Get over it – this insecurity, this anxiety, these discussions in company boards, these on-the-edge narratives accentuated by an illiterate or a motivated social media that has morphed into an influencer-loudspeaker that spews the latest outrage. Elections happen. Every democracy goes through it. Every political change brings a new set of directions, every direction an economic outcome. Stability, whatever be its outward expression, belongs to two worlds that we no longer live in. First, the bygone era of kings and tribal chiefs. And second, the ongoing era of totalitarian regimes such as the multi-designated leaders of China and North Korea, monarchies such as Saudi Arabia, chaotic-violent changes in some African states, and of course, backdoor deep state stealth in Pakistan.
Other than that, in the civilised world where citizens elect their leaders through a transparent process of anonymous voting, the only stability on offer is change. Given that
62 countries will go for elections in 2019, the fluctuating behaviour of markets, beyond the US-China trade war, reflects this political change. The two biggest elections are those in India and the European Union over the next two months – they impact 1.85 billion people. The other large elections the Philippines and South Africa (162 million) in May; Japan (127 million) in July, Canada and Argentina (81 million) in October; Poland and Australia (63 million) in November; Romania (19 million) in December. Each of these elections has diverse changes embedded into it, mirroring people’s expectations and their aspirations. Business and financial insecurity is reflecting that change.
India’s swinging markets are no different, its gyrations reflecting this global political economy uncertainty.
The questions companies are asking are yawningly the same they asked in 2004, 2009 and 2014 – on business stability, on rewriting expansion plans, on the mind of the new government, on the various options ahead, on what policy changes to expect – and will continue to ask in 2024, 2029 and 2034. Broadly, there are three questions today.
- First, will the BJP-led coalition return to power?
- Second, will this coalition be led by incumbent Prime Minister Narendra Modi?
- Third, what can we expect from a leaderless coalition, a diverse ‘mahagathbandhan’ of varying ideologies with an equally diverse 14 to 19 components’, whose sole political stance is to oust Modi at any cost, a Modi-mukt bharat?
These questions, howsoever relevant they sound, have lost their bite in the post-1991 India. Of course, policy reversals to exist – a tax tweak here, a price control there, a distributive restriction, an enforced price reduction and suchlike. But these are far and few, though the noise around them makes it feel as though the skies are falling. These risks are more a looming shadow of the past darkening today’s business atmosphere than a real across-the-board threat. They are out of synch with the relatively more liberalised India of today, with the four years between 1990 and 1993 being the cusp of instability.
These politically unstable years saw three Prime Ministers – Vishwanath Pratap Singh, Chandra Shekhar, and P.V. Narasimha Rao. Accompanying these prime ministers were three Finance Ministers (Madhu Dandavate, Yashwant Sinha, and Manmohan Singh). On the monetary policy side, the Reserve Bank of India came under the watch of three Governors (R.N. Malhotra, S. Venkitaramanan, and C.Rangarajan). On the economic policy advisory front, this period saw three Chief Economic Advisors (Nitin Desai, Deepak Nayyar, and Shankar Acharya). On policy management side, three Finance Secretaries oversaw the changes (Bimal Jalan, S.P. Shukla, and Montek Singh Ahluwalia). This was clearly a period of high economic uncertainty for businesses on the appointments side. But despite it being a time of great political risk, this risk did not flow over on the stable political system of India’s democracy that stood firm on its Constitutional institutions.
Political risk has several textures –
conflict risk as in Iraq, South Sudan or Pakistan,
social unrest as the Arab Spring in Egypt,
corruption as in Venezuela, Angola or Turkmenistan,
sovereign debt default as in Pakistan,
market imperfections where the country’s financial system becomes a tool to fund government economic policies such as China in general and its Belt and Road Initiative in particular. A
survey of 1,161 global decision makers found that the importance to political risk by corporate executives has increased over the last 15 years (ending 2017) and is considered more important than commodity (input) risk, with nearly 50% of firms avoiding foreign direct investment because of political risk. Look carefully, and every country carries a mix of these risks in its portfolio.
Investors and companies, both Indian and foreign, cannot ignore the history of policy and political risk in India. IBM, for instance, exited India in the 1970s but Nestle and Unilever consolidated their businesses in the same period. The excessive control through the Licence Raj from the 1950s till 1991 saw fortunes of both foreign and Indian companies swing from one end to another, until the economy began opening up and delivering new enterprises.
