Nifty may slip on India’s growing political division and scam

India’s benchmark stock index Nifty closed around 22004.70 Tuesday, slumped over -500 points from the recent life time high of 22526.60 scaled on 11th March; it made a low of around 21710.20 on 19th March. Nifty was under stress on the concern of political & policy stability and SEBI regulatory tightening on small /mid-cap MFs after Indian capital markets regulator SEBI advised mutual funds (MFs) to protect investor interest by limiting flows, rebalancing portfolios, and other measures in the last week of February.

India’s MF body AMFI has recommended that among other things, mutual funds should moderate inflows into these schemes and also rebalance the portfolio. The market may be worried that MFs will try to increase the cash in their portfolio and this could lead to more selling in the coming days. Apart from MF stress tests, SEBI is also concerned about the non-stop rally of Dalal Street and elevated/frothy valuation.

Nifty scaled around 22526.60 on 11th March, at a new life time high on hopes of an early Fed/RBI rate cuts and Modinomics optimism. Indian PM Modi is set to return with a bang for the next 5 years in the forthcoming April-June general election with an even higher majority (?). Overall, going by the present political narrative/scenario, and the lack of any credible face of opposition leader who can challenge Modi at all-India levels (despite hard work/walk by INC’s Rahul Gandhi), it’s almost certain that BJP is going to get 300+ LS seats this time, if not 370-400, the party is targeting this time.

But despite Modinomics optimism and the guarantee of Modi-III; i.e. return to Federal government in the forthcoming general election from mid-April with 300+ seats (if not 370) this time, Nifty is under stress on the electoral bond (EB) scam as it has not only tarnished PM Modi’s Godfather-like image of ‘honesty and crusader against corruption’, but also several other regional and main opposition political parties (except Left/CPIM). The EB scam is legalized political bribery involving federal/state infra contracts and favoritism (including policy twist) for hefty donations (quid pro scheme) by various business houses/corporate entities.

As almost all political parties of India are involved in the EB scam, no one is out crying for PM Modi’s resignation, at least on moral responsibility. But in the eyes of FPIs/AEs (US/EU), India’s political and corporate governance image might get tarnished. There could be further legal action on the corruption angle in the EB issues against political parties/governments, corporates, and investing agencies involved directly/indirectly amid increasing pressure by the SC under the present CJI (under quid-pro/corruption, money laundering and other criminal activities). India’s SC may eventually order a probe against the respective government of the day (involved political party) both at Federal and state governments for proving undue benefits against donation.

Thus the need of the hour is transparent political/election funding (campaign finance) in a country like India, the world’s so-called largest democracy or mother of democracy, which is now fast turning into an electoral quash-autocracy/banana republic. Also, official ‘white’ political funding through EB is only the tip of the iceberg and the unofficial black money political funding by even big corporate houses instead of favoritism/nepotism may be huge, coming through the hawala (informal/unofficial) route; only around 5% of political expenditure is accounted through EB around Rs.0.20T; i.e. the overall size of Indian political funding/politics is around Rs.4-5T (after considering all big/regional/smaller political parties).

Corporations/business houses are not paying out of their pocket; they are paying against ‘business’, they are getting contracts, favors, and even favorable policy twists. Thus India’s Rs.100T infra-fiscal stimulus (over five years) is a great source of corruption and subsequent illegal political funding. This is also stimulating the economy, creating higher demand and higher inflation as politically corrupted money is being spent by various political parties, especially during election days. India’s election spending by various political parties, individuals and government may be around Rs.12T and a major part of private funding is still under the table (unofficial Hawala route).

There were more damaging revelations for EBs on 21st March, when ECI published the ‘hidden serial number’ of those EBs, from where one found may have direct links between donors and beneficiary political parties. On 19th March, Indian industry/corporate associations like FICCI, CII and ASSOCHAM tried to block SC's directive to SBI for the revelation of the hidden serial number, but failed; SC asked SBI to comply by 21st March.

Now on the 21st March night, to divert public/media attention from the EB scam, India’s ED also arrested sitting Delhi Chief Minister (CM) Kejriwal (AAP Party) in connection with the alleged Delhi Excise policy scam on wine/liquor. This arrest marked the first time a sitting CM in India was arrested by any government agency, as the ED accused Kejriwal of being the key conspirator in the excise policy scam, involving favoritism and kickbacks from liquor businessmen (so-called South cartel) and using the kickbacks fund for the state election in Goa. The controversy surrounding the excise policy and Kejriwal's arrest has sparked political protests and brought the so-called INDI (I.N.D.I.A) opposition more united amid ‘vendetta politics’.

