What To Know Ahead Of India's Election

And I think you're not alone in that sentiment. I think a lot of people who are actually actively involved in that market are probably just as confused as you are. And I remained confused, although I did learn a bit after last week's episode. Well, you know, there's another gigantic economy, and after thinking about it this morning, it's also really huge, and I probably even know less about this economy than China's. Wait, uh an economy almost as big. You said, Yeah, well

it's not China, and it's obviously not the US. What's another Really, it has to be India. Yeah, so right, here's another country of the billion people, huge emerging market. And when I think about it, I realized, wow, I even know less about how the Indian economy functions. In the state of the Indian economy right now, uh than China's yeah, and obviously India is, Um. Well, it's a big economy. It's also a fast growing economy relative to a lot of others out there in the world. But

it's also kind of unique in many ways. And whenever I think about India, one of the things that always springs to mind is the uniqueness of its market, Like it's still a very closed off market in many many ways. Do you mean do you mean financial markets specifically financial markets? Yes, I should be clear, right, So I think not a lot of people talk about it, and not a lot

of people discuss it. Certainly it doesn't get as much attention in China, and perhaps for good reason, but I think it's an important time to be talking about it more. As you mentioned, uh, it's growing rapidly. There's also an election coming up this year, so I think it's uh, it's time that we had a an India episode. I'm excited.

I'm actually really really interested in the upcoming India elections. Um, they haven't the dates haven't actually been announced yet, but they could be announced basically any day after we published

this episode, because we are recording the day before. India is also due to release its latest government budget and this is like the big set piece from the current administration, the Modi government, um the Nationalist government, and it's gonna be really interesting to see what they do and whether they pull out all the stops to try to win support ahead of the election. So in light of all of this news that's about to happen, I think we

should get started today. We have two guests, two very smart commenters on all things macro and they know a lot about India, my own sex Saria of Macro Risk Advisors and Serenavas tra Vedanta of the Jerome Levy Forecasting Center, both of them joining us here in studio to talk about the election and the economy and the markets. And thank you both for coming in. Thank you, thank you crazy thanks guys. So, uh, let's get started first. Let's

talk about the election it's coming up with. As Tracy mentioned, we don't know the exact dates, but uh, both of you and Snavas, you could start first. What are you going to be watching for in this election? Well, you know, I mean it all comes down to the economy. As James Scottville famously said, it's the economy stupid. And you know, curiously, all the discussion in India is not much about the economy. It's all about you know, combinations, cast politics and all

that stuff. You know, it's it rarely is about the economy. But I actually look back in to the history of the last eleven elections and I looked at you've just simple prediction using a simple model of how GDP has done during the term of the incumbent government compared to the previous five years, and that has predicted nine over the eleven directions. It is the economy stupid, and I think Indian electorate is not given enough credit. They They

are actually pretty savvy in that regard. I think that's exactly right. The participation rate and in the for elections is in the sixties, much higher than say most drop markets, and that is trended higher over time. And the sort of incumbency anti incumbency that Samas mentioned has become more correlated with economic outcomes than social or religious related outcomes than it used to be in the past. So in many ways, I sort of see this as a maturation

of the Indian electorate. It's very easy to forget sometimes that the country is not even seventy years old. Basically starting seven so it's a very very young country, and I sometimes think about it as a parallel to the US maybe a hundred years ago, where you have a sort of state laboratory style model, where you can have massive variation between what's happening in one state. Was another

myke on that point. Could we maybe back up for a second and could you perhaps walk us through how we got to the current point because Moody, you know, Moody won his current position. He sort of ran on a big, big economic platform. Walk us through what he's been promising the Indian electorate and how the governmental system actually works, because as Joe alluded to, like it's quite different to what we see in other places like the US. So at the very high level, the political system or

the government system in India is a parliamentary system. It's sort of a variant of the British system. The voters don't vote for a person like in the US, to become the head of the state. They vote for local elections sort of like essentially, if you imagined, uh, you voted for everybody in Congress, and then Congress came together and picked based on whoever had the votes in a

party sense, who's going to lead the government. The other differences that it's not a two party system like in the US, it's some multi party system similar to say, uh, closer to something which people might be more aware of, like Germany where you have a number of parties come together and then they formed the government and then they picked someone based on electoral math to to be the leader.

