With equity markets continuously scaling new highs, who would guess that India’s growth is on course to print below 5% for a second successive year? Or that CPI inflation is still at 8%, the highest among the G20 universe? It’s almost as if India’s growth-inflation fundamentals have ceased to matter. Instead, markets continue to rally largely on growing expectations of political stability post the elections.
To be sure, a stable government—of whichever party—will be good for sentiment and markets. But the current market euphoria is pricing in a series of assumptions that must all hold. For starters that opinion polls have it right. Given the patchy record of pollsters in the last two elections, one cannot necessarily take that for granted. Second, that there is a fundamental economic pivot post elections. Given that the reform and welfare philosophies of the two national parties are not that radically different—like, say, the Republicans and Democrats in the US—it’s hard to imagine a massive economic pivot. And that’s a good thing—because both major parties broadly agree on the need for a GST, need for fiscal discipline, need for boosting infrastructure and clearing stalled projects. So if there is political consensus on key reforms—even if parties disagree on certain specifics—it suggests that reform in India is invariant to political formulation, a critical development. But it also suggests that we may not get the pivot that markets may be pricing in. Third, markets are assuming that the next government steps up implementation. But, if you look at the top 50 projects that are stalled (which account for nearly 70% of the value of all stalled projects), you will find that 60% of the stalled projects, in terms of value, are stuck because of state related issues—land acquisition and state contracts—over which the central government has no jurisdiction. Another 25% are stuck because of fuel linkages which ultimately relate to state electricity board financing—another area over which the Centre may have more limited efficacy. Only 8% are stuck because of environmental clearances—which, in theory, the Centre can grant on day one.
All this poses the risk that markets may be running ahead of themselves, and some caution is warranted. If expectations grow relentlessly and markets ignore the writing on the wall, disappointment is inevitable. Yesterday’s RBI policy is a classic case in point. There was an ever increasing belief that the central bank would stay on hold. And,