The second term of Narendra Modi started with great hopes which give way to despair as stock market participants and analysts saw various moves of the government which included cash giveaways, higher taxes on the rich, continued higher surcharges on capital gains etc combined with a lack of any structural moves to revive a sagging economy. This led to a feeling that the government was not concerned about growth and just wanted to pursue a structural agenda. This however changed very fast.

Subsequent to the budget announcements that were perceived to be Anti Growth there were a large number of representations made to the government where it finally dawned on them that it was essential to address both tactical issues in the short run and structural issues in the long run. This started off by announcements on the upfronting of the recapitalization of PSU Banks and moves to release money stuck in the GST Channel. The earlier announcement of the release of 75% of the amount won by mostly Infrastructure Companies via arbitration was also to be taken up vigorously. They increased depreciation on new cars, opened up buying of vehicles by government departments, proposed a fund to complete in-complete housing projects, removal of higher surcharge on Capital Gains announced the  Budget  etc. There were all good incremental steps but not something that would drastically change the discourse for India. Monthly Auto numbers, core data etc all continued to disappoint.

Then came the Saudi attacks which led to a spiral in crude oil prices. Maybe this or maybe something else triggered off a clear thinking in the minds of the senior functionaries of the government that they need to move differently, very differently now.

The first big structural reform then came up where the government announced the reduction in corporate tax rates to 22% for existing companies and 15% for new manufacturing companies. This straightway changed the long term growth picture for India in a very big way. Its not yet recognized by the markets to the extent of even 25% in my view. Unlike any temporary GST rate cut this is a permanent measure which will improve company cash flows forever. A large number of companies on the consumer, financials, automobiles etc pay full tax and this will straightway improve their cash flows significantly. New manufacturing units, even in subsidiaries can pay just 15% tax which is huge and can improve competitiveness significantly. The impact of this measure on reducing corporate taxes will be seen and felt over a long period of time and can potentially increase India’s growth potential by atleast 1-2% per annum for the next many years.

The second structural reform which was just announced yesterday is that Strategic Disinvestment will now be pursued as a strategy. This can boost the realizable value for the government by a huge amount. Till now the strategy of dumping PSU’s via ETF’s or follow on offerings was just damaging the valuations as fresh supply led to lower and lower prices. Strategic Disinvestment changes the entire picture. For example as against a market value of the governments holding in BPCL of around Rs 50000 Cr, strategic disinvestment can realize atleast Rs 75000 Cr. Similarly other companies  like Concor, SCI will also go on the block. What this will do is that it will not only lead to higher realization for the government in the short run but will also boost the value of the rest of the PSU’s and can start off a virtuous cycle of greater gains and higher stock prices for PSUs.

These two reform measures are big and create a longer term story for the Indian Economy. Along with this we see that other macro parameters are strong. Fiscal Deficit continues to be in control, Current Account Deficit actually came down in the first quarter and overall Balance of Payments was a positive $ 14 billion in the first quarter of this financial year as against a deficit of $ 11 billion last year. Inflation remains well in control and should lead to lower interest rates going forward. Crude Oil prices that had shot upto $ 70 after the Saudi attacks are now back to $ 60 levels, even below the levels prior to the attacks. Monsoons have been above average and with a huge gain in reservoir storage creates a situation of strong agricultural production not only for this year but also the next year.

For the short term initial indications of festival season demand looks to be strong. There are issues related to short term disruptions which come up due to news flow on companies like Yes Bank, Indiabulls Housing etc. However these are short term factors unlikely to impact the markets beyond a few days.

In conclusion the government now seems to be well on the way of structural reforms. There is a great chance that either LTCG will go totally or the holding period for zero LTCG might be increased to 3 years in the forthcoming budget. All macro parameters are favourable for India at this stage. The only issue was the intent of the Government which is also very clear now. Growth should be strong in the years 2020 and 2021. This is a good time to use short term volatility to built strong long term portfolios.

The upside potential to downside risk is big time in favour of investing.

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