QUANTUM ADVISORS PATHWAYS
Pathways deliver a deep dive into navigating the ideas and insights on new and rapidly growing India asset classes. In this Pathway we examine how India's loud, messy, chaotic democracy can overemphasise political risks for long-term investors.
By Arvind Chari, CIO
India's noisy democracy has long confounded investors. The world's largest election spectacle unfolds every five years with much fanfare. Campaign rallies overflow with colorful chaos. Results seemingly hand power to either pro-reform free marketeers or socialist state interventionists. The mood swings from optimism to anxiety overnight as ballots are counted.
Beneath the dramatic electoral spectacle lies an enduring continuity. Businesses have adapted to expect the unexpected from India's vibrant democracy. But informed investors have learned to see through the election drama and recognize India's steady incremental progress.
Governments come and go, but India's diverse economic ecosystem persists. The nation's growth trajectory depends not on the idols in New Delhi's corridors of power, but the billions of aspirations and actions of ordinary Indians that play out each day.
Indian Elections Don't Matter to Long Term Investors
On 17th May, 2004, the Indian stock markets hit its lower circuit, (-20%). The Bombay Stock Exchange (BSE)-30 Index, Sensex, fell by 842 points, its steepest one-day fall ever then.
The National Democratic Alliance (NDA) led by Bharatiya Janata Party (BJP) lost the general election to the United Progressive Alliance (UPA) led by India’s GOP, the Indian National Congress (INC). That the UPA alliance was supported by the Left/communist parties seemed to have spooked the markets in believing that the reform momentum will end and India’s growth trajectory which was recovering would be stalled.
No Country for a Strong Man
Do Global Corporations and Investors consider India becoming un-democratic, autocratic? Should they worry about Modi being a ‘Strong Man’? Global Corporations and Investors have seen the financial impact of investing in undemocratic, strongman led countries. We do not think this worry has got anything to do with the form of political system. The worry stems from individuals who have unlimited power to decide and destroy. We however argue that, India is not China, Russia or Turkey. Modi is not a Xi, Putin or Erdogan
The Emergency: When India Lost its Freedom 40 Years Ago
On June 25, 1975 Prime Minister Indira Gandhi – without consulting her Cabinet colleagues in the then Congress government – sent a letter to the President of India recommending the suspension of individual rights and freedom. India remains a working experiment in democracy. The Emergency temporarily shut down the experiment. For those who were unaware about this dark phase of India’s history, it is a reminder of the continuous struggle to find the correct form of government that connects the people to its leaders and, yet, is given the time to deliver on its promise.
Modi more Obama than Reagan
In light of the reality of India, the statement that a BJP-led government could be a Reagan-like Administration is a stretch. If the BJP did take those imaginary steps of reducing subsidies and leaving 50 years of bad planning to free markets to resolve, it would be hounded from power within a year.
The chances are that a future Modi Administration may end up more like an Obama regime: one of high expectations and low delivery where many supporters would like to press the CTRL ALT DEL button, as would President Obama.
A Decisive Mandate
Not since 1984, has India voted so decisively in favor of a party. The congress party then, on a post Indira Gandhi assassination sympathy wave, won a massive 400 seats.
Today the BJP and its coalition NDA; led by Narendra Modi and his campaign of Hope; Aspirations; Decisiveness; is all set to form a majority government with more than 330 seats out of the 543 seats. This is significant in many ways.
The Great Fat Indian Election
Despite all the fanfare and focus on elections, elections matter less in the long run and while election outcomes tend to matter less over longer periods of time, the few who are positioned “correctly” can make a fat profit. When the incumbent BJP lost the election in May 2004, the stock markets tumbled by -20% in a week (see Graph 3). But things changed quickly. The return during the Congress-led coalition over the next 5 years was a breath-taking +207% in INR (+197% in USD).
The Quantum G.A.P. Report
While the stability (or, rather, the lack of it) of coalition governments seems to concern most investors (domestic and foreign) due to a perceived linkage that coalition governments lead to bad policies which leads to lower growth rates, Quantum's Growth-Actioned-Politics (GAP) analysis suggests that there is no negative link between the GDP growth rate and the existence of coalition governments. In fact, one could infer from the data collated that coalition governments have been great for GDP growth rates.
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