Last week saw two major events that can shape the stock market in India. One domestic and one international. In India, the BJP won two state elections, viz Gujarat (which it retained, though with a reduced majority) and Himachal Pradesh (which it wrested from Congress).
Each state win strengthens the BJPs hand in the Rajya Sabha (Upper House) where its minority status can sometimes prevent legislation. With a majority in the Lower House and comfortable strength in the Upper House, the Government can now push through more economic reforms.
The Gujarat voters have sent a strong message to both parties, giving the BJP a lower number of seats, as a demonstration of angst against, especially, agricultural distress, and, at the same time, giving the Congress enough of a boost to encourage it to be a serious opposition, taking up serious issues without politicking.
Considering this, the next Budget can be expected to lean in favour of agriculture. This is as it should be, for agriculture provides employment to nearly 55 per cent of our population, yet they get only around 14 per cent of the national income. Clearly iniquitous and needs changing in favour of farmers.
The external big news item was that the Bill to reduce taxation in the US, giving away a whopping $1.5 trillion in tax cuts and code revisions. This, combined with cheaper energy from shale oil/gas, and innovations such as electric vehicles (from Tesla and others), autonomous vehicles (from Google and others) and the skill-sets available would essentially mean that money would flow into the US in expectation of higher growth in GDP. Lower tax rates would also bring back money that the big, and successful ones such as Apple, Google and others, have parked in Ireland and other jurisdictions; bringing it back to the US would have entailed a high tax outgo, now reduced. The greater flow back to the US would not necessarily mean reduced FII flow to India. The India story is good, and will get better if the government runs full steam ahead with economic reforms.
China’s oil futures foray
The threat the US faces is now coming from the Chinese who have started a futures exchange to trade oil in yuan, posing a threat to the petrodollar, and thus to the ability of the US to run huge deficits and have them financed by others. China is the world’s largest importer of energy. The Shanghai International Energy Exchange has already traded $40 billion of energy futures backed by the yuan.
Thanks to low interest rates on bank deposits, domestic retail investors are changing their method of investing their savings. Traditionally, some 80 per cent of savings in financial assets went into fixed deposits. But, because interest rates do not cover inflation, investors are now looking with lascivious eyes at equity and pouring money into the equity market, via mutual funds. As long as this newly-discovered love for equity lasts, the bull will run on merrily.
(The writer is India Head — Finance Asia/Haymarket. The views are personal.)