Govt capex to rise from Rs 69,000 cr per month to Rs 1.16 lakh cr to meet Rs 11.1 lakh cr target: Kotak's Nilesh Shah

The second-half growth will likely be supported by three key factors: Festival season, wedding season and rise in government capex, says Shah.

The recent state election results, according to Kotak AMC's Nilesh Shah, could boost the confidence of both domestic and foreign investors as it strengthens the government's ability to push through reforms.

On the more important issue of economic growth, Shah believes that economic growth in the second-half will likely be supported by three key factors — consumption driven by festival season, wedding season expenditure and government capital expenditure.

In a conversation with Moneycontrol, Shah spoke about what to expect from the markets in the coming months, balancing out welfare and growth, and the impact of the upcoming Trump presidency.

Also read: DEA Secy Ajay Seth sees 'some under-shooting' of the FY25 capex target

What impact do you see on the market after the elections results in Maharashtra?

The election results could boost the confidence in the government's ability to push through reforms. It could also help restore foreign investor confidence, as many foreign investors had been aggressively selling over the past two years and were underweight on India. If they believe the government will push through with reforms, they would not like to remain underweight by a margin. On Friday (Nov 22), we saw them writing puts, and this probably shows that they are interested in buying around the current levels and we may see some foreign portfolio money coming to the country. The market is also carefully observing how the government balances development with welfare schemes.

What kind of reforms is the market looking at?

Markets are looking for a range of reforms that support long-term growth, such as land reforms, labour reforms, farm reforms, judicial reforms, etc.  For example, if the land acquisition process becomes faster and more transparent, obviously, growth can pick up. If labour reforms are announced, certainly many labour-intensive industry can come to India. The rule of law is what is worrying investors because of the overburdened judiciary and the delays.

One is the standard set of reforms -- land, labour, farm, and judiciary. The second one will be ease of doing business. The third will be politically sensitive reforms like free trade agreement negotiation, strategic divestment, GST reforms, etc. Reforms which can sustain growth for a longer period will be political, administrative and fundamental economic reforms.

How can Maharashtra balance the fiscal burden of welfare schemes with the need for infrastructure development and economic growth?  Will this create fiscal stress for the state?

Our voters are smart enough to create that equilibrium where, on the one side, you have to take care of the bottom of the pyramid, and on the other, you have to create jobs and growth, so that they can be meaningfully employed.

In a country like India, we can never become pure capitalist, saying "I don't care for the bottom because there is a vote bank and election cycle". On the other hand, we can't focus on just freebies to win election as you end up compromising growth. The whole thing is how we maintain balance and carry people along, which is the beauty of a democracy. At the same time, we should ensure we don't overdo it. It's not that the government of India or the state governments are not asset-rich. They have assets. They just need to improve efficiency.

What is the outlook for economic growth in the second half of the year?

Second-half growth will likely be supported by three key factors. First, the festival season will drive significant consumption. Second, the wedding season, with approximately Rs 6 lakh crore expected to be spent across 48 lakh weddings, will further boost economic activity. Third, government capital expenditure is projected to rise from Rs 69,000 crore per month to Rs 1,16,000 crore per month to meet the budgeted target of Rs 11.1 lakh crore. Together, these elements should ensure better growth in the second half, compared to the first. Additionally, there is potential support from a strong Rabi crop as water reservoir levels (except in North India) are above the 10-year historical average.

On a global front, what do you see? What policy shifts do you expect to see with Trump coming to power next year?

What I heard from a global CEO is that politicians often make promises during elections but act differently once in office. Therefore, Trump should be judged on his actions, not on his words. When Trump first became president, he transitioned from being a businessman to a politician with no experience in Washington, D.C., governance. Now, he has some experience. He is expected to be a hard negotiator, aiming to secure disproportionate benefits for the US rather than creating win-win outcomes.

Another key issue is the high debt burden and deficit levels in the U.S. The only way to reduce the deficit is by raising income and cutting expenses. However, while there is a focus on cutting expenses, efforts to raise income are lacking due to tax cuts. For this strategy to succeed, economic growth must be strong enough to increase overall tax collections, offsetting the reduced rates. Balancing expense reductions while maintaining growth will be a delicate task. The Federal Reserve might play a critical role here by improving liquidity and cutting short-term interest rates, while allowing long-term rates to rise, which would deepen the yield curve. This approach could support growth despite the challenges posed by expense cuts.

Do you think that the dollar's strength will continue to play against us?

Beyond a certain point, they can't allow the dollar to appreciate much because it becomes a problem for them, too. Limited imports and higher exports mean that the dollar strength work against them.

From now until February, how will the market behave?

While hard to predict, directionally, if foreigners aggressively sell, the markets could come down. If they neither buy nor sell, the markets might plateau or move up marginally. However, if they begin to buy, markets will rally strongly. This time, there could be a disproportionate impact of foreign buying on the way up, compared to their selling on the way down. When foreigners sell, domestic investors absorb the impact. When foreigners buy, there may not be enough sellers to match their demand, driving markets upward significantly.

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