Markets seem to have made up their minds on the Rahul versus Modi debate
Even as the electioneering gathers pace rally by rally, the Indian stock
markets seem to have made up their minds faster than the voting public
on the Rahul versus Modi debate. Some have attributed the strong stock
market rally since September to the “Modi effect”. The Economic Times,
the go-to journal of corporate India ran a speculative story on its
front page when the Sensex touched 21,000 wondering if the surge was
sign that the big foreign institutional investors seeing the Narendra
Modi shaped letters on the wall. Since the Gujarat chief minister’s
anointment as the PM candidate on September 13, the stock markets have
risen about 6.5%. While the equity markets globally have been positive
during that period, thanks to US Fed’s decision to put off the tapering
its bond buying programme called quantitative easing that keeps
liquidity of the markets flowing, those sympathetic to Modi cannot
resist the temptation to talk up the impact of Modi. Some analysts say
that nothing has fundamentally changed on the economy or the corporate
earnings front
for the markets to soar in the last two months.
FIIs and equity research departments much like the psephologists on
television are busy trying to make sense of the political theatre. Last
month, there have been at least half a dozen such reports, and most of
them veering around the idea that the UPA’s time is up. Alastair Newton,
a senior political economist with the Japanese firm Nomura in a sense
kick started the Modi-is-good-for-the-markets campaign. In a TV
interview he said, “If Modi is the next PM of India, it will certainly
be seen as a positive by the financial markets given his track record in
Gujarat on economic reforms and boosting business.” He added that the
state of structural reform in India was sclerotic pretty much for the
whole lifespan of the UPA government. An Indian brokerage firm,
Edelweiss, told its clients in a special report that the distress in the
economy is only increasing and this will work to the benefit of
Narendra Modi, particularly among the urban class, as he is known to
deliver good governance.
Some analysts even talk of the Sensex zooming up to a fantastical
sounding 25,000 points if the former tea-vendor was to head to 7 RCR
Road. But politics is a little more complicated than that. A recent UBS
report says, “If markets were willing to bet on a positive political
outcome which aids economic recovery, then where might the markets go?
In such a scenario, we estimate earnings growth in FY15 can potentially
be 15% and markets could potentially rerate back to 15x forward PE. This
indicates potential Nifty value of 6800 in 2014 post elections.”
UBS analysts Gautam Chhaochharia and Sanjena Dadawala concur. “The
market appears to be more favourably inclined towards Narendra Modi-led
BJP. This is based on investors’ perception of his strong governance
track record. He has the reputation of being pro-industry and economic
growth. Current economic imbalances of under investment and over
consumption have been driven by loose fiscal policy, manifested also in
high CAD. In such a scenario, policies to aid revival of investment
cycle will be viewed positively by markets,” they wrote in a recent
report on the country’s political outlook.
While even the current government, led by the Congress, has embarked on
the same path (though only over last 3-4 quarters), the market has taken
it positively, it clearly wants more. Investors view loose fiscal
policies pursued earlier as a source of doubt as far as sustainability
of the new policies is concerned. This is especially so as it has not
given up on its social programmes, manifesting itself in new schemes
like the Food Security Bill.
While Modi may be perceived as “pro market”, they find it harder to
decode Rahul Gandhi’s economic vision. It is too simplistic to frame the
duel as one between Modi’s growth model against Rahul’s redistribution.
On both sides, inconsistencies abound. But a close scrutiny of the two
principal political protagonists is more warranted today than the two
previous general elections. “Policy reform has never been more important
in India. The economy has fallen on hard times: the rupee has plunged
against the US dollar; GDP growth has slowed; foreign investors have
fled; and corporate profitability is collapsing. These domestic-macro
concerns put upcoming elections in a different context to the last
three,” says Mahesh Nandurkar, a senior CLSA in a recent report.
Market reaction to electoral results can be strong and immediate.
Following 2009 election results, the market rallied 17% over two days as
the ruling Congress won a stronger-than-expected mandate. After the
2004 result, the market dropped 17% in two days as the BJP lost
unexpectedly and a Congress coalition, supported by the Left came to
power.
