As the Modi 3.0 Government prepares to take the oath, there are rising concerns about the pace and scope of future reforms.
UBS, a global financial services firm, has raised questions regarding the potential slowdown in the implementation of critical reforms, particularly in land and capital markets, given the current political landscape and the nature of Modi's allies.
Narendra Modi has been chosen as the leader of the NDA 3.0, and Delhi is abuzz with discussions about the new government, which will be sworn in over the weekend.
Allies have submitted their wishlist, and speculations about portfolio distributions are rife. However, the critical question remains: What does this mean for the Indian economy?
UBS suggests that while the government may continue to push supply-side reforms, tougher initiatives like the Uniform Civil Code (UCC) and land reforms may face significant hurdles.
According to Tanvee Gupta Jain, Chief Economist at UBS India, "We believe India’s growth over the past few years has benefitted from digitalisation adoption, higher services exports, credit expansion, and reforms to boost manufacturing/exports amidst China+1 supply chain shifts. Indeed, the government initiatives to boost manufacturing are already showing progress in sectors including electronics."
Jain anticipates the government will continue to focus on supply-side reforms such as manufacturing simplification, regulatory process simplification, labour law implementation, skill development, and creating employment opportunities, especially in blue-collar, low-skilled, labour-intensive manufacturing sectors.
However, she cautions that implementing more challenging reforms, including land reforms, significant infrastructure spending, divestment, farm bills, Uniform Civil Code, and One Nation One Election, will be difficult. These reforms are crucial for shaping the overall investor sentiment narrative.
Despite India's resilient growth, the UBS report highlights a "dichotomy between household consumption growth (below trend since the pandemic) and real GDP growth (holding up well)." Jain notes that "India is seeing a K-shaped consumption recovery with affluent/premium segment demand seemingly doing well, while demand for entry-level and mass-market goods has remained muted post the pandemic."
This indicates that lower-income groups, who were most affected by the pandemic, have not yet recovered their income levels to resume spending.
Limited fiscal support for vulnerable sections of society and weather anomalies affecting rural income have amplified this gap. Jain suggests that "to help broaden India’s growth, we believe India needs a broad-based recovery in the capex cycle as construction is the largest generator of jobs outside of agriculture."
All eyes are now on the upcoming Union Budget announcement. "Our base case is for the government to stick to a medium-term fiscal consolidation roadmap but with a populist bias.
The higher-than-expected RBI dividend transfer to the government (additional 0.3% of GDP in FY25) would create fiscal leeway to increase populist spending to support consumption for the lower income strata," Jain added.
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