A P: The India debate

A high-impact Budget will comfort the global investor

Across emerging markets' focused fund management complexes, there is a great debate raging about India. CIO's and fund managers alike are wondering what they should do with their India positions and weighting. Most are already overweight, not making much money if at all ,confused and nervous.

Wasn't India supposed to be a multi-year secular story? Wasn't reform irreversible? Weren't the election results in MP, Rajasthan and Delhi supposed to have heralded a new era in Indian politics, wherein reforms won votes? Could all this have changed with the fall of the NDA government?

Many of these same fund managers have been visiting India over the past couple of weeks meeting opinion makers and trying to figure out answers to these questions and many more.

Whoever you meet in India whether he/she be a politician, bureaucrat or industrialist they try to convince you that things are not so bad. They point out that Dr Manmohan Singh as the PM and Chidambaram as the FM are a dream team.

Never before has the political leadership of India been this economically astute and savvy. Chidambaram has a reputation for decisiveness and will deliver, the visitors are confidently told.

As for the Left they point you towards West Bengal and the significant economic reform undertaken by the CM of that state. If they have been practical at the state level why will the Left block reform at the Centre is the inevitable answer.

Also people point out that if the UPA has the Left to contend with then the NDA had the RSS/SJM to handle. Let it not be forgotten that this duo was not very pro reform or market friendly either in the beginning.

As for stability most people feel the government will last the full five years, as the Left will under no circumstance pull this government down only to let the BJP in.

As for the fact that many ministers of questionable capability are in power, it is pointed out that so was the case in the last government as well.

The greatest achievement of the NDA was in fostering private-public partnership for infrastructure and this will continue, even the Electricity Act review if any will be minor we are told. As for FDI expect a lot more rationality and consistency in sector wise limits and even though privatisation has changed to disinvestment, the results will be broadly similar.

Why worry about increased public spending as long as it can be financed goes the refrain, and there is a clear roadmap for tax reform.

There is a lot of posturing and pandering to constituencies going on currently the visitors are advised, ignore the noise and focus on action.

While all of the above is good and fine, there remain many seeds of doubt in global investors minds, hence the confusion on what to do.

First of all, contrary to popular perception many global investors have absolutely no feel for Dr Singh and Mr Chidambaram. Many of today's big players were not active in 1991-93, the real heydays of Manmohan and have never met him or even heard him speak.

As for Chidambaram, again most don't know of him and those that do blame him (unfairly in my view) for the Pay Commission disaster, associate him with the failed UF coalition and are not really aware of his reformist credentials.

Thus while the coming together of Dr Singh and Chidambaram is a dream come true for most Indians, most foreigners do not know enough to share this view. Just reading up about these two great gentlemen will never give an outsider the same level of comfort as someone who has lived in India.

While most foreigners have by now read up on West Bengal and appreciate the work done by its CM there, they cannot quite understand why the Left insists on making contradictory statements at the Centre.

While investors understand that the Left has no interest in the capital markets, still why make statements which have effectively reduced the market capitalisation of the country by more than

Rs 50,000 crore, unless you mean it. Whether you agree with the ideology of the Left or not, its leaders are intelligent and honourable people of high integrity who undoubtedly understand the consequences of their statements. Why would they consciously reduce the financial wealth of this country unless they meant to see through on their statements and promises?

As for the fiscal, no investor in his right mind has any issues with increased public spending in health and education as long as the fiscal situation is under control. The concern here is really in a higher fiscal deficit leading to a spike in interest rates, which could reverse the entire virtuous circle currently driving higher consumption in the economy.

If it were so easy to fund higher public spending through higher revenues then why hasn't it been done yet is the question investors have. What new secret formula for revenue will the new FM have devised and that too within 45 days of assuming office?

If the Kelkar committee report is the answer, investors can justifiably ask that if the previous government which appointed Dr Kelkar was unable to implement his report what gives you confidence Chidambaram will. Can all this public spending be financed without the corporate profit share of the GDP coming down?

As for stability, investors worry about the series of state elections over the coming two years culminating in the West Bengal elections, will these not lead to serious strains in the alliance? Can Dr Singh grow into his job, become assertive and handle coalition politics is another debate altogether.

Isn't the change in the airport privatisation rules a sign already of reduced interest in FDI, this is high-priority infrastructure after all and still so many issues? What about this talk of affirmative action? If it actually gets to Parliament as a bill, who will want to be seen as opposing it?

I am personally more optimistic than the global investor consensus. Hopefully Chidambaram will deliver a high-impact Budget and if we can sustain economic momentum, for which a good monsoon and Budget are both critical, then within three to six months investors will start embracing this government, warts and all.

Strong economic growth washes away many doubts. However if the economic momentum were to break for any reason then most people will dash for the exit and refuse to give any benefit of doubt.

Thus this government has to realise that its first Budget is absolutely critical. Many investors are sitting on the fence wondering whether to preserve whatever profit they have and run or hang on through this pocket of political volatility.

People are willing to ignore the noise and focus on action but only till the budget. It will be the clearest demonstration of economic direction, policy priority and the ability of Chidambaram to lay his own course.

If this were to be a disappointment, my sense is that most global investors would give up and trim their India weightings. A poor Budget will also short-circuit the economy through its impact on corporate and consumer confidence, any hit to confidence triggering a negative economic spiral.

As to what ultimately happens only time will tell, but the stakes resting on this Budget are very high indeed, not only for the stock market, but for the broader economy as well. Let us hope Mr Chidambaram can deliver.