Modi 3.0: As Nirmala Sitharaman back on FM’s chair, share market pundits bet on…

Despite geopolitical challenges, India's Finance Minister Nirmala Sitharaman's first term was marked by fiscal consolidation and a sharp economic recovery following the COVID-19 pandemic. As Sitharaman begins her second term, the Indian economy and the market hold high hopes for her leadership.

It can't be denied that the Indian economy saw a significant transformation under her leadership due to several reforms and policy tweaks. From consolidating 10 public sector banks into four to maintaining fiscal prudence and simplifying tax slabs, Sitharaman met market expectations fairly in her first term.

Also Read: Modi 3.0 Cabinet: Nirmala Sitharaman retains finance ministry

Many experts rate Sitharaman's first term as remarkable as she managed to keep the Indian economy firmly on the growth path amid a testing time.

"The Finance Minister's first term can definitely be rated 8/10 given the challenges faced on the macroeconomic front, both at the domestic and the global front, in terms of tackling inflationary pressures while, at the same time, ensuring growth remains a priority," said Aamar Deo Singh, Sr. Vice President, Research, AngelOne.

Also Read: Mint Explainer: Key policy changes in Nirmala Sitharaman’s first stint as FM

Macro stability is what the market wants, and Sitharaman can deliver on that, say experts.

"Nirmala Sitharaman's first term as Finance Minister demonstrated a commendable balance between fiscal prudence and economic stimulus, especially amidst the unprecedented challenges of the COVID-19 pandemic. Her strategic implementation of the Atmanirbhar Bharat (self-reliant India) package and targeted support for MSMEs, healthcare, and vulnerable populations significantly mitigate the pandemic's economic impact," Suman Bannerjee, CIO, Hedonova, observed.

"However, her tenure faced criticism for imposing high tax rates, including the controversial surcharge on high-income earners and increased taxes on certain goods and services, which some viewed as burdensome during the economic recovery," Bannerjee added.

According to Deepak Jasani, the head of retail research at HDFC Securities, markets are attuned to Sitharaman's styles and policies and may continue to show confidence in her abilities to steer the economy's pace.

"The Indian economy witnessed good growth under Finance Minister Nirmala Sitharaman (with able guidance from PM Modi). Being the first full-time woman finance minister of the country, Sitharaman has taken key decisions in her previous stint, such as consolidation of 10 PSU banks into 4, introduced new tax slabs in Finance Act 2023, ECLGS introduction to help MSMEs in need of cash, consistently underscoring fiscal prudence as a top priority, with the aim of reducing the fiscal deficit to 4.5 per cent by FY26, trimming corporate tax to 22 per cent, etc.," Jasani observed.

High hopes

Expectations from Sitharaman are high as she builds on her previous initiatives while tackling ongoing economic challenges.

When the Bharatiya Janata Party (BJP) missed the majority mark on its own, concerns grew that the coalition government may not deliver strong policy reforms. However, the Cabinet formation has signalled that the new government will not compromise on the policy front.

Also Read: Indian economy may grow at 6.2% next fiscal on manufacturing, services sector growth: Report

"The entire cabinet formation signals an important thing—the policy continuity of the BJP-led NDA government. All the key ministries are with the BJP," said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

The market wants fiscal consolidation now because the country's credit rating depends on it.

As per Vijayakumar, for Sitharaman, fiscal consolidation has been a top priority. She succeeded in bringing down the fiscal deficit to 5.6 per cent of the GDP in FY24, which touched 9.3 per cent of the GDP in FY21 due to the impact of COVID-19. So, the fiscal glide path is 4.5 per cent for FY25-26, and the market will look for indications of that in the Budget.

Also Read: Indian economy set to hit $5 trillion by 2024-25; $10 trillion by 2030, says Hardeep Puri

According to Bannerjee, key priorities include simplifying the tax structure to enhance ease of doing business and alleviate the tax burden, particularly revisiting controversial surcharges and GST rates.