More specifically to the current government. So since nine seven and Streams might have a more specific answer on this, I would say more than eight percenter. Time the government has been run by one party, which is the Congress Party UM and only since the late nineties has the b JP become a national level party of any comport um. And they had power from thousand and four previously, and

two thousand and fourteen was when Moody won. And obviously there's a lot of different things that people will promise, but really I think it boils down to two things. One thing between us already mentioned it was a very poor five year run for the economy from two thousand and nine to fourteen, And on top of it, there's a there's extremely negative sentiment environment for the current government

of the time, centered on corruption. So Moody came in and sort of made himself the centerpiece of this idea that he's going to give you good governance which is essentially anti corruption and economic outcomes that are better. And has Moody delivered on that, both the anti corruption and the good governance, you know, I mean, I'm not prevy to all the corruption things. This is always hard to improve. But from what I have heard, the high level corruption

is down for sure. And one of the signs that corruption is down is also that if you look at real estate deals, um, they are down, and real estate prices are down because you can't use mostly real estate deals are none heavily on cash and there's not enough cash in circulation. So in that sense, corruption is down. Yes, And you mentioned and just on this sort of delivery of economic growth, you talked about the strong relationship between

electoral results and growth. Has the growth been strong enough over the last five years that Moody is likely the favorite. No, it is touch and go. I would say it's a toss up. The growth has not real growth has been occaish, but not strong enough to make it a slam dunk. So it's a touch and go. And part of the reason why it has not been is the government actually has been on an austerity osterity bench much opposed to

my advice which I've been consistently writic about. Um, they see coming into two thousand four, when when this government was taking the office, Uh, the India was facing a corporate sector deal everaging those huge amount of corps sets to debt and banks were struggling with non performing loans, huge amounts of nonperforming loans. So basically credit system was shot. So in that environment, the government has has to do

the lifting. If you're going to listen to advice that the government has to consolidate its physical house, which the moding government started doing. On top of that, they took two major very disruptive reforms. One was demonetization and the other was GST, the Generalized Sales Tax. So it's a national national VAT kind of thing, replacing a huge mess of a labyrinthine taxes around the country. So you're doing those kind of reforms at the same time you're tightening belt. Uh,

It's it's not good for growth. I mean, obviously it's remarkable that growth has still been reasonably good given this kind of policy. So I im mentioned in the intro that we have the budget UM coming up. It's supposed to be released on a Friday, February second, and it does. It does feel like both sides UM are are basically sort of ramping up or trying to ramp up their spending. Now, Like I think the opposition party recently was pledging a

minimum income guarantee for farmers. So how how serious are people about I guess you'd call it sort of competitive populist economic policies. Are they actually going to start spending in significant amounts now? Well, you know, I think the populist tide in Indian economy has turned. It was no longer as populist, even though they make these statements, and surely the opposition is far more populist. And I don't

think Moody is as competitive populist. You know. One of his things is he just doesn't give into this kind of a populist blackmail. That's been his gig all the time. You know, that's why all that people have been talking about him, uh stimulating the economy for two or three years now, he has not been doing it because that's not what he believes and he doesn't believe in giving people buying people's vote through Phoebe's He says, look, you

trust my my policies and it's going to work. And um, so maybe he will do something in tomorrow's budget, but that would be very much against his instinct. If you go back to him when he was chief minister in gudarrad Um, he one of the things that he did was he took away free power. You know, one of the things that all governments give is free power to the to farmers. But effectively, what good is free power

