Timing Of Demonetisation Political, Served BJP Well: Alastair Newton
India stands to do relatively well if the worst of Trump trade protectionism comes about, Newton says.
This week on Thank God It’s Friday, we spoke to Alastair Newton, co-founder and director of Alavan Business Advisory on the recently-concluded assembly elections in India and the implications of the outcome for the 2019 general elections, how Modi-Trump ties could shape up, and expectations and outcomes from and the outcome from the European polls.
Here are edited excerpts from that conversation.
BJP At Vantage Point?
What are your thoughts on the political developments in India, especially Modi’s demonetisation exercise and his party’s surprise victory in the local state elections?
Overall, despite the results in Goa and Punjab, the results in the recent state elections were a big booster for the BJP. Particularly in Uttar Pradesh, it was a big vote of confidence in Narendra Modi himself, given the amount of personal time and attention he devoted to the campaign there.
Anecdotally, although many poorer Indians were inconvenienced by the demonetisation, a lot of those in UP at least felt that it was overall a good thing; it demonstrated Modi’s decisiveness and determination to battle against tax avoidance and corruption. In the end, despite the criticism of demonetisation - which there has been much of in the press, not only in India but internationally - BJP to an extent has been vindicated.
There was a clear link between the timing of the demonetisation and the timing of the Budget and these regional elections. The timing was very political indeed and it has served the BJP well. As things stand today - still two years before the next general elections has to be held - I think the BJP is set for the next general elections, not least because it is hard to see where the Opposition will come from. Congress had another series of disappointing results and the Aam Aadmi Party (AAP) also did less well than many had expected. So BJP is way out there ahead of other political parties as far as national advantage is concerned.
Way Forward For BJP: Reformist Or Populist?
Now that the Modi government has such a strong mandate do you think that, at least for the time being, reforms will take a backseat and it is likely to take up more populist measures in the run-up to 2019 general elections?
There’s always a problem with reforms. For all of its big majority in the Lok Sabha, the BJP still does not have an upper house majority and will not have an upper house majority until 2019 if you look at the regional elections scheduled to take place between now and then. Passing legislation is always going to involve compromises and some amount of dilution to get deals done. I am not expecting a huge amount of legislation between now and 2019 simply because of the impracticalities of pushing stuff through quickly without an upper house majority. What I am expecting to see is a good deal more fixed asset investment.
Fixed asset investments will see a boost from even the levels seen recently. If you want to call that populist, you can. But you can, with at least equal if not more justification, regard it as being a necessary supply-side investment with positive longer-term consequences for the Indian economy as well as the shorter-term booster to GDP growth. All other things being equal, we are likely to see an uptick in GDP growth in the second half of this year, which will revolve around the monsoon. There will be a bounceback from a slight slowdown which was a result of demonetisation. The Indian economy is in good shape. You have a very good central bank which is doing an excellent job of countering inflationary pressures and everything seems to look good today. I would also expect to see equities to do reasonably well. And we are likely to see the rupee to strengthen against a basket of currencies. It’s an open question – where the rupee-dollar is going.
One further point I would make which is quite important in the context of India. In the last 10 days, we have seen the price of oil slump by another 10 percent. Given the amount of energy India imports these days, a lower oil price is also good for the Indian economy and for the Indian finance ministry.
Fostering U.S. Ties, Afresh
We know Prime Minister Modi has had good relations with former U.S. President Obama. How do you think the relation between Modi and Donald Trump will pan out, considering what Trump has in mind for trade between the two countries and, to a certain extent, terrorism which plagues the Indian sub-continent?
First of all, it is not entirely clear by any means exactly what is going to happen as far as the U.S. policy agenda is concerned. It’s what I described in a paper I wrote recently as a ‘war in the White House’. Some experts will legitimately say that there are eight different factions around Donald Trump fighting for influence over the president. As far as the important ones are concerned, I would narrow it down to three factions. The first one is the Breitbart faction, that is the right-wing nationalists led by Steve Bannon. Peter Navarro, Trump’s trade guru, is part of that faction as far as economic nationalism is concerned. The second is the group which is known in Washington, behind the president’s back as the ‘adults’ or the ‘grown ups’. That is where I am talking about Mattis and Mnuchin, the people who have a realist’s view of the world and realpolitic and I would include the National Security Adviser McMaster and probably also Tillerman, the secretary of state. Now they clearly have a somewhat different perspective from the Bannons of the world. The third faction and perhaps the most influential one is the ‘family’, by which I mean Jared Kushner and Ivanka Trump. It is not clear where the balance is going to come down to among those people but it does stand to impact relations between the U.S. and India as well.
The second point is to look at it from the opposite end of the spectrum. That is, from India’s point of view. India is not highly dependent on exports of manufactured goods for its economic well-being. It is big enough to have a lot of self-containment economically. And I think in the emerging market firmament, generally, India stands to do relatively well if some of the worst things that Donald Trump has threatened to do in terms of trade protection do happen to come about. The Indian economy is more robust than other emerging markets and less susceptible to U.S. protectionism, with one exception – the issue of visas. So far, Donald Trump has shown no interest in trying to get jobs back into U.S. in areas such as business processing where India clearly has enormous strength and where any efforts to take back jobs to America would be damaging to India.
