With the possibility of a coalition government forming, ministries and portfolios could fall into the hands of parties other than the BJP. This could lead to varied sector-specific outcomes. Nevertheless, Goldman Sachs (NYSE:GS) expects the overarching focus on increasing capital expenditure (capex) to persist, particularly in manufacturing, which will continue to receive policy support. A notable shift might be seen towards greater allocation for consumption, which bodes well for the consumer durables sector.
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Impact on Key Sectors
Goldman Sachs highlights that infrastructure and cement sectors might face some adverse impacts. However, a robust real estate market could counterbalance these effects. The sectors to watch closely are Railways and Defence, given their remarkable growth in recent years. Companies such as L&T and Ultratech (NS:ULTC) in the infrastructure sector, along with Havells and Crompton in durables, and Astral, Polycab, and Kajaria in real estate, are identified as key beneficiaries of the ongoing trends.
Consistent Focus Areas
1. Capex Direction: Despite potential changes in ministry control, the emphasis on manufacturing and infrastructure development is expected to remain steady. This includes expanding the manufacturing sector, enhancing industrial infrastructure, and extending road and rail networks. Any changes in portfolio might influence the growth pace and fiscal allocation, possibly shifting some expenditures off-balance sheet.
2. Make-in-India and PLIs: The push for self-reliance and robust global supply chains will likely continue, with ongoing support for Make-in-India initiatives driven by production-linked incentive (PLI) schemes. However, the sectors receiving these incentives might change.
3. Railways and Defence Reforms: These sectors have seen significant reforms. For Railways, the focus is on manufacturing, R&D, network expansion, station redevelopment, and metro network growth in major cities. For Defence, the emphasis is on boosting domestic manufacturing and exports of indigenously made defence equipment, alongside accelerating the indigenization of major air and land equipment platforms.
Potential Changes
1. Capex vs. Consumption Allocation: The Economics team at Goldman Sachs anticipates that a coalition government with a reduced political mandate might struggle to pass major structural reforms, such as those in land and agriculture. This could lead to a shift towards welfare spending and higher subsidies. However, this might not necessitate a reduction in capex allocation, given the higher-than-expected dividend transfer from the RBI.
2. Investment Focus Across States: Coalition partners from various states or regions could shift investment priorities, potentially moving new manufacturing activities away from states like Uttar Pradesh, Gujarat, Maharashtra, and Tamil Nadu (NS:TNNP). This could cause delays or deferrals in project timelines by a few months.
Goldman Sachs' insights highlight that while some sector-specific outcomes may change under a coalition government, the overall strategic focus on capex, manufacturing, and infrastructure development is expected to persist. These developments will be crucial for investors to monitor, especially in sectors like real estate, railways, and defence.
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