if you don't actually get the power? Right, So he said, look, I won't give you free power, but I will ensure that you will get power at a reasonable rate, but it will be reliable and will be supplied all the time. And he'll eventually won on that platform. So you know, I mean, I think I don't think he will compete

on populacy. Well, so on these sort of I guess you could call him supply cide reforms or structure reforms to the economy, whether it's the nationwide tax system to unit by the patchwork, whether it's on just making sure the power systems run. Has he, in your view, been successful on those things? Does he get the structure reforms done that he claims he can do. He has done quite a bit, but there's still a lot to be done if you look at it from a purely macro

point of view, you know, with labor and everything. But I think his major plank is delivering the stuff that most most of us take for granted and developed countries, stuff like you know, toilets and electricity. You know, India's not even even now fully electrified. You cannot believe this, but it's still not fully electrified. So delivering electricity, delivering toilets,

clean water, you know, those kind of things. Um immunization helped, you know, those kind of things, very basic, grass tech stuff. I think that's what his his plank is going to be, is that. Look, I have given you guys this and that's his populous message. So a few points here. One I think where I disagree with Novas because I want to make sure that this podcast is not everybody agreeing on everything. Is that coming into uh there wasn't in my view, much of a choice in terms of what

the government had to do. If you remember at that time, uh Morgan Stanley had coined this popular phrase fragile five and India is one of them, and nobody talks about

it that way anymore. And a large part of that has to do with what the Central Bank did with Rajan at the head at that time and in the central government in adjusting one the oil subsidy policy, and essentially they disentangle the negative feedback loop from higher oil prices to both a bigger deficits of the government and the external sector and generally sort of changing the trajectory

of the fiscal of the fiscal side. Now it is fair to maybe say that, Okay, at what point do you turn that around and you stopped doing that and add sort of government resources that are going to be sort of deaf expansionary, but maybe you can handle it now. That is a fair point of debate. But I don't think that the overall action was entirely unjustified given what the situation on the ground. But this is a difference between an e M and a t M not being

able to do countersecut policy when you want to. If if if India could do counter cecultical policy when they wanted to, they would be the US, but they aren't. The other point would be in terms of what are they likely to do? I do think that they will engage in competitive populism. Maybe there will definitely be a gap between what the opposition is promising and what the the current party is going to promise. But I am while I understand the point that that is not as instinct.

The instincts get over ridden when the election is three months away. I'd be curious to get both your thoughts on the structural reforms that have already been mentioned. The demonetization move was, I guess is now widely considered a pretty unpopular one within India, but typically foreign investors love this kind of thing, right, Like everyone talks about em and the need for structural reform in India is actually doing some of it with some degree of success or

at least conviction. So how is that playing out both domestically and on the international scene. So here's what's happening with It happened with demonetization. Whatever the original logic for it was. I don't know whether that has ranned out, But here's what. What are three good things that have come out of it. First of all, the the decline in growth that came from demonetization was pretty temporary. Um In fact, World Bank has a paper on this based

on using satellite imagery of electricity electricity intensity. Um So, it was a sharp decline but quickly reversed. The benefits are one, tax buoyancy and tax collections in the tax base has increased. Even FD had an articles tax buoyancy. I saw you use that Termainent tweet the other day. Tax boyancy is how fast your revenues grow relative to GDP. So GDP goes okay, so, um so that has improved number one. Number two, the tax collection and the tax

base have improved. Followed up with g ST. The tax base is widened by okay, so that's one. That's a major thing. Um so in future. As Mink just pointed out, India is not the US, and one of the reasons India is not the U S or any e M is not a developed market is because it doesn't have the physical capacity or the tax base to be able

to sustain large programs. Well before we uh go further down this line, what do you say to my exclaim that, look, even if it wasn't the time for austerity due to the external situation, India just didn't have the capacity from too now to do much more on the fiscal front. No, no, I I do. I disagree with that. I think there was more capacity than It doesn't mean that they should have they should be doing five six pers in like China does you know nothing, nothing of the stock, but

significantly more than what they did. So I think it's one of degree. I think I think he probably would agree with that. Yeah, I think maybe two years ago they could have turned things around once it became clear that the currency was sort of generally stabilized, because I don't think foreign investors honestly are looking at, oh my god, the GDP, that the GDP is like thirty business points hire, So I'm not going to take all their money out.

