When Will They Begin?

When  Will They Begin?

The gap between the expectation and the pace of economic reform is widening. Things are not moving fast enough and there is no clear-cut road map. Small administrative and economic improvements have kept coming, but these have only acted as appetisers for the main meal to come.

The Government as a whole seems to pause and mark time when Modi goes abroad on bilateral and Summit meetings, or is out campaigning for the Assemblies. And the Prime Minister has been doing a lot of this rather than attending to governance himself over these first few months.

There are successes to count, handsome pledges of investment and cooperation from several important nations, President Obama himself accepting the invitation to be Chief Guest at  Republic Day 2015, President Xi Jinping’s visit, Prime Minister Tony Abbot’s visit, and now President Putin’s visit, amongst a number of other creditable foreign affairs ‘wins’. On the electoral front, wins in Haryana and Maharashtra and good possibilities in Jharkand, J&K, and in the Municipal and Local Body elections in Kolkata, are indeed substantial achievements.

But, what about the crucial reforms agenda, and the improved day to day running of the Government?  What about those slogans about precisely this?

There is a sureness about Narendra Modi during the electioneering and the foreign initiatives, that goes missing and becomes hesitant when it comes to recasting the nation’s economic possibilities. Here the Prime Minister seems to be influenced by various political and bureaucratic inputs and is unable to put his bold and visionary stamp on the proceedings. For a Government that is pyramided to the top for almost every important  decision, this is an impediment to progress.  

Everything Narendra Modi does personally is still perceived as potentially high-value, but his Government or indeed governance, has not made any big impact on the minds of the people so far. This is creating frustration and disillusionment amongst the BJP supporters and reenergizing the once flattened Opposition. The activity in parliament too is disappointing and as chaotic as in the UPA days of coalitions. Some inexperienced first-time ministers and fringe elements in the Sangh Parivar create unnecessary distractions, offering ready ammunition to the Opposition, and there seems to be no effective mechanism to monitor or control what they say and do.

The litmus test of how all this is to go forward will be the content of the Annual Budget in February 2015- it needs to establish a milestone for the new India that has been promised. If it fails to do so, the patience with this Government will certainly begin to run out.

In the stock markets, till recently, before the latest correction began to set in, most shares were trading at 17 or 18 times earnings. They were doing so in anticipation of the action of the Modi Government to follow. They looked over-valued against actual corporate earnings all the while,  but not if compared to the 25 times prevailing in late 2007.

But those 25 times earnings in 2007 were by way of ‘irrational exuberance’, and a lot of money flooding in via the FIIs in the context of a global bull run. These 18 times now also expect to go to 25 times; but based on solid company earnings in real terms. But with the currently ‘rich’ valuations,  many foreign brokerages are beginning to fight shy, preferring other, ‘cheaper’, markets elsewhere.

China, even a slowed down China, has size in its favour too, and has beaten down stock valuations today. And at a projected 7% growth figure in terms of GDP, it may be the more attractive investment destination. 

India’s dream run as the best performer amongst the EMs may turn out to be an altogether brief season. The amount of FII money coming into India could diminish in future, perhaps being cut to half, or less. This may have already begun, though a major ‘weighting’ review will take place based on both the legislative success of items such as the GST and Insurance legislation being processed in parliament, the international ratings for India in the new year, and the reforms content of Budget 2015.

Meanwhile there is a clamour for a significant ‘correction’, of at least 10 to 15%, in stock prices, in order to make it attractive. Of course, the FIIs, who control the Indian market, with their grip on some 22% of all the floating stock, can engineer this quite easily. They seem all set to do so, taking it down in order to push  it back up again to 35,000 on the Sensex, by the end of 2015.  A reason why this sort of rank manipulation is possible, is because the FIIs invest much bigger sums as influencers, and because the markets have run up, not on hard news but on favourable expectation.

At  present levels, real earnings have to grow to sustain the bull run. This can only happen if the economy picks up substantially. For this, the Government must make a number of bold reforms. Why this first majority Government in 30 years that needs a buoyant stock market for its own disinvestment programme, is being so cautious, to the point of exasperating business and industry,  is difficult to fathom.

Small incremental improvements of the kind that has become routine, can possibly take the GDP to 6.5% per annum. This may be creditable when compared to the dismal low of 4.5% that this Government inherited, but the job creation and alleviation of poverty needs upwards of 8% for several years ahead on the trot. Such growth cannot be generated from the small incremental moves.

The GST, the Insurance Bill, Land and Labour Law reform, are all emblematic of the yearning for change. 

But, along with such legislative change, there have to be changes in the way the young see their possibilities these several months down the line. It  was very exhilarating listening to the campaign promises, but the reality today, while not bad, mainly on the back of the spectacular fall in oil prices, rather than any Government action, cannot yet be declared as good.

And despite the number of Assembly Elections the Modi-Shah  duo may win now, that second term can only come if the people are satisfied that their aspirations too are being met. Controlling more  of the States and eventually, most of the seats in the Rajya Sabha may provide the mechanics of a sustained stint in power, but they cannot substitute for the widespread feeling that this Government is not living up to  its promise.

(1,086 words)

December 10, 2014

Gautam Mukherjee