Market Illusions and Modi Mania

Sukumar Muralidharan

29 March 2014

Notions about India’s 2014 general elections being determined in the stock market may be exaggerated, but not by much. In fact, there is an unmistakable correspondence between successive upward notches in the stock market in recent times and every step towards political pre-eminence by one of India’s most polarising political figures, Gujarat chief minister Narendra Modi. The only point worth arguing over is whether this correspondence is a matter of design or merely the outcome of investor sentiment – what Prime Minister Manmohan Singh has in a tired rhetorical trope borrowed from the economist John Maynard Keynes – long described as “animal spirits”.

The Bombay Stock Exchange’s Sensitive Share Price Index (Sensex) showed an upswing in April last year, which seemingly coincided with Modi’s grand coming out, when he broke out of his confinement in the local milieu of Gujarat as a person who still had much to answer for about the 2002 riots that gutted the state under his watch. There was one more upswing in July, soon after Modi was named head of the central election panel of the Bharatiya Janata Party (BJP). Then came the September exuberance. And we have not yet come to the euphoria of 2014, induced by the opinion polls which have already crowned him with the victor’s laurels.

Even Modi’s most ardent follower, to be sure, would hesitate to put down these movements entirely to his aura. Since the rally of the stock market in April 2013, there was a near catastrophic fall in May, precipitated in the main by an announcement from the U.S. Federal Reserve (Fed) that it would rethink the easy money policy of pumping dollars into the economy, enabling Wall Street to play the world’s markets. This was followed by a partial rally in July in the Indian markets and an end to the indecision in September, when the Fed affirmed its intent to continue bond purchases and ensure a world awash in dollars would not have to search for a rapid cure to its addiction. 

That these policy decisions from diverse corners of the globe coincided with stages in Modi’s ascent should be put down to happenstance. No responsible commentator should read any deeper meaning there. Since the media frenzy began mounting though, there have been a series of opinion poll findings through January and February, which take Modi love – always a subjective sense – into an objective finding that the party he leads would probably win a fairly decisive majority in the general election. These findings – all deeply questionable for various reasons -- were just the tonic that the markets required to set course towards new heights.

If investor confidence was really driving the markets, there was a curiosity about this phase of exuberance that media commentator Swaminathan Aiyar drew attention to. The impetus for the upward market movement was coming almost entirely from foreign institutional investors (FIIs) whose frenetic buying outpaced the keenness of the domestic share holders to sell. That disproportion in money power seemingly created a bias towards an upward rush of prices in the stock market, but fell short of being an index of political confidence in the promised new regime. It was a situation in which “those who can vote (in the coming election) are quitting the market, while those who cannot vote ... are getting in”. This could be described in various ways, but it was not as Aiyar noted, exactly suggestive of “voter euphoria”.

To take another key price indicator which (after a fashion) represents a reverse barometer of the national mood: the price of gold after rising to dizzy heights during the second five year tenure of the Manmohan Singh government, has since the early months of 2013, shown some degree of moderation. Gold is the safe haven that investors and small savers seek when times are turbulent. Yet the moderation in gold prices could not really be read as an index of confidence since administrative measures had intervened. The import duty on gold was raised from two to four percent in March 2012, then again to six percent in January 2013 and eight percent in June that year. Those were policy moves that gained little popularity with India’s burgeoning and increasingly voluble middle-class, which in its mood of rising resentment, could easily represent them as part of a continuum of measures taken by Manmohan Singh’s United Progressive Alliance (UPA) government to thwart the legitimate aspirations of India’s productive strata.

Gold has a unique position in the Indian consciousness. Early in 1991, the Reserve Bank of India (RBI) gathered up a large part of its gold reserves and dispatched the precious hoard to the vaults of a London bank, ostensibly to ensure that international creditors did not call in the nation’s external debt. The global oil crisis of 1990 had pushed India’s payments situation to near breaking point, announcing to a political leadership rather innocent of the ways of global finance, that the borrowing binge of the 1980s would exact a heavy price.

