Market analysts have given a thumbs up to Modi's new team even though the announcement of few ministers does come as a surprise to the Street.
Analysts are confident of PM Modi's cabinet and marked 4 out of 5, on a scale of 1 to 5 with 5 being the best and 1 being the worst.
“Our PM is wise enough to identify key competencies and skill set of his talent force. I would give a full rating as he churned top deck by assigning rightfully all three key ministries of Home, Defence and Finance to the right persons as they have wide and deep experience in the respective field,” Yogesh Vinod Mehta, Vice President at Motilal Oswal Financial Services Limited told Moneycontrol.
The President of India, on the advice of PM Modi, allocated ministries among the 54 Cabinet and State ministers on May 31.
Amit Shah has been appointed Minister of Home Affairs, while Rajnath Singh has got Ministry of Defence. Nirmala Sitharaman has got the Ministry of Finance and Ministry of Corporate Affairs.
Click here for the full list of Cabinet Ministers in Modi 2.0
Vijay Kuppa, Co-Founder, Orowealth told Moneycontrol that he would give 4 out of 5 to the Modi Cabinet. Given the record in the first term, we can safely assume that this would be a hard-working, low key and non-flashy government, he added.
The portfolio allocations have been a bit surprising, to say the least, Kuppa further said.
Ranjan Chakravarty, Product Strategy, MSE told Moneycontrol that he gives 4.5 points to the new Cabinet, and now the focus clearly shifts to growth. He outlined two priorities for the new govt—broadening and deepening the infrastructure space and putting an action plan together for jump-starting India's fixed income market.
Although the appointment of Nirmala Sitharaman as the Finance Minister came as a surprise to the Street and we did see a knee jerk reaction in the trade on May 31, but the market pared losses towards the close of the trade.
Sitharaman is known to be very diligent and committed to her work which augurs well for the finance ministry, suggest experts.
The job for Sitharaman as the Finance Minister is certainly not going to be easy in her first year as India is showing signs of a slowdown. India's gross domestic product (GDP) grew 5.8 percent in January-March, official data released on May 31 showed, confirming fears of a slowdown.
Most experts were expecting GDP growth rate of more than 6 percent. The growth in GDP was slowest since 2014-15. Slowdown signs have been visible since last year, with GDP growing 6.6 percent in October-December 2018.
“After Jaitley, Nirmala Sitharaman is the best bet that Modi could have had as she has worked under the finance ministry as MoS, has domain knowledge as she is post graduate in Economics and has also worked in the sector, so all the main boxes are ticked,” Garima Kapoor, Economist, Elara Capital said.
“Simplification of GST, measures to revive consumption, recapitalization of PSU Banks and addressing the dislocation in financial sector, especially NBFCs remains key tasks to address,” she said.
Kuppa of Orowealth said that in this Budget, she has to lay down a roadmap of how the government plans to increase GDP growth towards 9-10 percent per annum over the next five years with a combination of higher tax revenue (increased collections despite reducing absolute tax rates) and better quality spends.
Kotak Institutional Equities in a note highlighted following reforms that are needed:
In order to push up growth to the range of 7.5-8 percent on a sustainable basis, Kotak said India needs to reform agriculture, financial sector, infrastructure, labour, land and public finances.
Reversing the slowdown through fiscal and monetary stimulus will be challenging. With the consolidated fiscal deficit of around 6 percent and market borrowings (including PSE borrowings) of around 8 percent, expanding the fiscal may be counterproductive, Kotak said.
Fiscal stimulus: Focus on capital expenditure
The government needs to focus on ensuring capital expenditure targets for roads, railways and rural-urban infrastructure are met, Kotak said. The interim budget had already allocated a sizeable increase in social expenditure.
Given the prolonged slowdown in the housing sector, along with the income tax measures announced in the interim budget, the research firm suggested the government to look at expanding the scope of the affordable housing scheme (urban) in terms of a higher eligible loan amount for interest subvention and/or the interest subvention rate.
Monetary stimulus: RBI may reduce rates by 50 bps
Headline CPI inflation trajectory is expected to remain around the RBI’s comfort level of 4 percent—much of which is hinged on food prices. Kotak expects the RBI to reduce repo rate by 50 bps over the next two policy meetings in June and August factoring in the expected inflation trajectory and the growth prospects.
However, the transmission has been a challenge and it is more essential that bank and market rates transmit the rate cuts. Towards, this end, liquidity should be pushed to close to neutral—maybe towards surplus in the near term to partly offset the credit squeeze in the NBFC sector, it added.
Financial sector reform: Privatization and consolidation of PSU banks
The government needs to look at privatization and consolidation of PSU banks along with strengthening regulatory controls and improving governance, Kotak wrote in the note.
While the PSU banks have a large depositor base, the private banks have been shouldering the bulk of credit off-take, given the inability to lend by most of the PSU banks.
The effect is visible in the skewed liquidity conditions between PSU banks and private banks. While most of the banks have been re-capitalised and intra-PSU bank consolidation is underway, it does not necessarily provide a solution to the regulatory oversight, weak governance and lax risk appraisal that PSU banks often lapse into, the research firm highlighted.
Infrastructure: Ownership policy for infrastructure assets
According to Kotak, infrastructure development in the current shape and form will face challenges unless (1) government finances improve substantially which can then be used for infrastructure financing, or (2) the funding diversifies from being mostly government funded.
The primary challenge for the government will be to review (1) ownership policy for infrastructure assets, which restricts ownership and operatorship of assets in major infrastructure sectors to government entities and (2) pricing framework, which results in very poor returns for government-owned utilities.
Labor reforms: Safety, welfare, and remuneration
Reforms should be aimed at covering three broad issues: Safety of workers at the workplace, welfare of workers and remuneration of workers.
The government should streamline around 40 existing central laws (roughly split equally between general labour laws and sectoral worker specific laws) to target the above broad contours.
While some states such as Andhra Pradesh, Gujarat, Madhya Pradesh and Rajasthan have already implemented changes to labour laws, most states and central government is yet to revisit the plethora of laws.
