Reforms Likely To Spin Benefits Now

With the opening defeat of the National Democratic Alliance (NDA) in the Bihar elections, the party has clearly revealed the present status of its image in the minds of the populace. The pain does not stop with the defeat; it further deepens with the new equation of seat numbers since it will now further affect NDA’s status in the Rajya Sabha (RS), where it lacks a majority. Bihar has 16 seats in the RS.

The numeric disadvantage of NDA in the Rajya Sabha will now get prolonged and it might be possible that the NDA will never be able to claim any majority during PM Narendra Modi’s term. The NDA, or rather the Bhartiya Janata Party, would have to refine its strategy to avoid a repeat of such failures what with elections in Assam, Tamil Nadu, West Bengal and Kerala scheduled for the first half of CY16.

The markets too displayed a knee-jerk reaction post the Bihar election results’ announcement. The Indian equity barometers opened lower by more than 2 per cent on Monday in the immediate trading session after the electoral announcement. However, the indices recovered smartly and closed only 0.5 per cent down at the end of the trading session on that day. This recovery in the domestic markets was due to the minimal impact on the country’s overall economical decisions, considering that the government has shown phenomenal energy in passing various key bills.

Though the pace of the reform process has been slow due to lack of majority in the RS, the government will now try hard to improve its floor management in the parliament and push aggressively the various pending bills in the coming few days. It is also likely to increase the amount of public spending in order to gain advantage in the upcoming elections in CY16.

Further, macro-economic factors such as inflation, fiscal account deficit, capital account deficit and forex reserves have begun to come under control and the government’s public finance measures and economic reforms have started giving comfort to the Reserve Bank of India (RBI), which has embarked on reducing the policy rates, which have already been slashed by 125 basis points in CY15. On the corporate earnings’ front, though there was no traction in the earnings over the last couple of quarters, these are expected to take a ‘U’ turn very soon. The government has started taking steps to improve the economy by increasing public spending, which is likely to show its benefit in the coming quarters.

Further, the lower commodity prices will definitely decrease the raw material and fuel and energy costs for the Indian corporates, thus improving their profitability in the days ahead. After losing all the gains made during the last one year, the Indian stock market is trading at almost the same level as that of last year. Hence, it should be taken as an opportunity to invest for the long term as the country’s fundamentals are still intact and we can definitely expect further improvement in the economy because of the government’s expected amplified focus on reforms and public spending.