According to a study, of five big risk parameters, India scores the worst in having an excessive bureaucracy (63%) followed by corruption (18%). Political instability is at a low 10%, compared to say Pakistan’s 50%, Sri Lanka’s 32% or Latin American nations that range from 21% to 28%. The paper goes on to say that weak policy enforcement remains a problem.
But the short-term foreseeable risk that companies are worrying about today is electoral uncertainty, not conflict, not unrest, not corruption, not defaults and not market imperfections. To reframe the problem, the worry is about whether the new government will deliver policy continuity.
Embedded in it is a hope that the current government returns to power. This is not because of any love for the Modi government but for a seamless continuity of policy and predictability of direction. This atmosphere is not very different from that in 2014, when despite corruption being the overarching issue that affected companies adversely when they were not given spectrum or mining rights for instance, the hope was for the Congress-led coalition to continue.
This is where the structural conflict between democracy and capitalism erupts. Capitalism stands on delivering a higher return on capital, a rising market capitalisation, a secure and high growth (short term for executives, long term for investors). Democracy is about making political choices that pivot around entitlements through elections and the power to vote. Capitalism is structured to accentuate inequality through the force of ideas and enterprises. Democracy seeks to end it by ensuring higher taxes on the rich, greater control and regulation of companies. Capitalism creates GDP, jobs and wealth. Democracy seeks the trickle down of these growth levers through distributive directions and tax policies. The role of the government or a democratic economic system is to balance the two, as one feeds the other.
It is but natural, therefore, for businesses to get jittery in the run-up to elections. In Elections 2019, there are broadly two narratives that have been floated – neither of them true. The first states that if the BJP- and Modi-led coalition returns to power, it would give greater force to majoritarianism, even as real issues such as farmers’ incomes or jobs are brushed aside by the broom of nationalism and security. The second holds that if the mahagathbandhan comes to power it would mean a return to dynastic politics, whose tools of trade are corruption, which terms the anti-Hindu minority appeasement as secularism and is driven by false liberals, who have no courage to secure the nation. The role of companies and the risks to both these narratives is invisible in public discourse – talking about business has become a taboo, its expression a political hot potato. Create the jobs we need but don’t expect us to stand by you, the political establishment is implying without saying it publicly, a script we have seen play out in democracies across the world.
That said, it’s time to answer the three questions this essay raised in the beginning. The short answer: nobody knows. How can any sane person predict an election in India? Forget general elections, even a municipal poll has only one deliverable – surprise. So, quit the debate, and watch from the pavilion how the next two months bring a cycle of new narratives, one daily, only to be smashed the next day. Watch how politicians jump parties wearing skins of morality but hiding petty individual interests beneath them. Observe carefully how the intelligentsia attempts to balance its storylines, careful to keep both the heavyweights in good humour but allowing for shifting loyalties in the garb of reports, analyses or opinions.
And as far as companies, their strategies, their investments, and their expansion plans go, here’s some advice. Forget this election or the last, ignore this party or that, stop trying to build boxes of security and predictability.
There is only one thing to remember: after 1991, the Indian economy has been moving in only one direction – opening up, getting more transparent and delivering growth. India is today soon to be the world’s fifth largest economy, with a GDP close to $3 trillion. Political preferences aside, companies need to have faith in the Indian voter, the Indian consumer and her aspirations. Above all, they need to invest in the Indian democracy.
If you study the past
72 years of policymaking and its evolution in independent India, you will see that irrespective of the government in power, from 1991 onwards, politics and economics have come together to deliver infrastructure, a greater ease of doing business, and barring a sector here or an industry there, a policy direction that has continued to balance growth and redistribution, technology and jobs, innovation and opportunity. Fears of India’s political risk stem from history, particularly in the 1950s to 1970s. India has survived those repressive and regressive decades, it has survived the tumultuous 1990-1993 years, it has delivered growth despite its deep-rooted socialist policy framework, it has gone beyond corruption, technology will allow it to leap over bureaucratic hurdles. Today, business uncertainty and political risk of elections are insignificant before the bigger picture of growth, market and global repositioning of India.
Message to companies and corporate captains: don’t let electoral risk get the better of you, look at the horizon, you will see growth, investor returns, executive bonuses, and high valuations.
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