With political stability secured, no worry for the economy: IIFL’s Nirmal Jain

When the Election Commission of India announces the voting results on 4 June, the markets will be tracking the margin of victory for the NDA, and not wondering about a possible loss, said Nirmal Jain, founder of financial conglomerate IIFL Group.

The government that takes charge once the results are officially announced has its task cut out, Jain said. In an interview with Mint, Jain said the new administration should accord priority to labour reforms, the electricity Act, increased privatisation of public sector undertakings, and support for manufacturing.

“The new government is expected to implement ambitious new laws, tax reforms, incentives, and trade agreements to further support manufacturing," he added.

Jain also offered insights on why foreign portfolio investors are selling Indian stocks, and on sectors that make for attractive investments this year. Edited excerpts:

 

The exit polls predict a stronger performance for the NDA. What does this mean for the economy?

The exit polls show a majority for the BJP, and close to 350 seats for the NDA. This augurs well for the economy as political stability is key for continued thrust in infrastructure and inclusive growth.

What if the actual results throw a negative surprise?

The surprise can only be in terms of the number of seats won by the NDA. As long as the BJP/the NDA form a government with a clear majority, we do not have to worry much about the economy and growth.

What should the new government focus on?

India’s economy grew at a faster-than-expected pace of 7.8% year-on-year in the first three months of 2024 (January-March), driven by a strong performance in the manufacturing sector. Economists expect this momentum to continue throughout the year. 

The ‘Make in India’ initiative, championed by Prime Minister Narendra Modi, has been central to transforming India’s services-led economy into a manufacturing powerhouse, which is crucial for boosting export growth and job creation.

Also read | Roadmap for financial sector reforms to be unveiled post polls

Going forward, the new government is expected to implement ambitious new laws, tax reforms, incentives, and trade agreements to further support manufacturing. This focus on manufacturing is designed to drive significant economic benefits and align with broader supply-side reforms. 

Additionally, priority should be given to labour reforms, the electricity Act, increased privatisation in public sector units (PSUs), and support for manufacturing. Other critical areas include reforming land records, harmonising fertiliser prices, implementing full direct benefit transfers, and possibly revising land laws.

The Reserve Bank of India’s largesse (record dividend of ₹2.11 trillion) would help the government contain fiscal deficit and spend on social and infra sectors. What’s your view?

This government has demonstrated fiscal prudence and therefore we can expect incremental revenue spending to be under check, prudent social spending, and an aggressive thrust for infrastructure and construction, with a focus on generating employment and uplifting the rural GDP. 

PSU stocks have done well, and the government has shown a clear focus on creating value for investors. The RBI dividend has been a shot in the arm. Disinvestment will generate resources to meet public spending without exceeding the fiscal deficit target and keeping inflation in check as well.

We have seen sectoral rotation since the Nifty recovery from 7,511 points in March 2020 to the present level of 22,500-plus. What sectors are in vogue for the current year?

I think strong momentum in defence, engineering, and capital goods will continue despite rich valuations. In a broad-based rally, investors looking for relative value and liquidity will be attracted to the financial sector as banks and NBFCs have tremendous long-term value in a rapidly growing economy. 

Also read | There’s a reason why the Indian stock market seems to love the BJP

Also, with the government and central bank having done commendable work to ensure strong balance sheets and a governance culture for banks, PSU banks still offer great value. 

Public capital expenditure thrust means cement and infrastructure stocks will do well too. Chemicals is a sector awaiting some earnings estimate stabilisation, dependent on China’s pricing.

Will mid-cap and small-caps still be the Street favourites, or are large-caps looking attractive?

At this point, the Nifty is at 20x one-year forward earnings, whereas mid-caps are at 28x and small-caps at 22x. The BSE indices indicate similar trends. 

On the whole, there is a clear case for large-caps in a post-election rally, assuming the return of a stable government. However, mid-cap and small-cap stocks have a large universe and one can find value and great ideas through bottom-up stock picking.

Do you think there will be tweaks in capital gains tax for equities, fixed income, and realty in the full Budget for 2024-25?

It is unlikely that there will be major changes in capital gains in this Budget. The government seems committed to pragmatic policies conducive to attracting investment and capital formation, besides ensuring a stable and consistent policy framework for investors. 

Nonetheless, simplification and harmonisation of tax rates between and across asset classes are likely.

Why have foreign portfolio investors started selling India? Is the attractive valuation of China pulling them? Or any other reason?

India’s market, especially mid-caps, is a bit expensive. The interest rate cycle has seen delays in turning favourable, and costlier money means that incrementally foreign inflows will be less strong until the rate cycle turns, which we expect to happen later in the year, globally. 

China has also troughed, which makes it attractive. Finally, the strength of domestic equity inflows keeps creating attractive exit opportunities for FII money.

What is your view on gold and silver?

Central banks are increasing gold reserves due to inflation and potential threats to the US dollar’s status as the world’s reserve currency, particularly from emerging markets like China and India. Although these currencies are not yet ready to replace the US dollar, their economic growth drives gold demand. 

Additionally, Russia’s invasion of Ukraine and subsequent sanctions highlight gold’s attractiveness as a sanction-resistant asset that central banks can securely hold domestically.

In 2024, silver’s outlook appears cautiously optimistic. There are indications of a resurgence in Indian demand, which could lower inventories and stir market interest. A recovery in China's industrial demand will be crucial for a rally in silver prices to sustain.