ONE YEAR ON…
The problem with hype is living up to it.
‘Ache Din’, Mr. Modi repeatedly pronounced in a victory speech last year, and vast swathes of Indians took him at his word. In India’s financial world, dominated by middle-aged Gujarati males, to express even the most tentative of doubts was to invite opprobrium, even derision:
“The Gujarat model in all of India, Boss!”.
“He works so hard - you will be amazed by the speed of decision-making”.
“These Babus - sab ko seedha kar lega.”
I didn’t doubt any of these assertions; further, their cheerful - if dogmatic - optimism was a welcome change from the deep scepticism that UPA II had generated. My concerns stemmed from the nature of our economic woes, and the history of recovery from financial crises. India’s crisis, as in most parts of the world, had followed an investment boom; born of cheap money from central banks, especially the US Federal Reserve, this gluttony of investment had caused some of India’s largest business houses to pile up balance sheets that were not able to deal with their own size.
These woes always feed back into banks. In India, the problem is compounded by the fact that public sector banks account for over two-thirds of financial assets, and a broke exchequer has had little capital to inject into banks. Clearly, the repair of the largest balance sheets in the nation was going to take a long, long time. It is now 7 years since the global financial crisis broke in 2008, and RBI governor Raghuram Rajan warned just last week that we haven’t seen the worst of bad bank loans - called NPAs, or Non-Performing Assets, in the jargon.
But I get ahead of myself: by May 2014, the Modi-believers had captured the imagination of financial markets; the exuberance began with the first opinion polls earlier that year, and through all of 2014, Indian stock markets were on a roll, putting on 30%. The reality check of Mr. Jaitley’s first full budget put a brake on this cheer, and since then, our markets have been less than cheerful - though one must attribute some of that caution to concerns that 7 years of cheap money from the US Fed may actually start reversing later this year.
Since I tend to view the economy through the prism of capital markets, I decided to look at the shifting perceptions of investors towards different sectors of Indian economic activity.
Given the optimism that a Modi government would revive investment, shares of companies manufacturing capital goods surged all of last year. The BSE Capital Goods Index began 2014 at 10,000, hit 14000 by the the BJP was voted in, and by early July, had recorded 16,600. Optimism about investment peaked in March of this year, and the sectoral index peaked above 18,000, But the reality check of the budget knocked some edge off that, and now the index is roughly where it was a year ago.
In contrast, prices of consumer goods shares moved up more moderately in the early Modi days, but kept going. Today, the BSE index for the category, the FMCG sector index, is a good 25% above where it was a year ago.
This is precisely the opposite of what the market expected in 2014. The Modi effect was supposed to usher in a period of entrepreneurial optimism, and send the investment appetite soaring. Instead, investment-heavy sectors have been sluggish, and order books are seeing too few fresh entries. Consumers, on the other hand, are gradually picking up spending. By and large, factories are being able to cater to the revival of demand without installing fresh capacity, thanks to over-investment during the boom. During the slack years, some loans have been paid down, so finance charges for consumer goods companies have also been getting pared.
Companies producing goods for Indian consumers have also benefited from the recession in global markets. The Chinese slowdown, in particular, has meant that commodity prices have eased hugely. India has been a huge beneficiary of the drop in petroleum prices; but input costs have dropped across the entire spectrum of commodities, and the CRB Reuters Index for commodities dipped from a peak of 312 a year ago, to 210 in March of this year.
This mix of demand and cost factors suggests that the recovery in India’s economy will continue to be led by consumption goods, and the investment cycle will revive only gradually. Given the challenges in several sectors of our economy, I can’t bring myself to trust the sudden spurt in our recorded growth rate to over 7%. If the number is real, our own poor mobilisation of savings, and the sharp drop in growth of bank deposits will make it challenging to fund this growth. Our government’s skills will be tested by its ability to attract global finance, especially if western central banks are in a tightening mode at the time.
Despite all the promises made by our Finance Minister, our tax authorities continue to play fast and loose with arbitrary demands. Indian tax-payers have to put up with their harrassment, but foreign companies have scores of shores to choose from. Moving the needle on our Ease of Doing Business - which is at the bottom of the global charts - is going to be a Herculean task; in the last year, despite the tall talk from podiums across the world, I see no evidence that Mr. Modi’s government has made compliance easier for the Indian - or foreign - businessman. The mistrust of business runs deep in the veins of our government, and is matched only by its ability to inflict pain upon, and extract money from, from our entrepreneurs.
If Mr. Modi’s government wants to shift the trajectory of the Indian economy, it will have to show a great deal more resolve at every step of its engagement with the economy - in legislation, in tax administration, and above all, in speed of decision-making. Otherwise, our economic fortunes, ‘Ache Din’ or their opposite, will be dictated by Modi’s stars, not himself.