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Politics And The Pursuit Of Wealth

Shashank Khare explains how politics impacts the economy and financial markets, and why we should care

The common refrain among us middle-class folk is that we would like to have nothing to do with politics and despicable politicians. We would rather focus on our careers and earn enough to live a comfortable life. As a result, apart from sporadic vocal street protests, the middle class has largely disengaged itself from the political process. Though laudable, this single-minded focus on your career is misguided and, ultimately, self-defeating.

At this stage, you may say that you’ve heard the spiel on the democratic duty to vote and the impact of politics on the economy, but that is all in the long run. Since we’re all dead in the long run anyway, you’d rather focus on working, saving and investing now than waste your valuable time engaging in the democratic process. Moreover, all politicians are alike, so what is the point?

Truth is that all politicians are not alike, and ignoring the political dimension can have a large impact on your wealth. Politicians dictate policy choices that impact the economy and financial markets both in the near and long term. Therefore, the first step is to include politics in your investment framework. Events such as the Indian stock market crash after the 2004 general election show the sagacity of such an approach. Fears that pro-liberalization policies may be reversed by the incoming UPA government led to panic-selling after election results were known. Those who understood and appreciated the political environment and knew that the new government would largely continue with liberalization made a fortune as the equity market bounced back quickly.

Although such shorter-term effects are easier to discern and recall, it is the slow economic change brought about by politicians that has a bigger impact on your wealth. A case in point is the economic mismanagement of Venezuela by Hugo Chavez. Despite being a large oil exporter in an era of rising oil prices, Venezuela has lagged other South American countries in terms of GDP growth and has experienced rampant inflation. Needless to say, Chavez’s rule was not conducive to wealth creation. This requires good economic management, which, in turn, requires good governance. It is no coincidence that better governed countries are generally wealthier. Graph 1 compares per-capita income to government effectiveness for democracies and shows that better governance is related to exponentially rising incomes. This relationship holds even when rich western countries are removed from the set.

Second, both GDP and per-capita income in the two states have increased faster than India as a whole during the tenure of Modi and Kumar (graphs 2, 3 and 4). Since the general economic climate facing India was the same, their superior growth is likely due to good policy choices. A comparison with West Bengal, a state not known for its politicians’ economic acumen, underscores the point that able politicians make a big difference to economic prospects. As graph 4 shows, West Bengal experienced sub-par growth during the period of comparison.

If you’re still sceptical of these general economic statistics, then looking at the impact on the housing market may finally sway your mind. Economic growth and rising incomes usually favour house price appreciation, thereby directly benefiting most people’s single largest investment. Hence, backing politicians with sound economic policies is in our self interest. Unfortunately, given the difficulty in obtaining house price data, it is difficult to compare the long-term performance under Kumar and Modi. However, from what is available, it is not surprising that Ahmedabad shows some of the largest gains. House prices there rose 27.5% per annum on average from March 2009 to December 2012 (based on available average price/sq. ft. data on www.magicbricks.com using a simple average appreciation across localities. Given these are estimates of average asking prices, the range of actual average appreciation is likely to be substantial. But the point estimate suffices as a rough guide for the purposes of comparison), which was way ahead of Kolkata, where prices went up only 15.2% and other smaller cities such as Pune (10.8%) and Jaipur (9.7%). Put another way, if you were a homeowner in Gujarat compared with West Bengal, your present networth is 46% higher since 2009.

Even if you are not swayed by patriotism and civil responsibility, you must acknowledge that it is in your self interest to understand and engage with politicians’ policies. An engaged, educated and informed electorate can form a voting bloc that pressurizes politicians to govern more responsibly. Resigning from the political sphere in disgust only makes it easier for those who you abhor to come to power. It is also a futile gesture since inept politicians, by their poor policies, ultimately undo all your focused efforts to earn and invest. A developing country such as India with pervasive corruption and weak institutions needs the middle class to re-engage to ensure their and everyone else’s dreams of wealth and prosperity are realized.

Shashank Khare is an investment professional and writer. After studying engineering at IIT-D and business administration at IIM-A, he entered the world of credit derivatives before CDS became a four-letter word. Having successfully batted through the crises, he now indulges his passion for economics, finance and policy through writing and trading.

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