Overall, the reenergized INDI opposition alliance led by INC/Cong and AAP AAP is now trying to fight the ‘mighty’ Modi on a ‘save democracy of the country with secularism’ platform, while BJP/Modi is embarking on an anti-corruption, pro-Hinduvta and pro-development platform. But after the EB scam/fiasco, it’s clear that the BJP is equally responsible for political corruption (quid pro). In this way, the INDI opposition is now fighting the election on a ‘sympathy wave’ after AAP Chief and Delhi CM Kejriwal was arrested, The IT department froze all bank accounts of INC (allegation of no IT return for some old assessment year) and anti-minority (Muslim)/CAA act by the BJP just ahead of the election.

Now, on the eve of the election, BJP may be on the back foot to some extent on account of the wrong electoral strategy regarding the sudden implementation of CAA (subsequent NRC, etc), EB scam/fiasco, and appointments of two deputy election commissioners arbitrarily through a select committee comprising PM, HM/any cabinet colleague and LOP (Leader of Opposition), and not CJI as was the previous case.

Although PM Modi/BJP is set to return with a similar blockbuster majority in 2019 (around 300 LS seats) amid Modi’s Godfather-like image, matured political leadership, and development/anti-corruption/Hindutva platform, looking ahead, the 2029 General Election may be very tough for BJP amid increasing incumbent wave, unemployment and inflation and the fact that Modi will be around 80-years of age (although PM Modi now looks incredibly fit like in mid-mid-fifties, not seventies). But at the same time, opposition political parties led by INC should have a more mature and credible leader/face (Rahul Gandhi?).

Overall, India now needs a strong national-level opposition political party, having an all-India organization like INC, not state-wise regional parties to compete with the BJP at the national level. Presently, the BJP is fighting various regional parties in state legislative polls, but making alliances/settings with them at the national level directly or indirectly to retain the Federal government and also ‘friendly’ state governments. Two strong/big national-level political parties like BJP and Cong/INC will ensure checks & balances at all levels. For this, INC should also be transformed from a family organization to cadre cadre-based organized political party for equal opportunities for all party workers (like BJP/CPIM).

In brief, the image of India as the world’s favorite investment destination has been tarnished as a result of the EB scam, and Indian sovereign ratings/outlook may be reviewed negatively (for institutional weakness/corruption) if such EB/campaign finance scam continues in different forms without any suitable alternative to reduce the increasing power of corrupted money & muscle. Besides political funding reform, India has to also ensure proper judicial reform, so that corrupted money and muscle power can’t influence the judicial system.

There are also some controversies over EVM (voting machine) as it has a programmable chip that may be compromised. The solution is to return to the paper ballot system or deposit of VVPAT by the voter in a separate ballot box after executing the EVM button. Germany, which originally invented the present EVM machine, has already banned/discontinued EVM machines and using paper ballots. Similarly, Bangladesh and some other countries that were using such EVM machines, now also returned to paper ballots. U.S. is using a hybrid system of EVM/BMD/Optical scanner and physical VVPAT/Paper, which a voter can deposit of his/her own into a separate ballot box after executing EVM/BMD. Looking ahead, India’s SC may order ECI to deposit each VVPAT Paper into a separate ballot box by the voter himself to end all types of controversies/doubts. ECI has to count those VVPAT papers separately along with normal EVM machine count.

In the 2019 general election, BJP/Modi won 303 LS seats alone out of 545 seats against the required simple majority of 273 seats (halfway mark); additionally, BJP regional allies in various states won 51 seats, making the overall tally 354 against 2/3rd majority (around 67%) of 365 seats required to bring any big change in India’s constitution or any other big change.

Now in the forthcoming 2024 general election, 545/543 LS seats will be contested and the required minimum simple majority target of BJP/Modi on a standalone basis would be 273 seats and 2/3rd majority 365 seats. PM Modi/BJP is now publicly targeting 370 LS seats for BJP alone and 400+ for the overall NDA alliance; i.e. 2/3rd majority for any likely change in India’s Constitution or any big-bang reform like population control, land & labor reform including suitable minimum wages across the country.

But to win 365-425 LS seats from the present 303-354, BJP/NDA has to win many more LS seats in WB and southern states in a big way. If BJP has to win a 2/3rd majority in LS alone, then it has to win many more seats (than in 2019) in WB, Odisha, Delhi, TN, AP, Kerala, and TS (big Swing Seats), keeping in view that in other winning states, BJP has already reached a saturation point by already gaining a maximum number of possible LS seats.