The other thing related to that is to trace these questions around how are foreign investors, you know, sort of generally involved in this market. I think initially she made the point that it's sort of a you know, low connect tipt market foreigners. I don't think actually that's right. On the equity side, it's a forty plus percide ownership by foreigners, so but on the that side it's in

the single digits. So the so the difference is compared to most other em it's the equity ownership that tends to be the capital counter risk as opposed to the dead ownership, and it has very little compared to most countries dollar debt, So it's it's a very low dollarization economy and therefore it can sort of sustain a lot of these other problems. Uh that that happened in this place like Indonesia or Mexico where foreigners on a lot

of bonds, they on a lot of dollar debt. Well, I was just gonna ask, I mean this, uh, summer of eighteen, we saw various countries get in trouble, Turkey, Argentina, coinciding with a pretty sharp jump in um oil prices, and so that really exacerbated some of their external tensions. And I think I think in both of those cases pretty levels of dollarrization in the economy. India also had doesn't produce any oil, has a lot of oil import bills,

but that but they didn't struggles much. Well, the rupee did come under pressure, but they didn't struggle as much because the results were high and you know, the situation

was much better as compared to two. But on the point on equity ownership, you know what has happened is here the one of the consequences of demonetization is what you've done is you push people out of the cash economy, right, So a lot of people who had black money, what they would typically do is either keep it in gold or by real estate, right, so those were the two favored destinations. By pushing people away to more formal sector,

you are actually financializing the economy. So the financial participation in equity markets has increased leaps and bounds since two thou sixteen, when after demonetization there's a big break in mutual fund influence, steady influence steadily increasing. So domestic PARTI patient has actually been a buffer against foreign this year foreign last year. Foreign institutional investors have been actually taking money out of Indian equity, but it was buffered by

by the domestic investors bringing in money. So that's been one of the impact of you know, eventually stabilization of the economy and more formalization of the economy. One thing that's helped on that front, also from the policy side, is that the government pushed for significant increase in simply

linking people to bank accounts. So then thea say five years ago, it was probably in the teens in terms of percentage of people who even had a bank account, let alone people who had credit um and that has jumped massively. So now you have people who are linked into some sort of system and as are maybe shouldn't ask talk about a little bit more is a sort of social security number type system that was Also, this

is not a current government thing. This has been existing and been pushed for the last ten plus years, but it has sort of gone exponential in terms of coverage. So you have a lot of simply formalization of the economy that is taking place, which is not very sexy. It's not a creative to GDP in the moment, it might not even be a creative to GDP in five

years time. But what it is doing it's it's building institutional or state capacity to use a sort of more formal term, that is that sort of board well for putting a floor on growth over time. The on on oil to the earlier point, I make two comments. One, actually, oddly enough, India has become a pretty significant exporter of oil from a product site because there's a big oil industry and actually the biggest company in India's is Reliance, which is an oil producer. So oil is a bit complicated.

But also and this, you know, going back to the fiscal sort of contraction point. The one of the ways that the fiscal is to expand when oil prices went up was because the government essentially would step in and protect the consumer completely, so the consumer would not see any price increases, so you would have garn account increase into more deficit and the fiscal increase dollar for dollar.

They essentially broke that linkage, and that's part of the reason why when you had this big problem in Turkey, you did not have that in India because that the fiscal reform had taken place. And you know, this is part of the small disagreement the Trense and are having here. I think that was the right thing to do, because would it have been better if that spend a little bit more money versus so the currency getting smashed ten percent further, it's not obvious to me that the tradeoff

was wrong. But this was my point about structural reforms and attracting foreign investors versus how the domestic population might

feel about these reforms. At what point does you know, strengthening institutions in various ways, introducing these supply side reforms, at what point does that actually feed into the economy and make everyone feel much better about their own place in the world, because I imagine at some point people start to run out of patients and that's when you come to sort of a crunch point for the government.