Official spokespersons in moments of subsequent candour, would admit that the drama of hocking the country’s gold was confected with specific intent to prime the public mood for a radical change of policy course. It was, well before Naomi Klein, the Canadian political theorist and campaigner coined the term, the “shock doctrine” in action. The drama had the intended effect. Manmohan Singh, sworn in as Finance Minister in P.V. Narasimha Rao’s cabinet in July 1991, began the change of course with little political dissent or credible challenge in terms of practical options. Some of the middle-class insecurity spawned in the year of living dangerously was evident in gold prices going up by close to 25 per cent in the year that followed. But the fever for gold subsided rather fast. Over the next four years that Manmohan Singh reigned over the Finance Ministry, the price of the metal increased cumulatively, by a mere 15 percent.

Manmohan Singh as Prime Minister exerted a very different manner of influence over India’s gold psychology. Between the time he left the finance ministry and the time he took office as head of the UPA coalition, the price of gold increased by just about 15 percent. When the UPA coalition observed the one-year anniversary of its assumption of office, the price of gold stood roughly 5 percent higher. In the next year, it went up by an astounding 65 per cent. Since then, reckoning in terms of successive anniversaries of the UPA, there have been just two years of relative moderation. Today the gold price in the Indian market is roughly five times what it was when Manmohan Singh assumed prime ministership. If gold fever is a negative barometer of public confidence in the management of the economy, the vote clearly has been a resounding negative for the UPA, especially in its second term.

For all the emotional ties that bind the Indian middle-class to the barbarous relic, the stratospheric heights the metal has achieved in recent times suggest a spillover into a state of neurosis. There may be an element of rational calculation in the investment decisions made in gold. But in 2012, the economy driven by all its “animal spirits” seemed on the brink of an abyss that seemed deeper and much darker than the worst that 1991 threatened, and official spokespersons had to consciously disavow the positive rhetoric, repeatedly describing gold as an “unproductive asset” in public statements, and rapidly escalating duties on its import.

The causes of this rethink were fairly clear. As the Economic Survey issued by the Finance Ministry just ahead of the Union Budget in 2013 put it, imports of gold had grown by 11.2 percent in volume terms and 39 percent in value terms the previous year. In its contribution to India’s imports, gold ranked next only to petroleum and its derivatives, vital energy inputs for India’s new economy. Gold in fact, contributed to 30 per cent of India’s deficit on trade account that year. And it was plausibly argued that the feverish buying of gold was forcing the Indian rupee to new lows as global traders sought to maintain a rough parity with the price the Indian consumer was willing to pay.

In the official view, the higher duties imposed on gold imports beginning 2012 were an absolute necessity to stabilise the economy. Corporate India though, had a different perception. In its annual report for FY 2012-13, Titan Industries Ltd –which has a reputation for making precision watches but earns over 90 percent of its revenue from jewellery – reported that the year had turned out to be “very special” because the “rise in the price of gold started tapering off quarter after quarter during the year, and finally crashing in April (2013) to April (2012) levels”.

Titan is a part of the Tata group, one of India’s most storied business empires. It seemingly had ample grounds for worrying that its own position had eroded as the gold jewellery market turned adverse. This was partly because “regional players” which should have remained confined to their narrow domains, “started exhibiting much larger ambitions”. “Companies were starting to get listed, much larger stores were being opened across the country and substantial investments were being made in marketing”. And then most disappointingly of course, the policy regime had turned unfavourable with the duties on gold import being raised. This sober stocktaking was followed by a positive signal to Titan shareholders of better things to come. There was reasonable prospect, the company announced, of a reprise of the decade-old story of “India Shining”, when the “feel good” factor was seemingly the principal driver of the economy.  “India Shining” as a story, Titan declared, “provided the tailwind” for its jewellery division for much of the previous decade and that momentum was “still very much there even if less pronounced”. In fact, the company was prepared to assure its shareholders that there would be “some acceleration in this story, post 2014 elections”.

“India Shining” is in the lore of the marketing profession, remembered as a case of a nation being branded for sale in global markets as a worthwhile place to invest. Its origins as a marketing trope are not yet properly recorded, in part because the media which ardently promoted the mythology is not quite keen to recall how it went overboard with a propaganda device founded on quicksand. The mythology really begins in the last months of Atal Behari Vajpayee’s tenure as prime minister in 2003, though few then thought that the reign of the affable and avuncular head of the BJP-led government was in imminent danger of ending. The Indian economy had just come off a very bad year with a monsoon failure in 2002 – perhaps the worst in close to two decades – devastating livelihoods across large swathes of the country. Probability laws favoured a good monsoon the following year and indeed, rainfall in 2003 was most beneficent both in quantity and geographical spread. Within a couple of months of the official withdrawal of the monsoon – usually announced by the India Meteorological Department at mid-September – the signals were clear. The economy would enjoy in statistical terms, a record year of growth. The statistics though, could not quite capture the trauma that large numbers in the country were just recovering from. Nor could they even begin to understand the terms on which the recovery was negotiated by each of the drought hit individuals and households.

