Moneycontrol Pro Panorama | Maharashtra election: Sentiment up, but fiscal problems loom

Experts say a significant factor contributing to the success of the BJP-led Mahayuti alliance is the Mukhyamantri Mazhi Ladki Bahin Yojana scheme.

Dear Reader,

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.

Indian markets have responded robustly to the BJP-led Mahayuti alliance's decisive victory in Maharashtra. However, one must question whether this reaction is merely a knee-jerk response. At the time of writing, the benchmark indices were up by over 1.2 percent, closer to the day's low. Monday's move follows a 2.3 percent rally on Friday, which was influenced by exit poll predictions indicating a potential BJP win.

The overnight shift in sentiment is not solely due to the electoral win; it also suggests an anticipated increase in government spending in the medium term. In the first half of FY25, overall government expenditures remained flat year-on-year, with capital expenditures (capex) down by 17 percent.

According to a note from Motilal Oswal, the elections have clarified the government's direction, indicating a likely ramp-up in spending during the latter half of fiscal 2025. Given that Maharashtra is a key industrial state contributing approximately 10 percent to India's GDP, it has the potential to stimulate capex spending.

However, there are concerns regarding whether the state has sufficient fiscal space.

Over the past five years, Maharashtra has experienced declines in various development indicators due to political instability. Coupled with numerous freebies, this situation leaves limited room for the government to initiate and announce new projects.

Experts say a significant factor contributing to the success of the BJP-led Mahayuti alliance is the Mukhyamantri Mazhi Ladki Bahin Yojana scheme, which provides Rs 2,100 per month (up from Rs 1,500) to women. Approximately 2.47 million beneficiaries are expected to benefit from this scheme.

Emkay Global has noted that various poll promises could lead to an annual budget increase of 40 percent, raising it to Rs 644 billion or 1.5 percent of GSDP, compared to Rs 460 billion (1.1 percent of GSDP). The FY25 budget may incur an additional cost of around Rs 70-90 billion.

While the market appears to be pricing higher government spending as a positive development, it seems to overlook the financial implications for the exchequer.

Each election reignites discussions about the sustainability of freebies. During the recent Telangana state elections, Union Finance Minister Nirmala Sitharaman highlighted concerns about political parties making unrealistic promises without considering their financial viability. She emphasised that "false promises are being made", and warned that parties often backtrack when it comes to fulfilling their extravagant promises.

The impact of these giveaways on state finances varies with each state. Ultimately, the common citizen suffers as states grapple with underdevelopment due to insufficient funds or increased taxes required to finance these programmes.

While this electoral victory serves as a sentiment booster for markets—evidenced by rising indices—its longevity remains uncertain. In the short term, a more pressing issue is FII withdrawals from Indian markets. These investors are unlikely to be swayed by state election outcomes; instead, rising US bond yields continue to pose a significant concern. Unless this trend reverses, we may witness ongoing withdrawals.

Although FIIs have been selling in cash markets, they have started unwinding their short positions in derivatives. With monthly expiry approaching, the market direction will depend on FII decisions regarding these positions; if they choose to roll them over, we might see markets test recent lows in the short term.

The electoral results will have some medium-term implications, but more importantly, the market direction will depend on fund flows, which, in turn, will depend on US bond yields.

The direction of long-term effects will stem from how freebies impact state and central finances, indirectly impacting corporate profit. Balancing fiscal prudence with growth will be critical; without it, growth may take a back seat as fiscal challenges mount.

A new feature in MC Pro

MC Pro portfolios are popular among subscribers, having consistently outperformed benchmarks. Earlier published in the form of articles, these will now be housed in a separate section called Alpha Folios that will be managed by the MC Pro research team. Click here to see what Alpha Folios has to offer.

While Alpha Folios has been taken live, MC Pro has also launched a brand-new thematic portfolio, the Affluent India Portfolio - a hand-picked basket of stocks designed to ride a multi-year theme of Indian consumers’ growing preference for premium products. The MC Pro Research team believes that the premium segment will continue to grow as the nation transitions towards becoming a middle-income country.

The portfolio is built to capitalise on the premiumisation theme, has 13 stocks to begin with, of varying weights, and 14 percent cash that should get deployed on addition of new ideas and/or tweaking weights of existing stocks. The stocks in the portfolio come from varied sectors ranging from travel and tourism, consumer durables, jewellery, luxury cars, entertainment to wealth management.

This thematic portfolio will be managed dynamically – the managers of this strategy would keep a close eye on the portfolio and review it periodically for adding/deleting stocks or tweaking weights for the portfolio to remain relevant with changing times and market conditions. While the endeavour will be to outperform the benchmark, the strategy would play out gradually over time. The portfolio is meant for investors with a slightly longer time horizon of 3-4 years for the theme to play out fully.

Investing insights from our research team

Coal India: Long-term outlook remains attractive

Max Healthcare: Quick turnaround in acquired assets makes us positive on the stock

Indian Defence Stocks: Correction unlocks long-term growth potential

What else are we reading? 

Rising women power is visibly influencing election outcomes

Unilever is doubling down on India -- What that means for HUL’s investors

Chart of the Day | Active funds make a comeback

The Eastern Window: India needs to reconsider its policy towards the new Bangladesh leadership

COP29: Debate mirrors rising temperatures, but climate finance ice refuses to melt

The return of the techno-libertarians (republished from the FT)
Maharashtra changes the dynamics between Modi and not just the opposition, but also allies

Mahayuti’s unexpected scale of victory puts RSS in the driver’s seat within the Sangh Parivar

Shivaji's Legacy: Lessons for new Maharashtra government on good governance

Markets 

LIC turns focus on large-caps; net buys shares worth Rs 18,000 crore in Sept quarter

Technical Picks: ABREL, KARURVYSYA, DCAL, ICICIBANK.

Shishir Asthana
Moneycontrol Pro