Top Emerging Markets Economist Tells Us India's Modi Is 'Selling A Dream'
Opposition leader Narendra Modi is widely expected to be India's next prime minister and the ruling Congress party is expected to lose. Modi is currently the Chief Minister of Gujarat, a region known for economic progress but also violent riots.
While he has managed to position himself as a champion of economic growth, his plans remain largely unclear.
"He's selling a dream," said Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley Investment Management. "We don't have specifics as yet."
We spoke with Sharma, author of "Breakout Nations," on the Indian elections.
Here are some highlights from the interview:
- Sharma thinks the elections have had an 'anybody but Congress' theme to it. Modi has planned his campaign like a U.S. presidential election.
- Modi could win the election comfortably even if two-thirds of the country didn't vote for him because India has a very fragmented polity.
- Gujarat has had two advantages, an entrepreneurial population and its coastline, but its performance has improved a bit under Modi. Modi has positioned himself "as a connoisseur of all of India's problems."
- Politics have helped drive Indian equities in the past five to six months. But the bigger picture is that the Indian market is the most highly correlated to other emerging markets.
- India's investment cycle has many problems that Modi might not be able to solve.
- India has largely fallen off the map but we're still in a low growth world. If India could revive growth again it could offer an interesting opportunity for investors.
- The emerging world is seeing a large anti-incumbency wave.
Here's the entire interview:
Business Insider: What would a Modi term mean for India?
Ruchir Sharma: I've been traveling in India, although I'm based in New York, what really strikes me here is the fact that this campaign started out, as what I described, as an 'anybody but Congress' campaign. It was quite apparent over the last 24 to 36 months that people were quite disgusted with the ruling Congress government because they thought it was inept on every front, whether it was inflation, corruption, or getting anything executed. It was seen as incompetent.
Modi has very smartly - this is the first time that I've seen this in India - been planning this like a U.S. presidential election. That is to say that ever since the BJP lost the election in 2009, five years ago, he has been sensing that the next election he really wants to take a shot at it. He has been behind the scenes working at it, in his own state of Gujarat. He's offered a complete contrast in terms of economic performance and governance, and the way the government runs there. He has systematically been planning this for five years in a U.S. presidential election style way.
As I've been traveling what's been very apparent is that, I was in the interiors of Uttar Pradesh, one of India's poorest states and what I find remarkable is that in the villages, people would speak about how they think their problems could be fixed by Modi. From the depths of despair they've come to see Modi as the man who will come and change things. I don't know whether this feeling is irrational, because none of the people have ever been to Gujarat or possibly been outside their state and yet this feeling exists that he's going to come and change things. The whole Muslim issue is controversial, and it is baggage for Modi, and people understand that but think what the hell, things look so bad let's give this guy a shot.
RS: The current trend in India, and as you rightly pointed out the polls can be quite unreliable, really seems to suggest that Modi has made it all about himself, that he's succeeded in doing so, and that he's not going to need much outside help. That seems the way this election is headed currently, unless something dramatic happens this week or unless there's a voice out there that we're not picking up.
The rise of the regional parties has been one of my favorite themes as well. I think that's a train that's continuing, but this is about the decimation of the Congress party. The Congress party in this election is likely to fall to its lowest tally ever in post-independence India. Its vote share has plummeted, so this is as much about Congress being completely decimated. And the regional parties are still doing what they have to do.
One of the most fascinating statistics I find, which people can't quite appreciate, is that even if Modi wins this election quite comfortably, two-thirds of India would not have voted for him in this election. India remains a multiparty system, its polity is very fragmented. The regional parties are here to stay and possibly rise but Modi's real big gain is coming at the cost of the Congress party.
The reason behind that statement is that the polity in India is very fragmented with strong regional identities...there are many states where the national parties such as the BJP only have a marginal presence and the regional or state level parties call the shots...that's why even in what is being described as a 'wave election' for Modi, his party is unlikely to win more than a third of the vote with the regional parties still cornering significant vote shares in states where the BJP and the Congress only have a marginal presence.
BI: There are loads of publications that have pointed out that Gujarat was doing quite well before Modi came to power too. It isn't necessarily that's kept economic growth going in that state…
RS: That's true. Gujarat has two advantages, one: the population is quite entrepreneurial and industrial and so Gujarat has been doing well for a longer period of time. And two: the geographical sweet spot - that it's basically located on the Western coast, and has good coastline, and that helps Gujarat a lot.
Having said that, a look at the history of economic performance of Indian states, and what it shows typically is that many of the other states that were doing well in the previous decade, often tend to fade in the subsequent decade, so often we've seen examples of states, like some of the southern states, like Karnataka or Andhra Pradesh, they'll do well for five or 10 years, and then they won't do that well. In Gujarat, what's been remarkable is that it's continued to do well for long periods of time, under Modi, in fact the performance has improved a bit at the state level.
