Modi 2.0 May Shape India On Chinese Model, Says Shankar Sharma
The BJP’s clean sweep gives Modi the mandate to follow the Chinese model, Sharma says.
The Bharatiya Janata Party’s clean sweep in the 2019 Lok Sabha election gives Narendra Modi the mandate to do whatever he wants, much like in China, according to veteran investor Shankar Sharma.
If the Chinese government wants a piece of land, they acquire it by “uprooting” peasants and rehabilitating them, the vice-chairman and joint managing director of First Global told BloombergQuint in an interview. Modi’s mandate allows him to do just that, he said. “I don't see what is going to stop them from developing a China-type economic model.”
The BJP on its own crossed the majority mark with 303 seats, and the tally soars to 352 when allies are combined. The BJP had won a majority on its own in 2014 as well and Sharma said Modi has always been free to implement policies without having to rely on the views of coalition partners.
“We need to wait and see if their philosophy is going to be different in the second innings or is it going to be the continuation of what they started and maybe some of it was unfinished in the first innings,” he said.
Sharma, however, does not have a clear picture of what the new government is going to do on the economic front. Consumption kept the economy buoyant, he said. But a dramatic slowdown in the past few months is a great cause for concern and Modi has his work cut out “The government needs to first figure this out causes and then figure out the remedies.”
Sharma also pointed to lack of innovation among Indian companies. One of the hallmarks of a growth economy is the churn that you see in the index composition of that country, he said. If the index changes rapidly, the old order is replaced by the new and indices like S&P and Nasdaq today do not resemble what they were 10-20 years ago. “In India, it has remained flat. There has been no churn in the top 10 companies,” Sharma said. “A standard set of companies has always remained in the market and that shows a lack of innovation and ability to build significant new businesses that we as a nation lack.”
Watch the full conversation here:
Read the edited excerpts from the conversation:
This is a massive mandate for the BJP. What kind of implications will it have on the economy and markets at large?
We have to wait to make conclusions on what implications it has because the BJP already had a majority so it’s not as if they were hobbled in any way in the previous term for making decisions. In contrast to the UPA which was hobbled in a lot of ways because of lower numbers and the Left obviously used to exert its own point of view. The BJP, fortunately, and NDA-I had no such constrains at all on policies or initiatives. So, I don’t think we should necessarily say that because the party has got a majority this time, it has suddenly been freed up because it has always been free to implement policies the way it wishes, without relying on coalition partners. In light of that, we need to wait and see whether their philosophy is going to be different in the second innings or is it going to be a continuation of what they started and maybe some of it was unfinished in the first innings. In my mind, it is oversimplification to say that with 2.0 suddenly things will change and dramatically so because of this mandate. Because this mandate was a better repeat of 2014.
What should be the economic priorities of this government in its second term?
In India, there is no shortage of issues to focus on the economic front. You can have your hands full. The fact of the matter is that what we did not get from this election campaign from the BJP was what their economic plan was going to be, because their election was fought and campaigned on completely different basis. So, we don’t have a clue about what their thinking is going to be in the second innings. In terms of priorities, we all know it is fairly common knowledge that the corporate numbers have been hurting. Especially on the capex side. It was already very low in the last several years. What was keeping the economy buoyant was really the consumption in the market. That, in the last few months, has suddenly started slowing down dramatically. And that is a great cause for concern for the government as well as for people participating and analysing markets. Why that has happened has a very complicated answers and the government really needs to first understand the causes and only then you can figure out what the remedies might be. It will require a lot of deep thinking with good economists. The government must cobble together, rather than just rely on the seat-of-the-pants, the opinions being voiced by all in India, and India is very free with opinions. They really need to go down to pure data, correct data to really understand why consumption has suddenly fallen off a cliff. It is only then that you can make remedies which will be useful.
About the farm support programmes, where is this money going to be coming from? Would it be sacrificing fiscal prudence to attend to these priorities?
The interesting thing about the previous government was that they could push through things across to the market or across to the public at large which no government in the past has been able to do. And they could market almost everything so well that people ended up accepting those things as being the correct things to do so. For example, fiscal prudence was sacrificed from the very first budget when they said that they will reach the fiscal deficit target that they had set but we will bridge them because we are going to spend on infrastructure and for necessary expenses and expenditures. They communicated this message so well that the markets thought that it was a positive. While at the previous government, if Pranab Mukherjee was our finance minister and if he had said the same thing, the market would have tanked 5 percent. That’s the beauty of their messaging that they manage to get across uncomfortable messages in a very convincing manner. I think for them breaching the fiscal deficit is not a big deal. It has happened in the past consistently but they have managed to put it across in a certain manner that analyst also says that it is alright you want to spend on growth, it’s okay you can go to focus on 4.5 percent deficit or where they want to go to. I think you will see slippage or rather they can say it is deliberate.
With this kind of mandate, where they get clout not in Lok Sabha but also in the Rajya Sabha to push through what they want. Do you think government will be able to tackle issue like reforms for labour and privatisation?
