MODI MANIA hits the Markets

With the steady rise of the Sensex and FIIs since the September 2013 announcement of his candidacy, Modi may have been holding the bull’s horns the entire time
Sukumar Muralidharan DelhI 

Notions about India’s 2014 general election being determined by the stock market may be exaggerated, but they’re not off the mark. There is, in fact, an unmistakable correspondence between the recent surges in the stock market and Narendra Modi’s ascension towards political pre-eminence.

The Bombay Stock Exchange’s Sensitive Share Price Index (Sensex) showed an upswing in April last year, which coincided with Modi breaking out of the Gujarat milieu and eying the national stage. The fervour persisted with minor interruptions throughout the campaign season, cresting new waves of bullish optimism with the first exit poll results, broadcast soon after the last ballot was cast in the seven-phase election. Since then, the mood has turned euphoric. As at least one commentator has pointed out, bull runs on the stock market tend to be self-fulfilling. The more people expect prices to go up, the more they invest in the market, and the more prices actually go up—until, that is, they ask for a payback, and the market finds that it does not have sufficient real money to pony up.

It is instructive to look back to the days of the 2004 election surprise, when the Congress beat the odds amidst the BJP’s deafening cacophony of “India Shining”. In the immediate aftermath of the Congress’s shock victory, it became accepted wisdom that the BJP and its friends had been turfed out because of a mass upsurge of those at the receiving end of its economic policies. The “feel good” mythology was turned on its head. By that logic, it seemed appropriate for the Congress to reverse course. Investors in the market soon stepped up with an explicit warning that the smart political course could well be economic suicide. Just days after the results were in, on May 14, 2004, foreign institutional investors (FIIs) with strong positions in the stock exchanges pulled out in droves, driving down the Sensex by 330 points, or six per cent. As one of its top stories the next day, TheTimes of India (ToI) reported that the drop in the Sensex was the sharpest in over four years and had wiped `57.3 billion (`5,730 crore) off the aggregate value of the market.

The didactic purpose of that particular mass evacuation of the market had seemingly not been served. When the markets reopened after the weekend break, the FIIs drove down the index by 842 points, or 17 per cent, in a mere 22 minutes. After emergency measures to staunch the haemorrhage, the Sensex closed the day 565 points lower. The erosion of value was estimated by  ToI the next day at `133 billion (`13,000 crore). Under a headline that described an ostensible “quit India” movement by the FII s, ToI reported that Manmohan Singh—then believed to be the finance minister-designate—had called up Finance Minister Jaswant Singh to ensure that effective measures were taken to “stop the stock rot”.

That very day, May 18, Sonia Gandhi gave up her putative claim to the prime minister’s post, nominating Manmohan  instead to lead the complex political coalition that had emerged in the 2004 general election. And Manmohan was instantly seen as a rather amenable figure from the perspective of the markets. On May 20, the ToI reported on its business pages, with some satisfaction, that the markets were on a “recovery trip” and had gained 129 points.

Manmohan Singh retained his cautious and unadventurous attitude towards policies that might potentially step outside the bounds of strict fiscal rectitude. Within the Congress party, though, it was recognized that despite lustrous patches, most parts of the country remained in a slough. A semblance of social and economic equity had to be restored to sustain the democracy. With Manmohan Singh reluctantly playing along, the Congress saw political salvation in revisiting the populist commitments of the 1970s and early 1980s. This meant providing stimulus to the rural economy in an effort to directly address poverty.

The miracle of the economic populism inaugurated in 2005, with the passage of the National Rural Employment Guarantee Act (NREGA), is that it lasted quite as long as it did—indeed, was even extended from the 200 poorest districts to the entire country in 2008. Till the early years of the UPA’s second term, which began after a convincing electoral triumph in 2009, there was no hint that the fiscal commitments made by extending the right to work were a serious strain. In August 2010, Finance Minister Pranab Mukherjee spoke with absolute confidence about further extending the charter of rights and entitlements to every Indian citizen. The right to education would be the first step, after which the priorities would be to make operational rights to food and health. This level of ambition, Mukherjee said, would have been beyond imagination in the 1980s, when the government—despite best intentions—found itself stymied in all efforts to directly address poverty. What had made the unthinkable a distinct possibility was the turning of a page in the 1990s, which generated the second wind in India’s growth story.

Mukherjee may have got his dates a little wrong, but it is accepted by wide consensus that, in 2003=04, the Indian economy entered a new trajectory of near-double-digit growth.  There is also general agreement that one of the most significant contributions to that momentum came from the rise in gross domestic savings. This gain is incomprehensible without accounting for the sudden blossoming of foreign investor interest in India. India drew a lucky number in the global casino in 2003, when the tide of speculative capital, unleashed from the hoard of the global economy, began washing up on India’s shores. There is no agreed-upon reason for why India became the chosen destination for Wall Street’s billions of dollars that year, but after rampaging through East and South-East Asia, Latin America and the post-socialist economies of Eastern Europe, India’s turn seemed likely to come at some stage. Certainly, ever since 1991, India had been readying for just that moment when it would win out against lesser rivals in the global beauty contest for attracting the largest capital inflows. And when that moment arrived, rather belatedly, judgements were disoriented and unhinged.

Within five years, the sheen had begun to wear off what was touted as India’s growth miracle, puncturing the blustery self-confidence of a newly empowered middle-class. The Congress, which won another unanticipated electoral victory in 2009, stemmed the gash of elite loyalty in part by pressing down harder on the fiscal pedal; volumes of speculative money sloshing around in the economy soon began seeking out vulnerable pools, such as commodities, fuelling a food price inflation that proved especially debilitating for the poor and working classes that the Congress depended on as
core constituency.

Elite circles then began resounding with the call for policy clarity. Only some manner of authoritarian direction, it seemed, could restore the country on the path towards growth and great power status. The choice was Modi, not despite his record of authoritarian and intolerant action, but precisely because of it.

Modi’s arrival on the national stage restored the interest of the foreign investor and acted as a tonic for the markets. Since he was named the BJP’s candidate for prime minister in September 2013, foreign investors have apparently pumped `1000 billion (one lakh crore) into the country. For the first time, indeed, the US is believed to have exceeded Mauritius—the traditional hub of funds inflow—as the source of investment in India.

India’s richest man, Mukesh Ambani, is estimated to have added `310 billion (`Rs 31,000 crore) to his fortune since September. Modi’s most intimate confidant in the business world, Gautam Adani—whose corporate imprint graced every aircraft he took on his high-voltage campaign blitzkrieg—has more than tripled his personal net worth this year.

There is little doubt that a part of these windfall gains was funnelled through the siphon of the Indian stock market into the unprecedentedly well-coordinated, forceful and expensive campaign that Modi ran. The Modi sarkar begins its tenure with an immense accumulation of corporate IOUs to repay, and there seems little ambiguity over who will be asked to bear the price.