And at that point, that's when they might start introducing these sort of competitive populist fiscal policies like we were talking about earlier. These things, you know, they are they are complicated because they what they are doing is they're setting the scene. Doesn't mean that I think growth is going to take off, right, uh. And if you look through India's history, a lot of things have happened by serendipity, but because the structure was in place, they were able

to take advantage of it. Fall into the software boom, right, the the investments in software boom, whether it was in the technical education infrastructure, or whether it was in the domestic software industry which had been developing since the nineties, sixties, seventies, all those things, they were like nobody even cared about those things. And certainly when there was a software boom, oh, certainly all those things became a strength. Right. So it

doesn't but that's a long time. We don't know when these things are going to benefit and how long it will take. And your point is absolutely right. In the meantime, people, the electorate gets angry and and frustrated and and clearly there are huge aspirations in a young country like India, where the youth population is huge. They just don't want simple things like free vs. You know, they want jobs,

They want better prospects and that comes from growth. And yeah, sure, I mean I think that those those pressures are there in democracy, and um, they will spill over. Yes, This is where I would go back to a point that I made earlier about sort of uh, sort of a state laboratory type set up a perfect example of the

question that Tracy had already happened. So, Rajasthan is a state on the west course of India, and there you had a sort of state government which is also a b JP one, but a much more aggressive one in terms of the reforms that they were trying to pursue, including on the labor side, which is one of the sort of biggest problems in India. And they pushed them through, but it came with a cost in terms of for a while depressing growth relative to the rest of the country.

And they were thrown out of power, So you are always sort of dealing with the situation where if you push things too far at the cost of growth in the moment, are you then taking yourself out of doing better forms in the future. So it's it's really an optimization problem that I don't think there's any right answer.

But yeah, it's interesting talking about that sequence because it now strikes me listening to this is kind of the opposite of China, which we were talking about last week, which has just been sort of pedal to the floor growth all around the country for a long time and now is sort of having to deal with these things. I was like, well, what if that model isn't working, we actually have to deal with restructuring and restructure where

the demand came from. It sounds like India is kind of doing the opposite, uh, not going pedal to the metal with growth, but actually trying to address some of these things preemptively too hopefully have a brighter, brighter point in the future. Right. But India also faces, as opposed to China, more balance of payments um constraints compared to China, Right. And the other thing is India goes through these faces

all the time right. I mean it has these pedal to the mental growth phase which it had from two thousand four, but then it became unsustainable. It showed up in inflation and then eventually balance of payment problems, and then the government got voted out because people don't like inflation either. That's one of the beauties of democracy. You get instant feedback, right and so um so then you

get through this period of consolidation. But most of the time what happens is the government that consolidates does not reap the benefits of the consolidation. The same thing happened from the government got vooted up and the next government enjoyed the benefits of the boom that came. You know.

That's that's sadly part of democracy. The other sort of the comparison to China is really interesting and I you know, people make that all the time, a sort of clarification thing that or something that really puts the under stock contrast. Think about where India is in the credit cyclip versus China. Real credit growth over the last seven years has been near zero in India, so it and there's been a

lot of dead consolidation. Even three years ago post TFC in dollar terms, the more npls that recognize in India than China, and you think about these two countries are not actually similar in terms of what their sizes and in terms of definitely not similar in terms of what the credit in the system is. So uh, a lot of this is not by design. I must say that this is not as if there's some set of people are trying to say, Okay, this is how you want to do it. A lot of things happened in India.