But I really feel that this debate about what Gujarat has done, and how things have stayed in Gujarat has almost become a bit irrelevant because the perception which has spread like wildfire, is the fact that India needs a tough, decisive leader, at a time when it's going through a lot of economic turmoil - where inflation is really high, growth is really low - that we need a really decisive leader to come cut through this mess. Modi has been able to effectively position himself as just the answer to India's problem. We can spend a lot of time parsing through the data, and that's true of most debates, but the key here is that - and I can't understand whether it's rational or irrational - he has been able to position himself as a connoisseur of all of India's problems, including inflation which has been so high for five years now.
RS: Here's the thing about Modi, he's selling a dream. We don't have specifics as yet. Indian campaigns are very different from U.S. campaigns where polices are debated a lot. In India the debate on policies, or even what they say in the manifesto, just doesn't mean much because those things aren't followed through. Or, the manifesto could be drafted by somebody who is not even supposed to that relevant in the next administration. It's very difficult for me to know what they're going to do. This election is about selling an economic dream, it's not about what the specifics are.
What he will come [to power] and do, I don't know. What should he do? I think we all know - India needs better labor laws, the labor laws are much too rigid; Indian fiscal spending is out of control, spending needs to be put under check; you can't have wage inflation which is running way higher than productivity levels; we can't have subsidies for so many essential items in India; and similarly we can't have retroactive taxes; we can't have regulation which is unclear for so many critical sectors in India from power to coal. So the list of what needs to be done is long, and expectations are high, but specifics of what have been offered in the campaign so far, as is true of most Indian election campaigns, has been low.
BI: After a pretty terrible run, Indian equities have been doing well recently. Are they just riding on the sentiment of Modi?
RS: I've seen in emerging markets over the past five to six months, all the emerging markets where you're expecting political change, markets have rallied quite a bit. We're seeing that in Indonesia, in India, and we're seeing that now in Brazil. Every time the polls show a drop for the incumbent there, the markets tend to rally.
There's a real feeling among investors in all these emerging markets, that economic change is required and reforms are required, because the old model is not delivering results anymore. Whether the incumbents are tired and out of energy or they got too complacent. So yes, politics has been playing a role in influencing the Indian market direction over the last five to six months.
Having said that I think the bigger picture is that the Indian market is one of the most highly correlated emerging markets in the world. In fact it's possibly the highest over a five, 10, 15 year period - there's no other emerging market that has a correlation as high, to other emerging markets, as India has. That still remains the dominant story but yeah, from a short-term stand point, it has been very driven by politics.
BI: Some have argued that it doesn't matter who comes to power, India's investment cycle is going to languish for a while. Do you agree with that?
RS: I do sort of agree with the statement in that India's investment cycle has many problems which Modi may not be able to solve. For example a lot of stalled projects are at the state level, and not at the center. But having said that, I think the issue is that if he does carry out some of the critical reforms that we've spoken about - labor market reform, reducing government spending which allows interest rates to start coming down - I think those kinds of things will help investment.
That's economics 101, if you do manage to get lower interest rates because inflation is brought under control, you do manage to get some sort of labor market reforms that will help the investment cycle.
RS: For U.S. investors, the key thing is that India has fallen off the map. After all the talk about China and India in the same breath, interest in India in general has faded a lot. Having said that, it is still a low-growth world, there are few growth opportunities out there. So if India manages to get its growth rate up to 6 to 7% or so, it becomes a meaningful thing because it's a $2 trillion economy, and if it starts growing again at 7%, rather than the 4.5% we're currently down to, it becomes an interesting opportunity for lots of people because it means the pie is growing faster. Without getting something to shake the system up it will be difficult to get growth again.
India, on the international stage, is a power that keeps punching below its weight. I don't think geopolitics is a factor at all. It's almost as if the world has told India go sort out your own problems in terms of the political and economic mess that we have. And in terms of geopolitics we're just not featuring much anymore. The focus in Asia, the pivot as you know, is basically about the rise of China and how that disturbs the relationship of other countries in the region. India is really out of that equation. Geopolitics isn't where India is featuring at the moment, it's really abut China and that west.
BI: Is there anything else you'd like to add that I haven't asked you about?
RS: This is a big year for political change across the emerging world. Forty percent of all democracies in the emerging world are going to the polls this year. And there's a big anti-incumbency wave which is sweeping through the emerging world, where people want political change because they're fed up with the poor economic performance of the last two or three years.
Even in India this was very different from five years ago when investors were rooting for the Congress party to come back to power. And on the first day when the party returned to power, on the first day the stock market had to be shutdown because it lost 15% in a day or something which is the maximum upper limit. That should also remind investors that initial reaction can be quite impulsive and you've got to look at things over a period of time and how things play themselves out. The initial reaction can be quite impulsive, up or down, when you get the results, but it's worth remembering back in 2009, how quickly expectations were disappointed after that initial burst of enthusiasm.