Ruchir Sharma On Elections 2019, Narendra Modi And The Indian Economy

Democracy on the Road - As the title suggests, Ruchir Sharma’s new book is a high-speed, breezy drive through two decades of electoral politics. Over 25 trips, the global investor, with a motley group of journalists and some politicians, has played election tourist. Attending campaigns, meeting political leaders and interacting with voters...to understand why India votes the way it does.

The answer to that has been well-known for long. Caste, class, onions, anti-incumbency...anything could swing an election.

But Sharma does come away with an insight that, while not new to some, is worth the 364 page reiteration. That “India’s political DNA is fundamentally socialist and statist”.

“... the governing class does not want reform,” he writes in the concluding chapter. “The state machine allows them to appeal to voters by launching one welfare scheme after another, and to most politicians reform implies loss of control.”

Expressing surprise that even a centre - right party such as the BJP has resorted to dole outs, Sharma said, in an interview with BloombergQuint, that competitive populism was the biggest threat facing the Indian economy.

Sharma pinned his hopes for progress on the states. “ Generally, the story in India is one where you can get decent economic success stories at a state level and at some level it aggregates to be a good national story,” he said.

The head of emerging markets and chief global strategist at Morgan Stanley Investment Management prefers not to associate his day job with this third book. But his Central Park West view mixed in with childhood summer vacations in Bijnor, Uttar Pradesh allow the book an objectivity not sans emotion.

The intimate details of meetings with Chandrababu Naidu, Mamata Banerjee, Mayawati, the late Jayalalithaa, Vasundhara Raje, Ashok Gehlot, Yogi Adityanath, Sharad Pawar, Nitish Kumar, Sonia Gandhi, her son Rahul, Narendra Modi and Amit Shah among others, underscore another point well made in the book.

As for the upcoming general election, Sharma puts it pithily when he says "the 2019 ballot will offer a choice of two different political visions, one celebrating the reality of many Indias, the other aspiring to build one India".

Edited excerpts from the interview with Ruchir Sharma.

Modi Is More A Performer Than Reformer

Your assessment of the Modi government’s five years.

Sharma: I go back to the 2014 election campaign. In that campaign, the mood of the nation was captured by the high expectations we had of the government. We went to Bihar and Uttar Pradesh for the 2014 campaign in May. Every time our cars hit a speed bump, the inside joke would be that “Modi will fix it”. It seemed that every problem would be fixed because in that election hit was projected as being this messiah who would come to power. By 2017, when we went back to U.P. for our 25th election trip, the scene had changed, in terms of the fact that it was taking a lot longer for things to get done and you had the controversial demonetisation which had happened just before that.

What he meant was that he (Modi) is focused on getting projects done. But there is not much of a big picture reform that is happening as far as the government is concerned. By reform, I mean getting more of the government out of your way, because that is what ‘reform’ in this country means. Some argue that demonetisation was a reform step but that is not really reform. I am talking about getting the government out of your way, decreasing the regulatory burden, being true to your promise of “minimum government, maximum governance” - which we haven’t seen.

This election, thus, five years on, will not be fought on development. I think the Modi government will speak about their achievements, but I doubt if that will resonate with the public since no government in this country, especially at the national level, is able to transform the lot of their people over five years because the state is so badly broken. The delivery mechanism in this country is badly broken. You want to give a minimum support price to farmers, but they can’t get it because of the state bureaucracy, and they have to go and sell their produce out in the open market. You want to give farmers a cheque to encash and many state banks will sit on it and not clear the cheques for a long time. So, that is the plight of the country. I don’t think there is any architectural change in that. That, I think, is going to be something which the government will have to grapple with as it goes back to the voters after five year.

How do you assess the economic changes this government has been able to bring about, if any.

Sharma: “Changes upon changes, this country remains the same,” is one of my favorite lines in the book.
The pace of change is always incremental in nature, so you always step back and look at the long view. Things change but no government in five years is able to do anything dramatic which makes a difference or which people feel on the ground. It takes too long to change the plight of the people in this country. Even when you try and do stuff which is close to an election and try and help the people, they are very cynical about it and they feel this is just last-minute stuff being done (vote purchase). They want to keep the money, but they want to change stuff too quickly.

That is my point about the nation—the change is always incremental in nature, governments can come and go but it doesn’t really alter the trajectory of the economy. So, election is a great spectator sport and doing these trips for me is fascinating because you get to learn about India, you get to go to places in India where you could never imagine going. I don’t think it has any significance or bearing on the economy or the markets. It causes some volatility, but it does not have much in terms of an enduring effect.

In 2004, we were shocked when the Vajpayee government lost the election, there was mayhem in the (stock) market for a few days but after that, it was the biggest bull market in Indian history partly because of the big global boom back then.

In 2009, the same foreign investors wanted Manmohan Singh to come back and their wish was fulfilled. He comes back, the markets limit up for a couple of days, you can’t get a trade through, and look what happened after those five years. It was a terrible economic mess that we and the markets had to deal with.

