P Chidambaram, Narendra Modi are Sensex 40,000 PMs

The General Elections in India are just one year away though it might be sooner if mid-term polls are called. Financial markets are poised to give a thumbs up to the right person who is voted for the Prime Minister’s chair. Markets may not really worry on the party or alliance that is voted into power in 2014 but markets will definitely worry about the choice of the Prime Minister.

The outlook for the economy and markets is more positive than negative as the country goes into 2014 general elections. The markets will get a huge boost if the right PM occupies the chair. The question is who is the right PM for taking the Sensex to 40,000 and the rupee to Rs 45 to the dollar?

The markets will definitely welcome the current finance minister, Chidambaram to the PM’s chair. The FM has been doing the right things in the last six months by taking tough decisions on subsidies, FDI, government spending and deficits. Chidambaram also has a good grasp of the markets and has a strong connect with FIIs, who can really come in droves if he says and does the right things.

The markets will also welcome the current Gujarat Chief Minister, Narendra Modi as he is seen as an out and out capitalist. He is seen as pro industry and pro middle class and markets will look forward to policies that aim to boost capital markets.

Chidambaram and Modi are Sensex 40,000 PMs. Elections are always a lottery in India and anyone can become the PM given coalition politics. Markets will definitely be wary of any PM known to be outright populist without any economic reasoning. Unfortunately there are too many such PM candidates floating around and hopefully none of them emerge as the PM.

The 2014 incoming PM will be inheriting an economy that is on the mend. The PMEAC (Prime Minister’s Economic Advisory Council) has forecast better macro numbers for the economy for fiscal 2013-14. GDP growth is expected to grow at 6.4% from 5% levels seen in 2012-13. Industrial, farm and service sectors are expected to register higher growth rates. Current account deficit is projected at 4.7% of GDP against 5.1% of GDP. Inflation as measured by the WPI (Wholesale Price Index) is expected to stay at around March 2013 levels of 6%.

The FM is sounding confident of ending this fiscal with a fiscal deficit lower than budgeted levels of 4.8% of GDP. PMEAC forecasts are usually optimistic but this year forecasts of macros such as current account deficit looks more pessimistic as the fall in oil and gold prices (down by over 10% over the last couple of months) has prompted private economists to forecast the deficit at less than 4% of GDP.

Interest rates are expected to come off in the economy on RBI rate cuts and improved domestic liquidity situation. Ten-year benchmark government bond yields have fallen to two year lows on the back of prospects of lower interest rates going forward.

The economy is on the mend largely on the back of factors such as a) the present government waking up to taking hard decisions such as bringing down spending and lowering subsidies by increasing fuel prices b) low base for growth and high base for deficits and inflation and c) global liquidity driving FIIs who have invested over $28 billion in Indian equities and bonds in the last fiscal. However the economy is not out of the woods and it is vital that the next PM should focus on continuity of reforms.

The Indian Rupee (INR) is trading just off 5% from record lows and is still down 20% from highs seen in mid 2011. The Sensex and Nifty are up 10% over the year but have returned nothing over the last five years. The INR is expected to strengthen going forward as lower deficits and higher growth improve the prospects for the Indian economy. Equities will rise on the back of lower interest rates, strengthening INR and improving economy.

Arjun Parthasarathy is the Editor of www.investorsareidiots.com a web site for investors