What a strong Modi govt implies for markets & economy

Exit polls suggest an absolute majority for the BJP-led National Democratic Alliance (NDA). If so, India will have a strong Modi-led government, free from fickle allies.

What will be the outcome for Indian politics, the economy and markets? No party or combination has won an absolute majority in the Lok Sabha since 1984. So, the predicted NDA victory will bring back stability and decisiveness after three decades. It will reverse the unstoppable rise of regional parties and coalitions.

Narendra Modi had to overcome the apathy of ordinary voters, who know very little about events in other states. Modi achieved astonishing success in spreading the message that he had produced good results in Gujarat and could do the same for India.

More important than speeches or TV ads were stories of good governance carried by migrant labourers in Gujarat back to the Hindi-speaking belt. Modi is the first regional leader to create an all-India following. Hopefully, others will follow.

He — and Arvind Kejriwal to a lesser extent — have reversed the trend towards dynastic politics. Once-socialist parties have decayed into family satrapies of the Gandhis, Mulayam Singh Yadav, Karunanidhi and others. Modi provides a welcome break from dynastic supremos.

Politics in the Hindi belt has been dominated by caste and religion. But one exit poll suggests that Modi and Nitish Kumar will be far ahead of Lalu Yadav in Bihar. If true, this will mean the welcome collapse of northern politics dominated by caste and religion. In the Bimaru belt, many chief ministers emphasising development have won elections time and again, though Uttar Pradesh and Jharkhand remain exceptions. In UP, a Modi victory will be one of development over caste and religion.

A Gentleman’s Word

Many will disagree — arguing that Modi represents not development but communal murder, exemplified by the 2002 riots. However, his campaign has been based on development, not Hindutva. This has won over voters.

What consequences will a strong Modi government have for the economy? India has crashed from 9% GDP growth to half that rate for two years, even as inflation has averaged 9-10%. One-third of the slowdown can be attributed to global cyclical factors, which now look like being reversed, to India’s benefit.

However, two-thirds of India’s slowdown flows from domestic flaws. These cannot be overcome quickly. Many global investment houses have predicted Indian GDP growth of just 5.5% in 2014-15, rising maybe to 6.5% the next year.

A new licence-permit raj has come up, based on four pillars: environment, forests, tribals and land. A veritable jungle of central and state rules and laws has come up in these four areas. This was initially overcome mainly through bribes. But public anti-corruption anger has made that unfeasible, so we have paralysis.

Opening a coal mine now takes 12 years. Many Indian investors are investing abroad, not at home.

UPA-II tried to break out of this logjam in the last two years through a Cabinet Committee on Investment that cleared Rs 6-lakh-crore worth of projects. Alas, these did not translate into any boom in capital goods or contracts. Three-quarters of these projects are stuck at the state level, and New Delhi can do nothing about that.

Many infrastructure promoters are bust, and cannot raise fresh debt or equity even if they get clearances. Public sector banks are reeling under bad debt, and cannot expand without recapitalisation. This requires funds from the Budget, which is difficult given high fiscal deficits.

Bite the Bullet

A strong Modi government cannot just hope for higher revenues from a cyclical recovery. It needs to aggressively decontrol diesel and kerosene within a year, cutting subsidies by up to Rs 1,00,000 crore. This will release funds for infrastructure and banks. Modi needs to prove his toughness by doling out bitter medicine.

He needs to enthuse animal spirits in entrepreneurs. If he changes the national mood, consumers will start consuming and investors will start investing. If the mood remains sombre, so will economic growth.

Turn Sellers into Buyers

The Sensex has soared 1,500 points in three days, anticipating a decisive Modi win. Optimists think Modi will turn the economy around within one year, sparking the mother of all bull runs. The recent rise in stock markets has been driven entirely by foreign investors: domestic investors have been net sellers. If a decisive Modi victory converts domestic investors into buyers too, the markets could go much higher.

That remains a big if. P Chidambaram tried hard but failed to rectify many of the economy’s structural flaws. Modi needs to learn from this. Overcoming structural flaws means hard decisions attracting much criticism and temporary unpopularity. He will lack a majority in the Rajya Sabha, curbing his legislative capacity. Being a strong leader will not suffice: he needs to be a good manager too, tackling problems he never faced in Gujarat. Success is possible, but far from assured.

What do you think?