Sandip Sabharwal - Uncategorized - GOLDEN ERA OR TO THE DARK AGES

The Indian Economy after going through a phase of resurrection today is placed for a strong growth revival over the next few years. Most of the pain related to Bank NPA’s, Poor Consumer demand as well as a lack of investments is now behind us and despite new macro concerns related to a potential pick up in inflation due to higher Oil prices we are still in  a good space. However the scenario for equity investors can change very fast and politics can be blamed for that.

The Narendra Modi government in general has taken the right steps to revive the economy and build it up for sustainable growth. Most structural issues related to subsidies, revenue leakages, the carried forward NPA mess, financialization of savings etc have taken place steadily over the last 4 years. There has been a huge push towards infrastructure investments, especially Urban Infra, Roads and Railways which is reflecting in strong growth going forward.

A culture of compliance is being built up and inflation in general is under control with many structural measures leading to a more efficient economy. Fiscal responsibility has been given a new meaning and arbitrariness in policy making has taken a back seat. The thrust on building both sustainable rural and urban infrastructure is also a positive for the future.

Despite glitches the implementation of GST has not been inflationary and in fact we have seen prices move down across a wide variety of products. The impact of efficiencies related to GST are already being seen in many companies where companies are reporting higher margins despite there being not much of price increases across industries.

Today we see many consumer and infrastructure companies very positive on future growth and finally we have seen most banks recognize the NPA issues totally into the balance sheets which will improve growth prospects going forward.

The only flawed policy decision by this government more in terms of implementation rather than the thought behind it was Demonetization which I initially supported. However the implementation was bad and we saw that an economy that was just starting to revive was stopped like a speed-breaker and it took the economy more than a year to revive from that. Many people at the bottom of the pyramid were affected as rural cash flows were disrupted and many SME’s found it difficult to operate. The ongoing negativity surrounding Demon is still impacting politics today.

Recent politic developments are somewhat concerning all around. We today see a wide variety of rent seeking political parties come around to try and take on the BJP together in the next general elections around a year from now. I am a BJP supporter however I don’t mind if there is another stable disposition that comes up and rules the country. However what I see happening should concern all of us. Rent seeking regional parties (who are just interested in enriching themselves) can potentially come together and create instability. It is very clear that any pre poll arrangement will be tough to implement post elections in such combinations.

Today we are standing at a place where we could have policy continuity and a strong Narendra Modi Govt for the second term which could potentially set up the economy for a strong growth for a decade or more. On the other hand we could have a motley group of political parties comprising TMC, SP, BSP, JDS, Congress as a minority, TDP etc where each of these parties have a leader who aspires to be Prime Minister. If not the PM there will be fight for Finance Ministry, Home Ministry, Defence Ministry, Railways etc each of the places where huge rent seeking is possible. Any such combination will have no national interest in mind. They will just be interested in promoting their regional interests and will be just out to make the maximum of what they can in the time period for which they survive. There is no ideological compatibility among all of them and the only interest is to get to power by all means. Do we want such a thing to happen. A congress led (despite all the corruption scandals of their government) govt with other parties as minority could still have been acceptable although extremely suboptimally. We have seen what happened to telecom, railways, aviation etc during the previous coalition governments where entire sectors and industries were destroyed.

Now that the economy is on a sound footing the growth will continue to be strong even if the government changes next year for atleast 2-3 years more. However a Govt of motley parties will eventually start destroying all the good work of this government and eventually we will go back to slower growth. PSU Banks will again become personal fiefdoms and subsidies will be increased across segments to cater to their own vote banks. Revenue leakages will increase and corruption will increase substantially which eventually increases the cost of goods and services.

We need to be apprehensive of the future not because Narendra Modi is less popular today but because of the fact that they way the vote shares are structured if it is BJP Vs the rest the probability that the rest will win is very high.

Voters will need to be very careful next year. Do we want to move towards the Middle Ages or move strongly into the 21st Century. We can potentially have a very high growth period which lifts people form the bottom of the pyramid right to the top or a state where sub-optimal growth leads to greater unemployment and incomes.  Lets hope for the best.

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