Personal Finance: The way ahead for investors leaving behind the election rhetoric

The key question is how we should prepare in terms of personal finance for the next few years.

The dust is finally settling on the 2024 elections. The seven phases, the intense campaigning, plethora of opinions, exit polls and finally the result is pouring in. The trends at 3:45 pm seem to indicate that Narendra Modi-led government is in the lead once again to be at the helm, but with a reduced mandate (no absolute majority to the BJP). The key question is how we should prepare in terms of personal finance for the next few years.

First, India continues to improve its strength. Some recent news which would aid the next government.

* Record dividend by RBI strengthening the fiscal position and improving fiscal deficit.

* S&P upgrading the outlook to positive while retaining the overall rating at BBB-

* GDP growth for the last quarter (Q4FY24) revised upwards to 7.8% (full year FY24 to 8.2%)

* GST collections continue their growth over the past.

We are back to the era of coalition governments. This would have some risk of the government slowing down hard reforms and opting for some populist measures. The allies would demand their pound of flesh (e.g., special package, key cabinet posts for Andhra Pradesh, Bihar MPs etc.). The opposition would also be rejuvenated and would be a far stronger force in parliament. However, the result also indicates that India is a functioning democracy and that should give much needed confidence to global investors.

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The new government is likely to present budget in July. This should lay the foundation for the next 5 years. This would be even more imperative for the new government to take charge of the narrative once again.

The BJP/ NDA manifesto talks of taking India to a new phase of exponential growth. The document promises a slew of measures which includes poverty alleviation, jobs creation, increasing women participation in the work force, expanding the startup ecosystem, building Agri infrastructure etc. There is emphasis on India becoming a trusted global value chain partner, a hub for global manufacturing across sectors on the back of buildup and improvement of infrastructure (including railways, roads, aviation, waterways, shipping, digital infrastructure, and energy security). Emphasis is also being given to developing sports, investing in R&D, boosting tourism, and opting for sustainable solutions. In short, a lot of areas where if capital and resources are applied, we could have good sustainable growth over next several years. Several contentious issues may be left out of the agenda.

The opposition also put major emphasis on jobs creation and some welfare measures. There is a promise of rationalizing and simplifying taxation including GST. Focus on manufacturing and growth of economy was promised. So, there is going to be bipartisan support for continued momentum on economy, though there would be a short to medium term re-rating of the market to reflect reduced strength of the government.

Infrastructure and capex are likely to continue to grow. Private capex would gradually come in. Housing, especially affordable housing, would get a boost. Consumption would slowly come back and be strong. Manufacturing, including defense, would receive focus. Inflation, fiscal discipline, and sustainable growth would continue to be important buzz words.

The challenge is that some of these themes have already been priced up. The lower than projected mandate for NDA is leading to some profit booking. However, long-term growth looks likely given the demographic and other advantages of India. Of course, sustaining and building on it would depend on promises turning to reality.

From assets perspective, equity is set to continue to be the best asset class. A healthy correction now makes it even more likely. India slowly transforming itself (improved infrastructure and rising per capita income) and coupled with continued financialization of savings, flow of global capital to India would help the cause. Further, the growth is likely to be broad based including mid and smaller companies as well. So, short term movements apart, a slightly overweight position on equity may help in the medium to long term.

So, please do gradually add up to equity and equity-related investments. Mutual funds continue to be the most convenient instruments, though one can add through direct equity, PMS and AIFs as well. A little bit of stagger or Systematic Investment plan would be useful as markets are currently volatile. Returning FII flows (eventually) could aid large caps in the medium term, but over the longer term the broad market would do equally well (if not better).

Improved fiscal position and inclusion of India in global bond indices should provide a cushion for interest rates. Growth would provide upward pressure. Global interest rates remain elevated. However, over the course of next few months, RBI may cut rates by 25-50 bps, and this should help longer duration bonds.

There are enough challenges in the global landscape. Big democracies (US, UK, etc.) are heading for elections this year. Geopolitical crises continue unabated (Israel – Palestine, Ukraine- Russia or even the increased rhetoric on China- Taiwan) which have significant implications on global supply chains and cost of energy (on which India is dependent). Alternate assets such as Gold would continue to provide a hedge against adverse movements on this front and this does have a place in the portfolio.

One is hopeful that none of these would trip India in this phase as India continues to build its own strength. Some risks, from a personal finance perspective, include the new government aligning tax rates for short term capital gains for equity with debt or considering extension of the time to consider equity as long term (from the current 1 year) proving to be a headwind.

But for now, a simple majority of the central government, augurs well for India from a continuation of growth perspective. This should be a magnet for attracting larger doses of much needed capital. This is an exciting phase and folks participating in the India growth story are likely to be rewarded in equal measure.