With the change in government, there was some initial scepticism on the future of what we call “India’s 3 Arrows”, namely 1. Aadhaar - unique identity program 2. GST -tax reforms and 3. DFC/DMIC - Dedicated Freight and Industrial Corridors infra project. These doubts were more in the case of Aadhaar, where the BJP had seemingly been opposed (limiting it to only citizens rather than residents), and there was apprehension that they may discontinue the programme after they came to power at the Centre. There were also some misgivings around GST as to whether the government would be able to make any progress in resolving the points of contention. However, recent government commentary suggests that India's 3 arrows are on track, according to Gautam Chhaochharia, head of India research, UBS Securities India.
While the wish list of measures/reforms for the new government is long, 'We continue to believe that India's ‘three arrows’ are real, there has been tangible progress, the effects will be felt in the foreseeable future and the positive macro impact is likely to be significant and lasting. This is especially so if we look at the arrows together rather than separately. Each one could address India’s well-known macro frailties: the twin deficits (fiscal and CAD) and the impaired investment cycle, apart from enhancing productivity-driven growth. The impact of each arrow could be over 1% of GDP. Aadhaar could help improve the expenditure side of the fiscal problem, and drive financial inclusion with its own substantial benefits. GST may materially aid the revenue side of the fiscal problem. The DFC could revive the investment cycle and potentially manufacturing/ exports, apart from attracting foreign investment, he added.
'We expect continued announcements on policies/roadmaps from the Govt over the next few months, though markets will look for tangible indicators like earnings or macro parameters, beyond just headlines of hope from future reforms. We remain bullish on Indian equities nevertheless as current valuations are not expensive in our view and growth recovery hopes will likely ensure premium valuations. Our top picks, which also benefit from 3 Arrows theme, are: HDFC Bank, ICICI Bank, ONGC, and amongst midcaps: Britannia, Exide, Bajaj Electricals,' Chhaochharia opined.
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