Having set the context, I come to your question. I think Trump and Modi will get along extremely well. Trump clearly has a liking for strongman leaders. Narendra Modi is a strongman leader by any reasonable definition of the word. Trump clearly has a big focus on China. In common with U.S. presidents before him – and I am speaking particularly of George W Bush – he is likely to think that India as the world’s biggest democracy is a convenient ally for the world’s largest democracy in any struggle against China, not recognising that India will very much make its own way in its relations with China and do what is best for India and not necessarily what is best for the U.S.
The third thing is the question about Islamic terrorism. This is a domestic problem here in India but it is more of a problem relative to one of your neighbours. As far as that is concerned, a great deal will depend on where the U.S. comes down, under Donald Trump, in its future engagement in Afghanistan and that is also a big unknown.
Global Trade Deals
After America exited from the Trans Pacific Partnership, do you think China could step in to form its own version and what could that exit from TTP mean for India’s exports compared to Asian nations?
I don’t think the demise of TPP in itself has significant implications for India. I think the first part of your question is much more relevant. That is, what may follow the TPP negotiation. We need to look through an existing process which revolves around Regional Comprehensive Economic Partnership (RCEP) which is a – semi-dormant may be the right word to describe it – trade negotiation involving the members of ASEAN and the countries with which ASEAN already has bilateral trade agreement; clearly of great significance to India. If we get back to Xi Jinping’s speech in Davos, in January, it is clear that he is looking to seize advantage from the demise of TPP and the general uncertainty surrounding U.S. policy in Asia consequent to Trump’s election. He is looking to take advantage in setting China up as a regional leader and as a promoter of free trade. Having said that, we need to think carefully about what China means by free trade. In pursuing RCEP, China is not going to be looking to build an advanced market access beyond borders trade agreement which TPP would have been, had it become a reality. Rather, it is going to be looking at a more traditional, GATT style, tariff-related trade agreement. If anything China’s attitude towards trade is still somewhat mercantile. Finally, there is a fairly compelling amount of evidence that is suggesting that Xi Jinping is looking to build a liberal regional trade order on the basis of illiberal domestic regime. That doesn’t fit the Indian model either where you have a very powerful and thriving and healthy democracy in stark contrast to China. So in any future trade agreements in the region with which China and India are involved, India is certainly going to face challenges getting an agreement which works for it. But I do think China will pursue this agenda following the crash of TPP and the ASEAN countries will, in particular, be going to looking to find some sort of substitute for TPP which does inevitably involve China.
Coming to the elections in Europe, we know Netherlands has chosen in favour of the incumbent party but there is the matter of France and Germany which may be more critical to the stability of the euro zone. Should leaders like Marine Le Pen emerge as winner, what are the risks that capital markets may have to account for?
The chances of an anti-European party winning the election in Germany or even being forming a government in Germany is not high. If it is going to be an anti-European party which is involved in a government in Germany, it’s going to be the Die Linke, the left-wing, former communist not alternative of a populist, nationalist party. The next chancellor of Germany is surely going to be either Angela Merkel or Martin Schulz, now the chancellor candidate for the SPD. Schulz is even more pro-European, pro-EU, pro-euro than Angela Merkel is. I don’t think we need to worry too much about Germany at this stage.
Now, if Marine Le Pen were elected president of France, which is a non-negligible probability - still a good deal less than 50 percent if we look at opinion polls and other factors today. The first challenge she would face will be in the national assembly elections which follow just a few weeks later. There is nothing to suggest that her party is capable of winning a majority in the national assembly. Without a majority in the national assembly, she is going to find it very hard to call a referendum on France’s membership about the Europe or the European Union. There are mechanisms by which she could do it but it would involve going through constitutional courts. It would be very similar to something which Charles de Gaulle had to do back in 1958 to change France’s constitution to allow him to establish a Republic which is not an easy process by any means. But, the mere factor of Le Pen being elected is certainly going to send shockwaves through financial markets through Europe. It will be very hard for the Germans, whoever their Chancellor is, to work with Le Pen and it could still spell very bad news in the future well-being of Europe and the European Union even if she were unable to organise a referendum. So this is certainly an election which we need to watch very closely. Right now, Emmanuel Macron is certainly the favourite to win the election. I think the assumption is that Francois Fillon will not withdraw before the final days of nomination which is March 17. There is still a provision by which he could withdraw thereafter and the election will then probably be postponed for several weeks to allow a new candidate to try to gather momentum and that could change the equilibrium significantly. For the time being, I think we can reasonably assume that we are looking at a four-way race – Le Pen, Macron, Fillon and Hamon of the socialist party if he could gather some sort of electoral pact with the extreme left-wing candidate Jean-Luc Mélenchon. But that is pretty unlikely as things stand. All the evidence today is pointing to a Le Pen-Macron run off and although some supporters of the Fillon’s party may then defect to Le Pen and some from the extreme left may then vote for Marine Le Pen, It does look like Macron would win by a clear margin in those circumstances. But keep in mind, we have seen many surprising twists in this election campaign so far, and we can’t rule out further twists in the story between now and early May.