Following recent election results that beat exit poll projections, Prime Minister Narendra Modi was sworn in for a third term with the support of the National Democratic Alliance (NDA). While the Bharatiya Janata Party (BJP) itself did not win a majority, winning 240 seats, the NDA coalition won a total of 293 seats.
Over the past decade, under the leadership of Modi and the BJP majority, the government’s fiscal policies have sharply reduced subsidies from 18.2% to 8.6% of expenditure while increasing capital expenditure (capex) from 14% to 30%, signaling a focus on the offers. the economic growth.
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Despite concerns about a potential return to populism with a new coalition government, Bank of America (NYSE:) (BofA) said in a report that the pace of capital spending will continue along with moderate social welfare spending. This forecast is based on findings from senior executives at 90 leading corporations and 16 policymakers at a recent conference.
BofA identifies five factors supporting sustainable growth in capital investment:
1. NDA policy aimed at reforms. Historically, even under coalition governments, the NDA has carried out significant reforms. During the period 1998-2003, notable reforms included the National Highway Development Programme, the National Telecommunications Policy, the establishment of the Asset Sales Department and the enactment of the Electricity, Fiscal Responsibility and Budget Management Acts.
2. Strong fiscal position. A strong fiscal environment allows both capital spending and moderate populism to coexist. The fiscal deficit in FY24 was lower than expected (5.6% vs. 5.9%), driven by higher GDP growth (8.2% vs. 7.3%). Additionally, excess dividends from RBI and CPSE of $17 billion provide additional fiscal flexibility, ensuring that the FY25 capex budget of Rs 11.1 trillion and fiscal consolidation targets are not threatened.
3. Strategies to increase revenue: The government can increase its revenue by widening the tax net, introducing unaccounted wealth amnesty schemes, increasing monetization of infrastructure project assets, reviving the PPP model and opening up infrastructure monopolies to private and foreign investment.
4. Leverage for capital investments. Government infrastructure agencies have significantly reduced leverage from 59% in FY20 to 15% currently due to increased equity financing. This low level of leverage opens up significant opportunities to finance further capex.
5. Continuity of policy. In his post-election address, Prime Minister Modi emphasized continuation of policies aimed at growth in emerging sectors, nationalization of defense, green industrialization, global value chain integration, improved center-state relations and job creation.
While BofA forecasts a compound annual growth rate (CAGR) of 11% for FY24-FY27, they note a potential repurposing of the capital expenditure mix, prioritizing core infrastructure projects and rural development. Key upcoming developments such as the overall minimum NDA programme, allocation of ministerial portfolios, 100-day action plan and annual budget in July 2024 will bring further clarity to the government’s policies.
In terms of industry preferences, BofA remains overweight in the financials, autos, cement and base metals sectors, while remaining underweight in the power, information technology, healthcare, consumer staples (excluding autos) and energy sectors. They hold market share in telecom stocks given expected tariff increases.
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