Disregarding this apparent matter of detail, two senior advisors in economic policy to the Vajpayee government, Vijay Kelkar and Ajay Shah, just two weeks before the Diwali festival that heralds months of supposed comfort after all the hard work of the sowing and harvest, wrote a front-page article in the Indian Express which in retrospect needs to be preserved as an instance of branding gone disastrously wrong. Titled “Why is this a very happy Diwali? Top answer is reforms”, the article published on 22 October 2003 argued for a decisive rejection of the “cynical view” that the “rain-gods” were solely responsible for the new economic dynamism which had created a “feel good” sentiment all around. Momentous changes were underway and these would not be reflected in the reflexively cautious academic or official understanding because of “lags in the statistical system”. The corporate sector was doing well and so too was manufacturing. There was “clearly .. something deeper going on: it (was) not just (about) a good monsoon”. And with all the evidence considered, the answer to the “whodunit” was very clear: “the reforms did it”. Indeed, said Kelkar and Shah in perhaps an unintended compliment to the process that Manmohan Singh had begun as Finance Minister twelve years before, “for many years, the reforms process was criticised as pain and no gain. The results are now manifestly visible”. Having tasted the rewards of all the labours that had gone into the reforms, the authors exhorted an unidentified collective – undoubtedly intending the whole country, including the smallholder farmers just coming out of a drought-induced disaster -- to “come together and put our shoulders behind similar far-reaching reforms” in areas that had not gained from the enlightenment till then.

“Feel good” was soon the slogan on the lips of every candidate of the BJP and “India Shining” became the party’s claim to a renewed term in office. It was a sales pitch that the media joined in eagerly to promote. On 13 April 2003, as the campaign for the general election to parliament entered its final month, the Times of India (ToI) carried an extended interview with Prime Minister Vajpayee, which was in effect, a celebration of his tenure and an anticipation of more to come. The preface to the interview put it with absolute clarity: “Two years ago it would have been difficult to imagine Atal Behari Vajpayee heading the next government. Today, on the eve of election (sic), he is clearly the front-runner. Not only this, his stature has grown and the grand old man is seen (as) the biggest political brand. Sachin Tendulkar of politics, you might say. He’s the one setting the agenda – be it on economic reforms, contentious issues like Ayodhya or peace with neighbours”.

In an editorial accompanying the interview the same day, the ToI celebrated Vajpayee’s greatly adaptable and acceptable qualities as a political figure under the headline “Vanilla Vajpayee”. “Atal (sic) was the flavour of the month”, the newspaper observed, since he was very much like vanilla ice cream. There may be “bigger, bolder flavours”, but it was ultimately, “good old vanilla” that would prove the winner, because it could blend in harmoniously with any other flavour or mood. By these criteria, Atal-ji (sic) had nurtured his image carefully, so that he appeared to be all things to all people. 

“India Shining” proved a monumental dud in terms of the electoral rewards gained by its most breathless proponents. The Congress, having approached the election with something akin to a sense of dread, stitching up regional alliances that it was by doctrine averse to in a desperate bid to stem the BJP tide, was initially disoriented by the magnitude of its victory. For those steeped in ardour for the Congress dynasty, the verdict was an unequivocal affirmation of its leader Sonia Gandhi's claim to prime ministership.  Reacting with almost visceral disdain for this proposal, the BJP fielded its most theatrical elements to loudly rail against any prospect of the Italian-born Sonia Gandhi assuming the post. Vajpayee went into a seclusion that soon became permanent retirement from politics. And his successor and close political associate Lal Krishna Advani soon stepped up with his own judgment about the election results. There was no positive mandate inherent in the verdict, he declared. What was evident instead was a national outcome that was an aggregate of several conflicting regional verdicts. Advani cautioned against reading the election results as a "mandate for any alliance, much less for any single party and certainly not for any individual". Having won a mere seven seats more than the BJP, the Congress was obliged to follow the path of "maximum consensus" not merely within its alliance, but also with the opposition.

