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While the markets are pricing in a return of the National Democratic Alliance (NDA) government, the moot question is which sectors are likely to do well in the next five years. The experience of the last five years provides a decent indication. The initiatives of the NDA largely centred on policies to boost indigenization in defence, expand the road network and increase the use of renewable energy.
But as the chart alongside shows, investor returns have barely kept in step with the promised potential for infrastructure companies.
Analysts reckon these themes still have legs, that is, if the NDA returns to the corridors of power. In defence, for example, the government has focused on reducing imports from 70% to 30%, with local manufacturers stepping in to boost indigenization. This has been a positive development for domestic defence product manufacturers.
“Absolute defence spending did not rise as much, but the market share of domestic companies improved. In the past two years, reforms have slowed down, as a new minister was appointed and elections turned out to be the focus. Post-2019 elections, we believe projects of nearly $10 bn should be awarded once the new Cabinet is formed," Jefferies India Pvt. Ltd said in a note to clients.
The NDA has also had a favourable impact on road development in the past five years. In its current tenure, road execution has increased from 11km a day in 2014 to 30km in 2019. There are talks that road construction is expected to be scaled up further, going forward.
Local shipping, ports and logistics are other sectors that analysts have their eyes on. Turnaround time at ports has been reduced from 94 hours in FY14 to 64 hours in FY18 due to easing of norms, etc. Further, the dedicated freight corridor, likely to be operational within the next few years, is expected to improve railways logistics.
“Coastal shipping, which has tremendous potential to take the pressure off the Indian roads and rail traffic, is just 7% of the overall freight, vs 24% in China and 11% in Germany. Incremental projects of $75 bn vs ongoing $60 bn have the scope of being awarded if the current government returns," noted Jefferies India.
To be sure, the new government will have a lot on its plate, especially as consumption demand has been slowing. A crunch in the financial sector—due to the Infrastructure Leasing and Financial Services Ltd’s mess—may make it difficult for investment-led capex to revive immediately.
Still, if the economy has to fire on all cylinders till the next general elections, these sectors should be getting the NDA’s immediate attention. If so, this will be an area where investors will find an edge.