On the contrary BJP/Modi may lose a few seats in those winning states as a result of some incumbent wave (elevated inflation over +50% in the last ten years under Modi, elevated unemployment rate around 8% on average, growing income inequality, donation for business/contracts/favoritism and the allegation of ‘vendetta politics’). Also, considering the relatively higher Muslim and OBC voters in most of these big swing (non-BJP) states, it’s very difficult for BJP/Modi to win in these states in a big way despite the anti-corruption, development, and nationalist stance.

All these may result in fewer LS seats for BJP/Modi/NDA in 2024. If BJP alone loses around 30 LS seats from its 2019 tally of 303, it will lose a simple majority in the LS on a standalone basis, which may result in more bargaining power for its allies under NDA. In the scenario of BJP/Modi failing to get a simple majority of 273 seats in the LS alone, the market may take it as negative and the 1st sign that the 2029 general election will be tough for BJP/Modi.

As of now, the BJP is not able to capitalize on Modi's popularity in Southern States as INC and other regional parties are quite strong in terms of both money & muscle power to compete with the BJP. The market may be convinced that to growing popularity of BJP/Modi’s leadership, inclusive development, anti-corruption, and targeted social welfare model along with booth-level cadre-based party organization may pave the way for BJP to win an additional LS seats around 50 or even 100 in the 2024 general election for a convincing 2/3rd LS as-well-as RS majority alone. But in states like WB, BJP has no significant booth-level party organization, at least in rural Bengal. The same is true for the BJP in other key swing states despite the Modi wave. Thus, despite immense public enthusiasm during PM Modi’s rally/roadshows in TS, BJP got only 8 seats and it may take more time & effort, the right strategy for BJP to win in these Muslim/OBC heavy swing states.

Despite the appeal of Modinomics, India’s Federal government (India) still pays around 45% of revenue as interest on public debt, while various state governments also pay around 35% of revenue as interest on their public debt on average. Various states are now adopting increasing allocation for social welfare (grants/subsidies/freebies/dole money) under various schemes to get votes from poorer sections of society, which is a big vote bank for any political party in India.

Over the years, both BJP, INC, and other regional parties have been competing with each other and increasing various social welfare amounts to win votes and power in states. This is a growing red flag for overall Indian fiscal discipline despite higher/growing GST/tax collections. India should allocate much higher funds/resources for free (Govt/PPP) quality education (in English medium including higher education), quality healthcare (fully functional government hospitals) coupled with unemployment benefits for millions of unemployed persons as universal social welfare policy rather than present policy ‘Revdi/freebies/dole politics’ for a certain section of the society to win votes.

India may follow the US/European/West/Chinese model of socialism or mixed socialism for inclusive growth of the society/country so that there will be a thrust on quality employment rather than the growing culture never-ending cycle of ‘Revdi/freebies/dole politics’ to win votes. The increasing thrust of dole politics/direct cash transfer to a particular/poorer section of society around 80M people by both state and Federal governments may be acting as a fiscal stimulus to some extent, but not helping the GDP of the country, while fiscal math is getting scary day-by-day.

Now from politics to economics, as per the Government/MOSPI/NSO advance estimate, India’s Q4FY24 real GDP should be around Rs.46.41T; i.e. a sequential growth of +6.15% and yearly growth of +6.40%; the FY24 real GDP (Rs.172.90T) growth would be around +7.59%. Over the last few quarters, there were surprisingly positive revisions in the GDP data (ahead of the 2024 election), which may be ‘adjusted’ in the coming years, while Modi admin is now targeting $7T nominal GDP by 2027-30 (?) from projected $3.55T in FY24. This translates to almost 97% growth in 3-5 years, which looks almost impossible at this stage. Even if we consider 5 years (from FY24 to FY29-next general election), it will translate to around +19.4% growth rate on average, which also looks very tough. India’s nominal GDP in LCU (local currency unit-INR) should grow around +20% CAGR along with limited inflation of around 4-5% and limited currency devaluation/stable USDINR.

The Modi admin took a target of $5T nominal GDP by FY24 from $2.71T in FY19; but failed mainly due to higher inflation (deflator) and higher USDINR; India’s projected nominal GDP for FY24 would be around $3.55T; i.e. around 31% growths in 5-years at an average rate of around +6.2%. On the other side, India’s real GDP has grown from around $2T to only $2.09 projected by FY24; i.e. only around +4.5% cumulative growth in 5 years at an average rate of only +0.9%, mainly due to COVID disruptions, high inflation/deflator and higher USDINR.

Although India’s nominal GDP may be now around $3.55T, at the 5th largest position in the world, in terms of nominal GDP/Capita, India may be now still at the lowest in G20 simply because of its huge population. In terms of real GDP ($), India is now the world’s 6th largest economy, but far away from China’s $17.51T and the US's $20.18T simply for huge currency devaluation over the last few decades.

