What the market expects from Narendra Modi

After 30 long years, India has seen a landslide victory for a single political party, with the BJP crossing the 272-mark on its own. This, the markets hope, will mark the beginning of new era for India in several ways — a shift to development-oriented politics, clean governance, end of red tape and beginning of an efficient and effective administration.

With the markets rallying sharply, the new Government has to be mindful of the expectations riding on it. With all eyes now on the next steps, some of expected changes are immediate and urgent, while some others are structural in nature.

The first step must be to rebuild the confidence of the administration, as a motivated bureaucracy is a must for effective implementation of any policy. The new Government should undertake the task of tackling food inflation immediately. Several years of imprudent food policy (be it large MSP hikes, procurement, etc) have contributed to sticky food inflation. This has kept macro-economic policy (both fiscal and monetary) extremely tight despite demand slowdown. This is of particular importance given that 2014 is forecast to be an El Nino year. If inflation turns benign, monetary policy can start to support the slowing economy.

For the medium term, there are several must-dos. For one, the Centre needs to expedite the implementation of Goods and Service Tax (GST) by building consensus among States and getting approval from Parliament. If implemented, this will be the single biggest fiscal reform in decades, which can unleash substantial economic efficiencies.

Two, Direct Cash Transfers must be revived. This was an excellent initiative caught up in legal and administrative hurdles.

A third area where change is critical is coal and power distribution. Despite massive reserves of coal, India’s production has been struggling to meet the requirements of the core sectors. Private sector participation in coal mining needs to be enhanced and for that Coal Mines Nationalisation Act needs to be amended.

Finally, from a longer-term perspective, the new Government should focus on boosting the manufacturing sector, without which India will not be able to reap demographic dividends. The vast pool of cheap labour involved in the farm sector needs to be migrated to manufacturing.

A gradual easing of labour laws and sustained focus on infrastructure — ports, roads and railways — is the key.

(The author is CEO, Wholesale Capital Markets, Edelweiss Financial Services)