In the immediate aftermath of the election results, it rapidly became accepted wisdom that the BJP-led alliance had been turned 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 honouring the political mandate could mean economic suicide.

The arithmetic of the parliament that emerged made the Congress dependent to a great degree on the sustenance of the parties of the left, which had turned in their best performance in a long time. And spokespersons of the left were quick to affirm that they would be keenly interested in ensuring a course of policy congenial to their interests. On 14 May 2004, foreign institutional investors (FIIs) that had taken strong positions in the stock exchanges, pulled out in droves, driving down the Sensex by 330 points, or six percent. Under a front-page headline that read “Red Alert: Markets See Red as Sonia’s Red Ally Flashes Red Card at Sell-off”, the ToI reported next day, that the drop in the Sensex was the sharpest in over four years and had wiped ₹ 57.3 billion off the aggregate value of the market. 

The didactic purpose of the mass evacuation from 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 percent in a mere twenty-two minutes. After emergency measures to staunch the haemorrhage, the Sensex closed the day 565 points lower. The erosion of value was estimated by the ToI the next day at ₹ 133 billion. Under a headline that described an ostensible “quit India” movement by the FII’s – a phrase deeply evocative of a moment in India’s anti-colonial struggle – the ToI reported that Manmohan Singh, still described as Finance Minister designate, had called up the incumbent in that position, Jaswant Singh, to ensure that effective measures were taken to “stop the stock rot”.

It was that very day that Sonia Gandhi gave up her putative claim to the prime minister’s post, nominating Manmohan Singh instead to lead the complex political coalition that had emerged in the 2004 general elections. And Manmohan Singh was instantly seen as a rather amenable figure from the perspective of the markets. On 20 May, the ToI reported with some satisfaction on its business pages , 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. Because of his status as an unassuming bureaucrat who had been propelled into a position of great authority in an act of benediction, Manmohan Singh was never really his own man. Within the Congress party, it was the accepted wisdom that despite the lustre displayed in patches, most parts of the country remained in a slough of despond. A semblance of social and economic equity had to be restored if the democratic polity was to be sustained. The Congress party, with Manmohan Singh reluctantly playing along, saw the answer in revisiting the populist commitments of the 1970s and early-1980s. This meant providing a stimulus to the rural economy in an effort to directly address poverty.

The National Rural Employment Guarantee Act (NREGA) was passed in 2005, assuring every willing individual at least a hundred days of manual unskilled work, in the 200 poorest districts of the country. The fiscal year 2006-07 was the first full year of implementation of the National Rural Employment Guarantee Plan (soon named after Mahatma Gandhi and now known as the MGNREGP). The programme was in 2008-09 extended to the entire country at the urging of Rahul Gandhi, the Congress party prince looking for a platform to prop up his destined role.

Till the early years of the UPA’s second term, which began after a fairly convincing electoral triumph in 2009, there was no hint that the fiscal commitments made in 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 for every Indian citizen. The right to education would be the first step, for which a possible outlay of ₹ 2.31 billion over three years would be set aside. Following this, the next two priorities would be to operationalise the 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.

It is accepted by wide consensus that the Indian economy in 2003-04 moved to a new trajectory of near double-digit growth.  There is also general agreement that one of the most significant contributions to the new growth momentum came from the rise in gross domestic savings. After being in negative territory for years together, public sector savings turned positive in 2003-04 and increased strongly the next few years. Also turning in a strong performance was private corporate saving. The year 2008-09 brought about a partial reversal of both these trends, since private corporate earnings were deeply eroded by the global economic downturn, and the compulsion of fighting the recession through a fiscal stimulus obliged the public sector to undertake a number of fresh expenditure commitments.

A sudden blossoming of foreign investor interest was another notable change in the Indian growth profile in this period, portrayed in the media as a signal of confidence in the Indian economy. The real picture has been rather mixed. Far from being a real breakthrough, the surge of money coming into the Indian markets was probably just a temporary high, arising from a lucky number drawn in the casino of global finance. After a decade-and-a-half of indifferent or only sporadic interest in the Indian market – as destination for both direct and portfolio investment – foreign capital began flowing in to Indian markets in significant magnitudes from about 2003. The sudden upward spike in fact, begins at just the time that the “India Shining” mythology is beginning to gain traction.

