Perspectives

Indian Elections

In advance of the May elections, Brunswick Geopolitical asked Khozem Merchant, Brunswick Partner and Head of our Mumbai Office, to reflect on the current political situation in India.

These days, Prime Minister Narendra Modi’s political priorities are said to correspond to rooms in the proverbial Indian household: the kitchen is the place for welfare schemes, the lounge for the fiscal deficit. Symbolism aside, in February, Mr Modi spread his largesse across households in an interim budget necessitated by a general election to be held by May. This is India’s five-yearly convening of votes, as many as 900m, on a scale unmatched in any democracy.

Modi’s First Term

Modi was elected in 2014 after a dazzling campaign that promised development and jobs for India’s youth. His BJP was repaid with a handsome majority, an extraordinary mandate from an electorate whose diversity had yielded only messy coalitions in the past three decades.

Just one year ago, Modi, whose strong leadership style and proven business credentials remain a comfort for foreign investors, was a sure bet for a runaway second term. Now he seeks coalition partners. In the past three months the BJP has been defeated in assembly elections in three states, punished by an agrarian crisis harvested by low commodity prices.

Yet Modi is seeking a second term with India once again the world’s fastest-growing big economy, expanding 7.1 per cent in the quarter to September 2018. Foreign direct investment totalled $37.3bn in 2018, double the level in the last year of the previous Congress-led government and testament to Modi’s relentless sale of India as a safe home for global capital.

Modi burnished his business-friendly credentials as Chief Minister of Gujarat, and he has applied much the same energy and enterprising thought in Delhi. His launch of multiple national projects - with his image central - from health to civic cleanliness to affordable housing has earned him the condescending sobriquet of “event manager”.

At a fundamental level, Modi has set out to transform India into a globally competitive, job-creating manufacturing hub. Yet this ‘Make in India’ project remains more discussed than done. He has had more success with the creation of a digital infrastructure for a multiplicity of services from financial inclusion to (middle-men free) direct welfare payments.

The PM’s biggest legislative triumph has been the Insolvency and Bankruptcy Code (IBC), whose sale of distressed assets goes to the nub of India’s economic malaise: the $140bn of non-performing assets at state banks and its negative impact on lending and economic activity.

The IBC kicked-off with the auction of 12 big assets, some now a year past their deadline, frustrating global bidders. Though handicapped by elaborate and cunning legal challenges by defaulters, the process has affirmed a truth: India still struggles to create domestic markets that require the state to step aside and independent institutional capacity to take root.

Modi has stood solidly behind the IBC, just as he has with the introduction of India’s first uniform national tax. Ten years in making, the Goods & Services Tax (GST) was designed to broaden the boundaries of the formal economy by casting the tax net more widely.  GST, and IBC, won applause from investors keen to see a simpler operating environment but both were let down by inept rollout.

Investors from the UK and US, which both have tough foreign anti-corruption laws, quietly back Modi’s near-religious aversion to illegal payoffs, which he views less as a crime and more as a moral violation of the nation. The resale of coal licenses through an online auction set the new tone. But investors want more action on, say, land acquisitions (this had initially scared Japanese investors in passenger and freight rail projects in the north and west). Investors also want an end to policy capitulations to local lobbies of the type that threatens Walmart’s $16bn acquisition of India’s top e-retailer. These issues explain why India is only at 77 out of 190 in the World Bank’s ease of doing business index, a message to markets that carries acute sensitivity for Modi.

But also his failings…

Above all, Modi seems weighed down by a perception that he has failed on his big promise: jobs. About 20m Indians turn 18 each year and become eligible to vote. So potentially 100m new voters will line booths in May. This is the heart of aspirational India, and they want jobs.

What constitutes employment is not just moot, but metaphysical in India. Millions work part-time or are under-employed, hold multiple casual jobs in agriculture or work full-time in the informal economy, where four-fifths of labour works. The Centre for Monitoring Indian Economy (CMIE), a think tank in Mumbai, says 11m salaried jobs were shed in 2018, the climax of a period from 2014-18 when the economy, it says, revealed itself to be “magical” - growing robustly when domestic investment fell by a third.

Whether GDP or jobs, this government has contested statistical orthodoxies, sparking public debate about the integrity of revised government numbers and, more troubling, revealing Modi’s illiberal attitude towards functionally independent institutions.

Modi has created a more centralized government than any since economic reforms began 25 years ago, testament to his distrust of rivals and legendary micromanagement, and he has moved with stealth to bring public bodies such as the federal bureaucracy and the Central Bureau of Investigation (CBI) policing agency into his orbit. The Reserve Bank of India, which regulates banks and manages monetary policy, lost its governor in a stand-off over issues such as the allocation of its massive reserves to its owner, the state. Taking aim at the RBI has harmed Modi among foreign investors.

These untethered impulses reveal a reckless certitude in Modi’s political instincts - richly illustrated by his extinguishing of 86 percent of India’s note currency, in 2016. Demonetization was flawed in concept and designed far from cabinet and public accountability. It damaged GDP growth and extracted a cruel toll on the cash-based agro-economy.

Platform for a Second Term?

Modi remains a popular and charismatic leader who believes he deserves a second term for his record to yield enduring outcomes. His electoral success may turn less on his record, though, than the reality of a divided opposition. A ‘Mahagathbandhan’, or grand coming together of regional parties anchored by a common representation of farmers’ grievances and jobs, is being engineered by the master of coalitions, the Congress party, which has governed India for more than half a century, the latter period with multiple partners. As stated in The Economist, polls in India are notoriously unreliable, but the number of seats the BJP is projected to win has shrunk by a third and as a result the party is unlikely to retain its outright majority. The youthful Rahul Gandhi, the third generation of the family at the party’s helm, has had a torrid political apprenticeship but recent state assembly wins reveal both tenacity and, more importantly, a capacity to build bridges within India’s feverish factionalism. Modi, unlike his party, is temperamentally unsuited to coalitions. In May, he will be tested but whether he’ll be turned out remains a long bet.

Look Out For:

  1. A confident continuation of the bankruptcy code and rise of distressed assets market
  2. More healthcare reforms opening opportunities for treatment, financing/insurance and supporting technology services.
  3. Pension reform announced in budget with implications for finance companies, the appeal here will be the big rural numbers of potential policyholders.
  4. Moving the goalposts in e-commerce has spooked Amazon and Walmart, and there will need to be a resolution.
  5. Aggressive expansion of direct taxation to expand reach of formal economy will capture huge job creating SME activity excluded from GDP.
  6. The big one will be unfettered FDI in multi-brand retail: will Modi, with a majority, blink and open the door.

* A Congress-led coalition would focus like a laser on the rural economy and take the consequences on the chin (high inflation, loan waivers etc).

Khozem Merchant is a partner and the Head of our India practice, based in Mumbai. Khozem has over 30 years’ experience in the media and business sectors as a journalist with the Financial Times and management with Pearson. He launched and leads Brunswick’s India practice, specializing in Indian macro and public affairs. These notes are his personal views.