Besides, policies stimulating economic growth, attracting foreign investment, and creating jobs, especially in manufacturing and infrastructure, are crucial.

Bannerjee pointed out that continued prudent fiscal management is expected, ensuring adequate investment in healthcare, education, and infrastructure. Furthermore, promoting the digital economy, supporting startups, and encouraging sustainable development through green initiatives are vital.

G. Chokkalingam, founder and head of research at Equinomics Research Private Ltd, finds Sitharaman's return positive for the market.

"Things have been good during her regime, whether you talk about indirect or direct tax collections, fiscal balance, GDP growth, tax compliance, or the expansion of the taxpayer base. The last five years of experience will help her do much better," said Chokkalingam.

Chokkalingam expects her to try to make the current account balance and current account surplus permanent attributes of the Indian economy and should ultimately bring down the fiscal deficit to 4 per cent of GDP. 

As a taxpayer, Chokkalingam expects concessions for personal income tax on par with corporate income tax.

Jasani believes Sitharaman's focus areas will be encouraging and adhering to high growth, making it more inclusive, and creating employment. Rationalising GST and easing tax compliance are expected to be on the agenda.

One of the challenges for the new Finance Minister would be to gain the confidence of the BJP's key allies and make plans for Andhra Pradesh and Bihar, which may be expecting considerable allocations for their states.

"She will need to balance fiscal pressures in the new coalition government and a growing chorus for cash transfers to alleviate rural distress in the wake of such pledges by opposition parties. Among the other main challenges is ensuring macroeconomic stability amid global uncertainties. While rural-focused sectors could benefit from her policies, capex-related sectors could take a back seat for some time," said Jasani.

Impact on markets

Experts expect policy continuity and political stability over the next five years under the NDA regime. This should augur well for the market.

Sitharaman's second term could see policy measures that could be positive for the market in the long term. At present, the market's reaction to her return is neutral, as the focus is on the upcoming Budget and other policy decisions.

"The market reaction is neutral as it expects no drastic change but policy continuation. Sitharaman's reappointment maintains continuity in the government's economic policies and reforms," said Ravi Singh, the founder of DRS Finvest.

"Her reappointment is expected to provide market stability, which will help reduce fear or volatility in the market, providing a stable avenue for investment. Investors will likely view her return as a positive sign, as it ensures policy continuity and reduces uncertainty," said Singh.

The impact on different sectors

The market expects her to emphasise privatisation and disinvestment, reforms in the financial sector, and policies to promote infrastructure, manufacturing, and industries in the near term.

Singh underscored the need for accelerated privatisation of state-owned enterprises to raise capital, improve efficiency, attract private investment, and reduce the fiscal burden are the key things the market expects from Sitharaman.

Moreover, the market expects her to strengthen the banking sector through recapitalisation, addressing NPAs, and enhancing regulatory frameworks to support economic growth and financial stability.

Investment in large-scale infrastructure projects will boost economic growth, create jobs, and enhance connectivity and productivity across the country. Promoting 'Make in India' will boost local manufacturing, attract FDI, and reduce import dependency; fostering innovation and technological advancement are the other key factors that will prove to be long-term positives for the Indian stock market, said Singh.

Singh believes continued focus on infrastructure development will benefit sectors like construction, cement, and steel, while infrastructure push and modernisation initiatives may also benefit the railway sector.

Support for startups and the digital economy will also benefit technology, e-commerce, and fintech sectors. Financial sector reforms and initiatives will strengthen the banking sector, said Singh.

On the other hand, Singh pointed out that the government's focus on transitioning towards cleaner energy sources might pose challenges for the oil and gas industry.

The food and beverages sector and import-reliant industries may also face some challenges in Sitharaman's second term.

"Sitharaman's previous measures to curb unhealthy consumption habits could lead to tighter regulations or higher taxes on certain food and beverage products. Emphasis on self-reliance and domestic manufacturing could result in tighter regulations or higher import duties, impacting industries heavily reliant on imported goods or components," said Singh.

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