Let’s begin with Rahul. He seems to have unshakeable faith in his
government’s massive populist schemes such as the NREGA and the Food
Security Bill. Every speech of his revolves around his lineage, and the
UPA government’s ‘rights based’ model.
In her political biography Decoding Rahul Gandhi, author Aarthi
Ramachandran (disclosure: she is married to the writer) says that his
days at Cambridge University as a student of development economics has
shaped his Left-of-Centre redistributive worldview. “Rahul’s college
years were a time of wider exposure to the world of ideas for him. It
played its part in setting him on a trajectory, economically speaking,
that would bring his stated economic position close to what economists
Amartya Sen and Jean Dreze, the author of the NREGA, describe as ‘growth
mediated’ development or using the rapid economic growth to fund social
services, especially in healthcare and education, aimed at the poor,”
she writes. But when economic growth grinds to a halt, who will fund the
free lunches?
His populist worldview notwithstanding, he cast his lot with the UPA’s
decision to allow multinational retailers such as Wal-Mart into India—a
move the Congress and the Left parties apposed tooth and nail in 2004.
At the same time, Rahul’s interventions put paid to natural resources
firm Vedanta’s bauxite mining project in Orissa’s Niyamgiri. His trusted
lieutenants in ministries such as environment and forests have been
instrumental in making life difficult for the industry.
According to former editor of The Times of India, Dileep Padgaonkar,
Rahul ‘appeared to be a mix of the earnest jholawala, the social
activist, or the NGO-type’ while also having ‘a certain degree of the
element of the boy-scout in him. Quoting Padgaonkar, Aarthi Ramachanran
writes, “Rahul was not an ‘ideologue’ and had endeavoured to be away
from the categorization of right, left, right-of-centre and
left-of-centre’ which were the categorizations of Indian public
discourse. There is a big risk he runs in political terms. How is he
going to be perceived?
This is a country which adores categories. As of now he is defying all
categories, but has not yet emerged with a strong brand identity. This
is something he has to make up his mind about.”
The CBI’s decision to chargesheet Kumar Mangalam Birla, the chairman of
the third largest Indian conglomerate, and a widely respected
entrepreneur, in connection with the Coalgate scam has further dented
Congress and Rahul’s ability to create a business friendly ecosystem.
Not surprisingly, many investors are jittery at the prospect of Rahul
as PM. Bereft any administrative experience so far, his ability and
leadership is viewed as the biggest intangible in today’s India.
Narendra Modi and the BJP’s market friendly perception is interesting.
Neither Modi nor BJP have mounted any challenge whatsoever to the UPA’s
merry, populist ways. In fact, the BJP wants more populism not less. In
the parliamentary debate on the Food Security Bill, the party members
made a case for 90% coverage of the country’s population at prices
cheaper than envisaged. On NREGA too, the BJP’s criticism has been on
poor implementation. Modi who revels in showcasing the several billion
dollars worth of investment MoUs at vibrant Gujarat summits toed the
party line on opposing FDI in retail.
Modi’s pro-business credentials rest solely on his ability to make the
same creaky governance structure operate more efficiently. Even if the
BJP does come to power, it will find it difficult to do a u-turn on its
current economic positions. And it will indeed take a very brave man to
dismantle the populist legislative legacy of the UPA. The investors who
are gung-ho on Modi are banking on his can-do spirit and commonsense
approach to governance. That is a good indicator of how low the
expectations have sunk.
“Modi’s key message revolves around the need for economic development.
The message has included ideas of strong governance based on a small and
efficient government. His ideas have reflected well in his home state.
While Modi inherited a weak economy in FY02 (Gujarat’s state GDP trailed
India’s by 1 percentage point between FY00-02), between FY03 (first
full year of Modi’s chief ministership) and FY12, Gujarat’s real gross
state domestic product grew by an average of 10.3%. This was 2.4
percentage points higher than India’s GDP growth in the same period,”
points out CLSA.
But is there a way to pick stock market winners based on the electoral
result? Goldman Sachs can help. “Overall, the party platforms as we
understand them suggest that a Congress-led alliance victory would be
positive for consumption, especially rural, whereas a BJP-led victory
could potentially be more favorable for investments, especially
infrastructure,” says the investment bank. Now, you decide.