As FIIs unwind their positions in India in the wake of the uncertainty caused by GAAR, as domestic retail investors prefer to invest their money in gold rather than in the stock market and as rumours of a military coup make it to page 1 of the national dailies, it is easy to feel despondent about India. Seasoned FIIs tell me that India is now an “uninvestable imploding democracy.” So, is it all over for India? Is the fabled “India story” dead?
The Past, Put In Proper Perspective
To get a sense of India’s future at this despondency-filled hour, it is worth looking at a longer sweep of its history. When you look at such a sweep of Indian history, a few features stand out:
• The demise of national parties: In almost every decade post-Independence, the largest party in the Lok Sabha (the Congress for the most part and the BJP in some years) has systematically lost vote share. The percentage of the Lok Sabha seats won by the largest party in Lok Sabha has trended down as follows: 1st Lok Sabha: 74 per cent; 5th Lok Sabha: 65 per cent; 10th Lok Sabha: 46 per cent and 15th Lok Sabha: 38 per cent. The relentless demise of the national parties is arguably driven by the rise of more regional, less privileged, non-Brahmin and non-English-speaking elites. Hence, regardless of how the national parties perform vis-à-vis the KPIs you and I focus on (growth, inflation, interest rates, etc.), they are operating against the tide of change in India.
• The ascendancy of the suppressed: The adoption by the national parties, particularly the UPA, of an explicit pro-poor agenda aimed at wooing the disadvantaged castes and classes shows how powerfully democracy has swung the balance of power towards the less-privileged groups. Their cause is not just represented by parties like the TMC, BSP and DMK – parties whose raison d’etre is to lift the disadvantaged. Instead, their cause is now represented by every party as it is the only cause which matters at the ballot box.
• The rise of individual aspirations: At the level of the individual, the analogue of the previous bullet is a relentless rise in aspirations. As V.S. Naipaul memorably put it in his 1989 masterwork, India: A Million Mutinies Now, “The book was dedicated to a further idea: that India was, in the simplest way, on the move, that all over the vast country men and women had moved out of the cramped ways and expectations of their parents and grandparents and were expecting more.” These men and women want their children to be well-educated and healthy. They want to live in pucca homes and purchase products which signal to the community around them that they are moving up in the world. This dynamic predates the 1991 economic reforms and has a life of its own.
So What Will The Future Bring For Us?
• The fragmentation of political power: I have discussed in my previous columns how power in India is migrating away from the Cabinet in New Delhi to the States, to the regulators, the watchdogs and the Courts. Focusing specifically on the political fragmentation of power, I expect two key developments:
The rise of the Third Front: Why should I just be a kingmaker if I can become the King myself? That is the question that at least half a dozen regional Indian political leaders (including members of the UPA and NDA coalitions) are asking themselves today. Having seen the demise of the national parties, they can sense that there is a power vacuum in Delhi. Obviously, they want to fill this vacuum themselves. But to do so, they have to co-operate with each other and agree on the outlines of a power-sharing agreement. These discussions are under way and will reach a climax over the next year at which point…
Mid-term General Elections will become highly likely. At present, neither of the two national political parties has the will to trigger another Election. A year hence, with critical State elections lined up in BJP strongholds of Gujarat, Madhya Pradesh and Chhattisgarh over the next 18 months, the BJP will be more predisposed to vote with the Third Front and bring down the UPA.
• The creation of new power and wealth centres: As political and policy-making power migrates from Delhi to the States, we expect the previously unassuming State Capitals like Lucknow (UP accounts for 15 per cent of the Lok Sabha seats), Kolkata (West Bengal accounts for 8 per cent of the Lok Sabha seats), Patna (7 per cent) and Gandhinagar (5 per cent) to become important power centres. And as we all know, in India, with great power comes not great responsibility but great wealth.
• The continued absence of ‘national’ macroeconomic thrust: The new political elite does not have any political and economic ideology as such. For India’s regional and caste-based parties, their ascension to a position of power, after centuries of suppression, has been so rapid that for now they cannot be realistically expected to do anything else other than to use the power for self-interested ends. It will take at least 5-10 years for such parties to have any view on what should be India’s economic policy.
Investment Implications
For those looking for a grand India story to back (8-9 per cent growth, heavy investment in infra, the smooth administration of a powerful economy by able politicians), there won’t be such a story any more. Instead, the new India story will be focused on the micro rather than the macro:
• Individual aspirations: The aspiration which seeps out of almost every aspect of the Indian underclass existence is and will be a powerful driver for this country. For those who doubt its potency, I suggest you visit Sri Lanka to see what a country without such a visceral hunger to get ahead in life feels like. Such aspirations have already meant that a basket of “aspirational stocks” (with no particular regard to quality) have outperformed FMCG stocks by 7 per cent CAGR and the BSE100 by twice as much over the past decade.
• A few well-managed States: As India becomes a more federal country, the more able State-level Chief Ministers will be able to distinguish themselves even as the Centre crumbles. As Nitish Kumar has shown in Bihar, even in a broken State known for its serial economic and social failures, an able CM can independently drive growth. The scorching four-year CAGR of real economic growth in three non-Congress ruled States of Bihar (12.8 per cent), Gujarat (10.2 per cent) and Chhattisgarh (8.3 per cent) is indicative of the rise of well-managed States.
• Well-run, capital-efficient, small-midcap companies: As I have highlighted over the past year, Indian companies which don’t generate free cashflow and don’t have competitive advantages other than political connectivity, will struggle in the new dispensation. On the other hand, well-managed, cash-generative companies with brands, distribution, some innovative technology and demand underpinned by aspirational consumption, will thrive in the new India.
(Saurabh Mukherjea is the Head of Equities at Ambit Capital. The views expressed here are his own and not Ambit Capital’s.)