No worries about economy as political stability is secured: IIFL’s Nirmal Jain

When the Election Commission of India announces the poll results on June 4, markets will monitor the NDA’s margin of victory and not be surprised by a potential loss, said Nirmal Jain, founder of financial firm IIFL Group.

The government in charge has its work cut out once the results are officially announced, Jain said. In an interview MintJain said the new administration should prioritize labor reforms, the Electricity Act, privatization of public sector enterprises and support for manufacturing.

„The new government is expected to implement ambitious new laws, tax reforms, incentives and trade agreements that will further support manufacturing,” he added.

Jain also provided insights on why foreign portfolio investors are selling Indian stocks and the sectors that will make attractive investments this year. Edited Sections:

Post-election opinion polls predicted a strong performance for the NDA. What does this mean for the economy?

Polls show a majority for the BJP and close to 350 seats for the NDA. This is good for the economy, as political stability is key to a continued push for infrastructure and inclusive growth.

What if the actual results are a negative surprise?

The only surprise is the number of seats the NDA won. Until BJP/NDA forms government with single majority, we need not worry much about economy and development.

What should the new government focus on?

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

The 'Make in India’ initiative promoted by Prime Minister Narendra Modi is central to transforming India’s services-led economy into a productive powerhouse, which is key to boosting export growth and employment.

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

In addition, priority should be given to labor reforms, Electricity Act, increased privatization in Public Sector Units (PSUs) and support to manufacturing. Reforming land records, harmonizing fertilizer prices, implementing full direct benefit transfers and revising land laws are other important areas.

Reserve Bank of India’s Large Amount (Registration Dividend ₹2.11 trillion) will help the government to curb fiscal deficit and spend on social and infrastructure sectors. What is your view?

This government has demonstrated fiscal prudence and will therefore focus on revising revenue-enhancing spending, prudent social spending and an aggressive push for infrastructure and construction, creating employment and boosting rural GDP.

PSU stocks have performed well, and the government has a clear focus on creating value for investors. RBI’s dividend has become a hotbed. Disinvestment will generate resources to meet public expenditure without exceeding the deficit target and keeping inflation under control.

We have seen a sectoral cycle since Nifty recovered from 7,511 points in March 2020 to over 22,500 points now. Which departments are in practice in the current year?

Despite rich valuations, I think strong momentum will continue in defense, engineering and capital goods. In a broad-based rally, investors looking for relative value and liquidity will gravitate to the financial sector as banks and NBFCs have the largest long-term value in a fast-growing economy.

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

Public capital expenditure drive means cement and infrastructure stocks will also do well. Chemicals is one sector awaiting confirmation of some earnings estimates depending on China’s pricing.

Are mid-caps and small-caps still the street favourites, or are large-caps attractive?

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

All in all, assuming a stable government returns, there is a clear case for large caps in the post-election rally. However, mid-cap and small-cap stocks have a larger universe and one can find value and better ideas by picking stocks from the bottom.

Do you think the full budget for 2024-25 will include changes to capital gains tax on equities, fixed income and property?

Major changes in capital gains are unlikely in this budget. Besides ensuring a stable and stable policy framework for investors, the government seems committed to practical policies conducive to attracting investment and generating capital.

Nevertheless, simplification and harmonization of tax rates between and across asset classes is possible.

Why have foreign portfolio investors started selling India? Is China’s attractive rating pulling them in? Or any other reason?

The India market, especially the mid-caps, is a bit expensive. The interest rate cycle has seen delays in turning positive, and expensive money means incremental foreign inflows will be less robust until the rate cycle turns, globally expected to happen later in the year.

China has also pulled in, which is fascinating. Finally, the strength of domestic equity inflows creates 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, the world’s reserve currency, especially from emerging markets such as China and India. Although these currencies are not yet ready to replace the US dollar, their economic growth is fueling demand for gold.

In addition, Russia’s invasion of Ukraine and subsequent sanctions highlighted gold’s appeal as an unencumbered asset that central banks can safely hold domestically.

In 2024, Silver’s outlook appears cautiously optimistic. There are signs of a resurgence in Indian demand, which could reduce inventories and stimulate market interest. A recovery in China’s industrial demand will be key to continued gains in silver prices.