economies, but remains at the lowest in terms of GDP/Capita due to a huge population, now almost around 1.45B, larger than even China. In the previous estimate (PE), the NSO estimated India’s real GDP around INR 172.90T for FY24.

The unexpected increase in the real GDP for India in the last few quarters may be for increasing indirect tax burden (GST+ED+ID etc) as both real GVA and GDP are growing at around +2.0% sequential rate, while net taxes on products & services growing at around +8.3% sequentially.

In a way on the expenditure side, private consumer spending remains the backbone of the Indian economy, and remains the largest contributor to real GDP, now around 56% for the last few quarters, but slows down from the previous run rate of 58-60%; private & public/government CAPEX remains the 2nd largest contributor, now around 34% and government consumption the 3rd largest contributor, now around 10%. In the production side (GVA), the service sector remains the largest contributor of real GVA, now around 54% followed by manufacturing at around 17%, agriculture at around 15% and construction at 9%.

India is primarily a service sector and also import 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.

India needs now GST tax reform without frequent changes in rates and multiple slabs. In his election speech, INC/IND opposition leader Rahul Gandhi called for GST reform with lower single tax rates. 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 are 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 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.

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.

The average speed of normal passenger trains in India has now around 50-80 kmph for the last two decades or more, while that of China has significantly improved to around 140-80 kmph in the meantime (without considering thousands of high-speed bullet trains running around 300-400 kmph or more on an average). In China, normal slow trains (80-140 kmph average speed) are all AC coaches and even ordinary poorer people can afford them in sharp contrast to India.

High-speed Bullet trains are for relatively richer middle-class people, running in separate rail infra/network. But even the sharp contrast of normal railways between China and India concerning average operating speed and safety indicates that India is far behind China (a comparable large populous economy) in terms of normal railways infra, the lifeline of any developing economy. Also, the manufacturing industry needs a thriving railway network across the country/ports for proper transportation with lower timetables/costs.

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 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 SE/SA 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’ things 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 by Modi 3.0, Nifty may soon stumble amid the reality of political & policy uncertainty.

Technical trading levels: Nifty Future

Whatever may be the narrative, technically Nifty Future/ India 50 CFD (23600) now has to sustain over 23750 for any further rally to 23850*/24100* and 24400/24550-24650/24850*-25075 levels in the coming days/weeks (under strong Modi 3.0); otherwise sustaining below 23700-23650, Nifty Future may again fall to 23300/23000 and 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).