The effect of national politics on the market and the economy is way exaggerated as far as India is concerned.

‘Development’ Doesn’t Win Elections?

Minus the politics, what do you make of the economic strength of India? Do you believe the data that you read?

Sharma: I have made my views clear on the data. In 2015, when it was the first time that they revised the GDP data in a long time, I was very against what the new numbers told you since they did not pass the smelt test. I wrote openly about it - that this was not out of any malintent but possibly just incompetence that the government was keen to almost gloss over because it made them look better, though it made the previous government look better, too.

Now we must look at all other indicators to try and figure out how exactly the economy Is doing as far as economic growth is concerned. You look at a lot of high-frequency numbers—car sales, two-wheeler sales, consumption metrics to try and see what is happening out there. The data has already lost a lot of its credibility which is something I said even back then.

Regarding the economy, the strength of the economy is that development seems to take place at a state level. There are many breakout states in India in terms of how they have done. Even when Modi was the chief minister of Gujarat, he was much more effective in terms of what he could get done on the development front. You have success stories like Nitish Kumar in Bihar and the Bimaru states (Bihar, Madhya Pradesh, Rajasthan) have been able to transform themselves.

There are also other states which regress, like Tamil Nadu. This was a state at the forefront of economic development for many years. When we went on out election trip on 2016, it was quite clear that the state had regressed quite a lot, partly because of alcoholism.

In the book you've linked it to previous election rallies where free alcohol was the ticket to generating crowds...

Sharma: It's a vicious cycle that they are stuck in. At one level they want to give out as many goodies to the people as possible. But how do you get the money for that? So, liquor licenses and having more liquor flow through that the state is a way for the exchequer to get more money. But that is what needs even more welfare schemes to keep people happy because when we met industrialists in the state and they said absenteeism was a big issue for them.

The Risk Of Competitive Populism

Whether it's data integrity or institutional integrity issues or factors like a more dovish Fed or India's under performance this year versus global equity markets - what does 2019 look like?

Sharma: I think the biggest risk to India currently is that the Indian growth story somehow seems to chug along no matter what happened on the politics. But if you're asking me for the risks in terms of what I'm looking at currently - it's the risk of competitive populism. This is something we need to keep a watch out for. Partly because we expected the Modi government to stop that because in 2014 they seemed to attack schemes like MNREGA and the dole out culture.

Again, I go back to some of the anecdotes in the book. When we went to see the Rajasthan election campaign of Ashok Gehlot in 2013, he was pilloried by the BJP back then for being this chief minister for throwing one dole out after another. Modi would say to the people that he's insulting you by just doing this. Like he (Modi) wanted to believe that people want to work, people don't want dole outs.

And, here we are five years later and even the Modi government now seems to be going for one dole out after another. So, I think that that's the big change which has happened. If even the Modi government is doing that, a government which was supposed to be more right-of-center as far as economics is concerned, then you can imagine as to what a slippery path that could be. Because a lot of parties in the opposition, the Congress included, are pretty sort of spendthrift and quite happy to promise one thing after another.

In other countries it's a very different risk. Like Brazil or South Africa, they want a leader to come to power because they think that he's more of an economic reformist and that in many ways ends up being true. I think in India the risk is a bit different. We keep getting these difficult (electoral) verdicts where nothing is clear and where each party wants to try and somehow get ahead of the other on all sorts of promises to try and outdo each other. We don't have revenues to do it.

The Congress government, like UPA I, was very spendthrift but the remarkable thing then was that we were experiencing a global economic boom so they had the money. You would systematically underestimate how strong growth was and you keep putting out one dole out after other.

Now, the problem is, you don't have that economic boom, and this competitive populism, because people are feeling the distress and you want to keep them happy by giving one dole out after another, no matter which party you are from. That is the biggest risk.

But is that a basis on which global investors decide whether they still want to continue investing in India?

Sharma: I think it depends which global investors you speak to. There are enough long-term global investors who believe in India, who think this country is starting off a very low base, the penetration levels are very low and it doesn't quite matter which government comes to power. So the Indian growth story will continue to roll on. Not at the pace of China, because we don't have enough money to invest in infrastructure or other things because so much of the money gets siphoned out in these dole outs, which China never did when it was developing itself in the early stages. Many global investors don't think that way about what’s going on (competitive populism)

But since you're asking about the risk, the portfolio investors, that's something that they may begin to worry about if this culture continues. No one carries out economic reforms or does anything unless they have their back to the wall. Even with the UPA 2 government, it took the rupee crash of 2013 for them to stop their spendthrift ways. Until then, everything was about increasing subsidies and increasing dole outs.