Land is actually another one which you omitted to mention because if you remember in the previous avatar, they tried some land acquisition reforms and then they backed off very quickly. In my view, it is my reading as an analyst and it is that this government, in this avatar, in 2.0 can do pretty much what it wants to do, and I do not think people will mind. So, if you read the mandate correctly, deeply, at least the message that I get is that, if I was PM of India today, I would go out and completely, for example, if you were China and you wanted to acquire land and there is nothing you need to do and you can just go and uproot the peasants from there, move them into some hinterland and get it (land). I think this government has got a mandate that can allow them to do exactly that, which is the deeper message from this mandate. It does not matter what you do with us, you can go ahead and do whatever you want. That is my reading from this mandate. Given that, they can do pretty much what they want to do, they can really make it a China-type model if they wish. I don’t see what is going to stop a China-kind of economic model from developing, given the scale of this mandate.
What about the banking sector and Insolvency and Bankruptcy Code? There were some stressed accounts. Do you think the government intervention will continue?
Banks are different, and the IBC is a little different. Our reading of the IBC is that barring a few headline cases, nothing else is getting resolved. It is a very adverse and torturous process. And our reading is that the committee of creditors in almost all the cases is preferring to send companies to liquidation, and not trying to revive them by entertaining the bids on offer. I fail to understand how sending something to liquidation will yield anything at all. They are picked off piece by piece, cherry picked by vulture investors. You will be left with virtually one paisa to the rupee. I don’t know why that is the case. Maybe it’s coming out of a fear psychosis that bankers have undergone in the last few years where every decision has been put for questioning and in hindsight, you can question any credit decision. Even a credit decision made with complete honesty, but something can go wrong two to three years down the road and then if you are hauled up by the CBI or some agency, because some loan document was not signed properly. These things can happen, and not all of it is maleficence. I think IBC is suffering because of lack of confidence by lenders, that if we take a step, will that be viewed correctly later on? That’s the problem with the IBC. So, barring the headline cases, there are a lot of cases— nearly 70-80 percent — which are just being sent for liquidation. Banks continue to suffer. I don’t think banks have any appetite for risk left. They are extremely reticent to fund projects and I have been talking to a lot of infrastructure companies and I can tell you that just the government saying we want infrastructure to grow is not good enough. Just the government saying that they want to focus on infrastructure might be a good statement but in reality, banks need to fund that, and I know for sure that bank guarantees are a huge problem for many infrastructure companies to get. So how do you fund infrastructure? There are a lot of significant challenges on the ground.
What are your views on liquidity issue in the NBFC space. Do you anticipate government intervention here or is it the end of the problem?
I don’t think the problem has ended. I don’t see how the government can intervene and do what exactly. I don’t think the government has the capacity to write big cheques for this industry. This industry, in terms of size and huge systemic risk, is not equivalent to big bank failure. It is still a very small part of the credit market. I don’t think the government has any role to play here except to make polite noises that they will back it and save it. But, writing cheques for this sector is out of the question. But the stress for the NBFC sector is very real. You were a very concentrated liability business, in which you were getting liability primarily from a single source— virtually 60-70 percent is coming from a single source. Single source is a volatile source but with that source you go out and lend long term to people who otherwise wouldn’t be able to get credit like real estate, promoters’ loan and stuff like that. We have seen in the last year or so how badly those kinds of decisions have turned out, not just for NBFCs but also for mutual funds. I never liked that space ever. It has a good run once in a while when people forget the past and new set of investors come in and say this time it’s different. But I continue remain very circumspect about the sector.
In the next five years, do you expect the market to become more broad-based, which is not just focusing on top 5-10 companies which have a lion’s share of value? Do you expect the participation happening and market being broad-based?
That’s a big call to make and nobody knows who gets it and how it will be shape out. One of the hallmark of a growth economy is the churn that you see in the index composition of that country. If the index is changing fairly rapidly. You go to markets like S&P or Nasdaq or even China, you will see the old order is getting replaced by the new order and it is a continuous churn of companies. The index 10 years ago will not resemble the index today or index 20 years ago will not resemble the index 10 years ago. That’s a very healthy thing because that just shows that more companies are coming and throwing out the old. But in India it has remained absolutely flat. Go back and see in five to 10 years, there has hardly been any churn in the top 10-20 companies. The same set of telecom companies, consumer companies, chemical companies and banks that’s pretty much of it. Auto does not have a huge market cap. But there are basically just a standard set of businesses which have continued for decades. It only shows that the lack of innovation and the ability to build significant new businesses that we as a nation lack. I don’t know what causes that but it’s in sharp contrast to other countries and we follow index composition changes worldwide. India is one of the worst in that situation.
Outside the listed space, you have a bunch of really interesting companies which are acquiring scale like Paytm, Swiggy, etc.
We are looking at the listed space. That is a field we play in and I am comparing listed to listed. I am not comparing the unlisted U.S. market to the listed Indian market. I am comparing the Nasdaq—which is purely listed —to the Indian indices and I don’t see that kind of churn that you ought to see as a growth innovation-driven economy. So, what happens in the next five years and these companies, will they get replaced in the next five years? I don’t know because that’s not happened in the last 5-10 years. It’s been a very steady set of companies, same usual suspects all the time. The jury is out on that one.