As per the UN estimate, India is now approaching a huge population of almost 1.50B by 2030, surpassing even China. India's population is expected to continue to increase until 2064 when it will peak at 1.7B. India's population is expected to grow by 15.5 million people each year. By 2030, India will have 1.04B people of working age (favorable demography, but needs quality employment).

On the 16th of March night, after the official announcement of the election schedule by the ECI, PM Modi appeared in the India Today conclave and pointed out Modi-3.0 era may stress on:

·         India to become world’s 3rd largest economy; nominal GDP $10T by 2030 (?)

·         Huge Infra push led by transport-railways, roadways, and waterways

·         Bullet trains (HSR) and many more Vande Bharat (SHSR) trains

·         A stable and strong democracy

·         Space Programmes

·         Defense/Military export

·         Solar/EV

·         Semiconductor

·         Stress on middle-class people's social welfare (like some subsidies in affordable housing schemes)

As per PM Modi, cumulative fiscal stimulus in the last 5/10 years for some sectors:

·         Income tax rebate around Rs.2.5T

·         Railway ticket rebate around Rs.4.5T

·         Ayushman Bharat (Free Health Insurance) rebate of around Rs.1T

·         Nearly 250M people were out of poverty in the last 10 years

In his recent media interactions, PM Modi already hinted at big/monumental (rather than incremental) policy reform in his 3rd term aiming for India to become a developed economy by 2047, boosting quality employment ensuring price stability and social safety (quality education and healthcare by government-free for all). The market was expecting the Modi admin may bring some structural reform aiming at quality employment generation and population control in the next term (targeted poor/middle-class people having more than 2 children may not be eligible for any government subsidy/scheme/job like in China).

But sudden implementation of CAA just a few days before the announcement of the election may be a policy blunder for the Modi admin as a result of increasing arrogance and overconfidence. Modi admin/BJP is now on the back foot for the fear of completely losing the Muslim minority vote bank in Muslim-populated states including Southern, WB, Bihar, and even UP/Delhi. The sudden decision to implement CAA may be wrong as it will not change any ground reality of legal/illegal migrants in the country, living with valid citizenship for the last few decades, but may mislead the Muslim minority community, thanks to intense political propaganda by various opposition parties under INDIA coalition. Still, there is no visible sign of any credible & politically mature national leader, with an all India both level strong cadre-based organization (including INC/Rahul Gandhi) to challenge BJP/Modi’s political leadership at all Indian levels with a pro-development, anti-corruption, and Hindutva platform along with targeted social security narrative.

But this time BJP/Modi is confident about retaining/gaining an absolute 2/3rd majority in LS (around 365 seats). But for this, BJP has to win more seats in WB and some southern states, which looks tough at this stage, considering the polarization of Muslim votes, which got more complicated after the implementation of the CAA (Citizenships Amendment Act) and EB scam/fiasco expose- just a few days ahead of the announcement about election schedule by the EC. This time BJP may not get a 2/3rd majority in the LS of its own this time despite the deluge of development/infra projects launching ceremony across India worth more than Rs.11T, equivalent to the FY25 budget proposal.

Modi has to win the trust of millions of Muslims in India by a commitment to build the Babri Masjid in Ayodhya with the same scale/enthusiasm as Ram Mandir (in line with SC directive). But even with around 270-300 LS seats along with the support of other likeminded political parties (NDA) directly/indirectly (55-70 seats), the Modi admin should have no issue in launching the next generation of structural reforms to improve the country’s productivity and make India a developed economy from developing and 3rd largest economy in the world, comparable to the most populous neighbor China by 2047-50.

But for this to happen, India’s real GDP has to grow in double digits at least +10% CAGR in USD terms in the next 25 years, so that real GDP may grow to around $8-10T by 2050 from the present $2.09T. The supply/infra capacity of the Indian economy has to grow on multiple scales to serve the increasing demand of a growing and more prosperous middle-class population. The huge infra (traditional, transport, and social) and fiscal stimulus will also ensure quality employment in India to ensure millions of educated youths/middle-aged people get a decent/good paying job and reduce the growing income inequality.

Technical trading levels: Nifty Future

Whatever may be the narrative, technically Nifty Future (22095) now has to sustain over 22300 for a further rally to 22350/22450-22550/22650/22700* and further sustaining above 22700, may scale 22850/23025 and 23260-23575-23700 levels in the coming days/weeks; otherwise sustaining below 22250, may fall to 22000/21900-21840/21600*;  may further fall to 21500/21375*-21325/21250*-21130/21000-20850, and further 20630/20460-20280/19730 and even 19400 levels in the coming days/weeks.