Most Indian Politicians Are Statists

That brings me to one central theme in your book - reform.
Modi promised maximum governance, minimum government - but we really haven't seen any moves towards reducing the size of the bureaucracy or exiting from the variety of state-owned entities that India is invested in. It's clear that we don't have political buy-in into any kind of deep economic reform. Though some might argue that’s the western view of reform.

Sharma: You just compare it to China too. What's the big difference between China and India, as far as their economic growth is concerned? One of the big differences is that China invests nearly three times more in infrastructure as a share of its economy than India does. It's partly because they never believed in creating a welfare state in the early stages of their development. It was ruthless capitalism, in terms of people migrating to the coastal areas in search of better opportunities. It was almost like you want to push people into areas which you thought that they should be in, which is manufacturing and exporting your way to prosperity. Building all the infrastructure to facilitate that—the ports, bridges and SEZs. And in India, we just don't seem to have that priority because so much of the money gets spent on these dole outs and welfare schemes. So, to think that this is just the Washington Consensus talking - that we need economic reforms of free market, is wrong. There is a Chinese model which is much more infrastructure, much more sort of productivity-enhancing kind of spend, compared to what India does.

In India most politicians tend to be statists. Unless we are forced to do something about it, I think it's going to be the same. The only time India's carried out transformational reform has been under duress in 2013 after we were on the brink of rupee crisis and in 1991. So, all the reforms seem to take place when we are under real duress. Even the reforms of the Vajpayee era were because economic growth was so slow.

So, what does that tell us about the next 10-20 years - on politics, political economy and economically?

Sharma: It tells you the change in this country at a national level is going to be very difficult. You're not going to get the kind of breakthrough reforms that you expect.

That's where you'll end up getting more of a pro-development push. One thing I noticed, even when I go back to New York, is the number of state Chief Ministers who show up with their delegations to try and get more foreign investment is quite large. That was not the case 20-30 years ago so that's what really the Indian growth story is going to be about.

Elections 2019, Modi And Gandhi

As we know and you’ve written - there is no one winning element in an election. But as we go into 2019 have you any grip on what you think some of the key issues will be?

Sharma: I feel that this election is not going be about issues. Obviously, issues will be spoken about in campaigns. I think what's happened in India now, especially with increased polarisation, people's views on various issues is determined a lot by their political leanings first and their caste and religious equation.

You’ve met Narendra Modi on the campaign trail. What have your interactions been like?

Sharma: Unfortunately, a bit contentious at times. I think that some people in our group still feel very strongly about what happened in the past (Gujarat riots in 2002). With both Modi and Amit Shah the feel that you get is that they really haven't forgotten the role that the English media, in particular, played in the 2002 riots and they still have this hostility to that media. But as an orator on the stump, he's about as powerful as they come. Our group also has some foreign journalists in there and I remember they remarking to me that they've seen many campaigns and the oratory skills and the technique and resonance that he gets is something that they haven't seen.

Do you envisage a BJP government without Modi at the helm?

Sharma: It very difficult because I think that the rank and file is very committed to him. One thing about Indian politicians is that very few of them, even after they lose office, lose their leadership of the party if they are very strong there.

Look at these leaders—every five years- Mulayam Yadav, Mayawati, Vasundara Raje— they lose elections every five years, they go back and they know that their turn, after five years, may be brighter to return to power.

It is not like American politics which is very ruthless - where once you lose an election, it is difficult to contest again.

In India, they all fancy their chances so they'll come back often because the election losses are quite marginal and often the trend of anti-incumbency is rarely noticed. You can almost predict that there is a merry-go-round and your chance to be back in the spotlight will be there after five years.

You’ve written about meeting Rahul Gandhi. And how in 2014 he apparently delivered an hour long monologue to your group. If the Congress does not fare well in this election, do you see Gandhi having the longevity to come back five years later and fight even harder?

Sharma: Priyanka is now in the picture. It is very hard to predict. It's now the only profession for them. it's not as if they can go back to doing something else because it's too late in the game for that. So I think that it's very difficult for them to step off that. But if he has a poor result, all the attention—knowing the Congress party and its love for the dynasty—will begin to move to Priyanka automatically.

In fact, as I document in the book, in the initial years even after Sonia entered politics, everyone thought that Priyanka was the one and that she was the natural inheritor of the dynasty as far as the Congress was concerned. There was a lot of longing for that. Even now until very recently, until Rahul began to show some signs of being able to lead from the front.

Her coming now was a big surprise in terms of the timing. If Congress does poorly in the election, the attention will naturally shift to her.

Do you think the outcome of this election will have a lasting impact on how the world sees India - in terms of both the investability of India and economic growth?

Sharma: Maybe in the short term there will be an impulsive reaction. But as I said the connection between politics, economics and markets in this country is very weak. So, I don't think that the election outcome is going to change things in a material way, in terms of the direction of this country.

Competitive populism is the only risk I would look out for. If that persists for too long, then we need to be worried that are we playing with the finances of this country.

I think the importance of elections on investment and markets is way exaggerated.