Opinion

India Economy : Short-term pain as the economy adjusts to new construct

Mahesh Singhi Mahesh Singhi - 26th August 2015
(1) shift India’s savings landscape away from gold & land and towards the formal financial system, (2) disrupt the Indian model of crony capitalism model, and (3) redefine India’s subsidy mechanism. The global evidence proves that structural reforms hurt an economy in the initial years before the economy takes off.
India is at the beginning of the economic pain, as the resets engineered by the PM result in a downturn in real estate and rural India. PM Modi’s resets for the Indian economy are focused around a crackdown on crony capitalists, overhaul of the subsidy mechanism, and a crackdown on the black economy. These resets are already impacting GDP growth, as the rural economy faces unprecedented distress caused by lower subsidies (9% budgeted drop in subsidies in FY16), lower hike in Minimum Support Prices and a multi-city real estate pull-back (aggravated by a crackdown on the black economy), all of which is dragging down rural wage growth (5% now vs 15% a year ago). There is also growing evidence that private sector capex is not increasing.

Inflation in India was low and stable until the UPA’s ten-year rule. Modi’s resets should help bring inflation down on a structural basis. Furthermore, Reset 1 and Reset 3 are likely to lower the cost of capital; Reset 1 and Reset 2 are likely to lower the cost of land; and Reset 2 and Reset 3 are likely to lower the cost of labour. Even as GDP growth suffers in the short term amidst the breakdown of the old retrograde constructs. However, the new structure will take some time to become fully operational; hence, the three resets look likely to adversely impact GDP growth in FY16. The short-term pain in GDP growth will be driven by: (1) alterations in the subsidy regime, which will adversely affect rural/semi-urban consumption and construction activity; (2) crony capitalists’ refusal to begin capex activity, as they see reduced scope for supernormal profits under Modi; and (3) Modi’s attack on black money, leading to a crack in land & real estate prices, which will adversely impact lenders’ balance sheets.

In the short term Modi’s resets will adversely impact crony capitalists and rural demand reliant companies in the cement, auto, electricals, paints, banking and NBFC sectors. The most interesting development will be the emergence of a new generation of structural winners.


Mahesh Singhi
Managing Director - Partner,
Singhi Advisors Pvt. Ltd.


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