I like Tuniversa's word surrendipity. It just sort of happens. Maybe it's because of the democratic structure. Maybe it's because of the sort of you know, EU style. They're like fift you know, I don't know how many states even anymore. They keep changing all the time. Uh, it's very very varied. And it what it does is it reduces the chances of I think, making bad mistakes. It doesn't have the ramp like China US, but it does also it sort of puts the floor in some ways in terms of

how badly things can get screwed up. All Right, So we started this podcast by saying it's the economy stupid. So if the upcoming elections are all about the economy, and then I have to ask who do you think is gonna win? As it's a toss up. I think at this point it's it's a toss up. It's going to be really close, and it's going to come to

the managing the local coalitions. It's no party is going to get enough to form a government on its own, like, so you are going to be I think back to what in India people called coalition politics, which is you sort of cobbled together seemingly people with not lined up ideologies and trying to run a government for five years. Uh, that is the period where when things don't tend to happen quickly enough and people get very frustrated. And I think, uh, the risk of that is higher now then it has

been in in the earlier part of the decade. Well, will you both come on for a after the election rap and then we sort of analyze what happened and then talk about what's next. Sounds good, so we'll plan a follow up screen of oz tour of a Dante and my aunt Sex. Sorry, thank you very much for joining us. I feel like my knowledge is still just like scratching the service. But that's more than it was

this morning. Thanks guys, Thank you Tracy. Well, like I said there, I still feel like I probably know nothing, but maybe a little bit more than I did before. But I did think, I mean, I did learn quite a bit and thinking about all these different structural reforms. You know, so often you hear that term structural reform and it's kind of just some nonsense term that gets thrown around by someone trying to sound smart, or it's

just code word for cutting spending or cutting pensions. But it actually seems like the story in India is sort of far more nuanced and complicated than a lot of discussions about so called structural reform. Yeah, I totally agree, and I feel I feel a little well, I feel like you. I feel like I should know more about India, but sadly, I think most of my knowledge comes from Bollywood movies, which sadly don't have enough of political content

to satisfy a discussion like this. Although I did know that many villages in India do not yet have electricity because I watched that Shower Khan movie where he goes back to his home village and works on electrifying it. Anyway, Sorry, I'm gonna go off on a Bollywood tangent um. It is really interesting. The last bit of the discussion where we were talking about the possibility of a coalition government

posts the elections. That'll be an interesting one because if we think that people aren't satisfied right now under you know, a Modi government that has actually been able to get quite a few things done, it's going to be really really interesting to see how they react to a coalition government where there's a lot of uncertainty and maybe the possibility that the agenda sort of gets fought over and not much gets accomplished. Yeah, it'll be interesting to watch.

And I really liked a Serinavaz's point about how, for better or worse in a democracy, Uh, the government that maybe does the difficult stuff of the structural reforms that aren't short term growth often doesn't get to reap the reward. I mean, I think there's probably you could certainly point to several examples in the US where the president, uh, just who gets credit for the booming economy just happens to be the one who came in after the last one got booted out for a recession that maybe was

caused by something their predecessor did. So Yeah, that's just how it goes. But I'm now feel a little bit prepared at least to watch the election, and I have some knowledge of what people are voting on. It's gonna be great and all. So I know we're recording this before the budget announcement, but to the earlier conversation about whether or not Moody is going to go full on populist economic policy Friday, February second will have revealed a

lot of clues by the time we actually release this podcast. Okay, so when you're listening, go read the articles about what happened a couple of days before. And on that note, this has been another episode of the Odd Lots podcast. I'm Joe Wisenthal. You can follow me on Twitter at the Stalwart and I'm Tracy Alloway. I'm on Twitter at Tracy Alloway. And you should follow both of our guests because there are also two of my favorite people to follow on Twitter for all things India and macro and

politics and just a bunch of other stuff. Uh Serena vostra Vedanta he's at T three on Twitter, and my own Sex Saria He's at my own Sex Saria, so definitely you should follow them, and you should definitely follow our producer Topur Foreheads. He's at for his tea on her as well as the Bloomberg head of podcast Francesco Leave at Francesca Today. Thanks for listening.