Inertia is a powerful force in human and political science. And it is this precise powerful force or inertia of slow growth, policy paralysis and low business confidence that the new government is dealing with. The first two months of policy decisions makes amply clear the government's direction.
The policy stance has clearly shifted from a consumption-led economic growth to investment-led growth. There have been several hits and some misses in terms of policy actions and decisions.
During the first two months there were three economic events which we think are very important and would like to highlight. The first one was the increase in rail fares, the second was the railway budget and the third was the Union budget.
The quote below reflects the economic situation with the three events in perspective. “The heights charm us, but the steps do not; with the mountain in our view we love to walk the plains.”
While we want to achieve higher secular economic growth, the determination would be measured by the tough steps the government takes. The case in point is the rail fare hike. It is a hugely unpopular decision by a popular government, to take in the first month itself. In the subsequent two major events like the rail and the Union budget, we saw a clear direction of investment-led growth with accountability. Major thrust has been given to infrastructure, manufacturing, improving the investment climate, jobs growth, and “ease of business”. While there has been a positive direction, it would have been a welcome if more emphasis on targets in terms of numbers and deadlines would have been listed. One of the misses in our view is the inability to clear the Insurance Bill. We think it was time the government enforced its resolve by showing the power of its mandate.
In the last five months, equity markets, in anticipation of reforms and buoyant economic growth, have rallied about 20% from their lows. However, to see the effect of the policy decisions of the new government on the economy will take some time. It will take time for improved business confidence to turn to fresh business plans and capex and increased economic activity. It is not going to happen overnight.
We are in the vacuum period where the stock prices have run up but the commensurate fundamentals of the companies are yet to catch up. At the same time there has been a rise in