I just happened to read Shankkar Aiyar’s blog post “Locus Standi” dated 10 July in indiatoday.intoday.in on Sunday night. It was written on the 49th day after the United Progressive Alliance government was sworn in. Now, it has been another 40 days. We are coming closer to the 100-day mark now. A combination of bad luck, bad planning and ineptitude has drained almost all the post-election euphoria.
After the elections were over, Bare Talk had even contemplated the possibility that, given modest reforms and India’s domestic demand strengths, the country might be able to chug along at a sustainable growth rate of 6-7% for the next few years before global conditions improved and, subsequently, be able to raise it against a friendlier global backdrop.
This possibility appears to have receded for now. The press release dated 7 August from the India Meteorological Department is graphic and disturbing. Page 4 says it all. The cumulative rain shortfall since June is now estimated to be around 25% and the map covers a wide swathe of the country showing deficient rainfall. The western coastal states have done better.
The fiscal Budget could have been better planned. Keeping some powder dry for the drought would have been prudent. The argument that the Budget provided for the drought with its expansive thrust does not cut much ice, as the public would expect to see a specific response to the drought now. The scope for that has reduced greatly.
The prospects for modest economic reform, too, have been dashed, with the Prime Minister appearing politically weaker after the seemingly unilateral gestures he made to Pakistan recently in Egypt. Coalition partner Trinamool Congress has managed to successfully stall the Land Acquisition Bill. At the same time, the apparent conflict between public and private interests in the pricing of natural gas is now out in the open and needs to be resolved with the best interests of the country in mind.
The calendar second quarter results for Indian companies might have had isolated pockets of strength that boosted the overall result and isolated pockets of weakness that dragged it down. The overall impression is one of resilience, however. Historically, return on equity (RoE) delivered by Indian firms has been on the higher side. That is why, among emerging economies, India never became cheap. The ability to deliver a higher RoE commanded a premium, and investors were willing to pay that premium for Indian stocks. In relative terms, the Indian stock market is not as overvalued as some other regional markets.
However, the bulk of the RoE performance came on the back of a massive restructuring that took place organically during the days of the high interest rates in the mid- to late-1990s. Forced by higher interest rates, Indian companies became leaner and more efficient and, at the turn of the decade, private sector leverage ratios—household and corporate—were lower in India. There is no evidence that household leverage ratios, in general, have shot up. However, on the corporate side, there is more to it than meets the eye. The lack of transparency on promoters’ leverage perhaps understates the true leverage in the corporate sector.
Further, conversations that Bare Talk has had with fellow Indians in recent weeks suggest that the politics-business nexus has reached staggering levels. The column by M.J. Akbar published in The Times of India on 9 August captures this vividly. Although we thought that the election results were an opportunity for renewal, the opportunity has either dissipated or new challenges have emerged, such as the drought. It is time for national leadership—political and corporate—to rise to the occasion.
Elsewhere in the world, the elite have used the crisis, by and large, to entrench themselves. The solutions that have been pursued do not appear to offer a sound basis for sustainable recovery without further imbalances and bubbles developing. India can be an exception, still. It has a long history of putting larger considerations ahead of material pursuits. We seem to have slipped of late. It is time for Indians to discover that spirit again. The likelihood of a major drought, the outbreak of a pandemic and persisting global growth challenges call for extraordinary and selfless leadership to guide the nation through difficult times.
The issues are neither about the stock market level nor the economic growth rate now. Drought brings with it both nutrition and health challenges, on top of the challenge of the H1N1 pandemic. It is about looking after the lives of millions of poor people who have no one to turn to but the gods and political leaders to tide them over these difficult times.
It is time for a Safdarjung Road summit of political and corporate leaders to reassure the nation that its fate is in capable hands and resting on broad-minded shoulders.
V. Anantha Nageswaran is chief investment officer for an international wealth manager. These are his personal views. Your comments are welcome at firstname.lastname@example.org