Except for insiders, it is never easy tracking the entry and exit of speculative money into the stock markets, though the index of share prices offers a reasonable metric. If the Sensex were the guide to locate that specific moment when India became a hot investment destination, the 2003 monsoon was it. By conventional understanding, accepted in both the folk and scientific accounts, the monsoon sets in over the state of Kerala on India’s south-western coast on the first day of June. There are years in which it announces a delayed arrival; even years when it fails to appear for weeks together, by which time panic is the normal response among large masses of India’s people.

In 2003, the monsoon arrived on time and showed the early vigour that promised quick progress and plentiful rain. In June 2003, the Sensex, after hovering in the 3000s range for close to ten years, only shooting up to the mid-4000s in brief episodes which were quickly brought down to reality, increased by close to 10 percent. The next month it further went up by a like magnitude. And then there was seemingly no stopping it. By December 2003, it had crossed the 5000 mark for the first time and was bidding fair in April the next year to top 6000 – at just the time that the “India Shining” mood was peaking and the affable and avuncular Vajpayee’s claims to a fresh mandate were being widely described as irresistible. 

Vajpayee’s banishment into political oblivion by a most inconvenient electoral mandate led to a few months of sobriety on the markets. The earlier panache, though, was rediscovered with the reassuring figure of Manmohan Singh in charge. By November 2004, the Sensex had actually topped the 6,000 mark. Conquest of the next psychological peak of 10,000 came in January 2006.

In the midst of all this, there was little room for considering certain evident sources of deeply vulnerability. Portfolio investments though large in volumes, remained volatile, with large inflows typically being accompanied by large withdrawals. Thus after registering a historic high of 2.22 per cent of GDP in 2007-08, net portfolio investments (i.e., inflows less outflows) fell to a negative figure the following year as investors pulled out in the wake of the global economic meltdown. Inflows recovered since, but to this date, have continued showing a certain eccentricity and unpredictability that leaves Indian capital markets in a seeming state of unending confusion.

What is classified as FDI too is a very ambiguous entity. Rigorous research to uncover the reality behind the mythology, indicates that much of the inflow of FDI originated in known tax havens, especially Mauritius. A large part of the inflow was for acquisition of shares in existing companies and could not be deemed to have added to productive capacity. And over 70 percent of the money coming in was destined for the services sector – notably real estate and construction and financial services – as against just over 20 percent in manufacturing.

As interesting as the Indian growth story since 2003-04 – perhaps more so if the connection between the two were to be drawn out – has been the escalation in credit creation. The chain of linkages here is very simple: large volumes of money coming in from overseas would under free market logic, have pushed up the value of the Indian currency. To stop this, which would have possibly led to a severe contraction in all export-oriented sectors, the RBI had to continually buy up the foreign currency coming in, pumping equivalent rupee amounts into the banking system. Flush with this injection of liquidity, the banks in turn pumped up their lending against real estate and consumer durables, marking out for special attention the aspirational middle class that was suddenly finding its dreams within reach.

It all turned sour in rather quick time. The share markets began to show signals of incurable fickleness from about early-2008 and the money that was otherwise seeking returns from investment in assets, began flowing into the commodity markets, pushing up prices in a persistent inflation that lasted till at least the middle of 2013. The engine of credit creation was pulled in by the RBI which found the risks of inflation far more serious than dampening the free spirits of the aspirational class. Demand for the glittering new symbols of affluence – automobiles and real estate – began to falter and the large corporate entities that had made hugely debt-leveraged investments in these sectors began disposing of assets to just stay solvent. Credit portfolios of the banks turned problematic. Of the mountain of non-performing assets held by the country’s banks today, a very large proportion is contributed -- according to top investigators -- by some of India’s most storied corporate firms. From about late 2010, a cascade of revelations began to emerge about the unsavoury political deals that had been made by the UPA administration to gift-wrap scarce resources – such as the communications spectrum and mining lands -- for the untrammelled profiteering of chosen corporate cronies.

Despite the greater than anticipated majority won in 2009, public endorsement for the UPA, at least in terms of middle-class sentiment, was soon in free fall. In April 2011, in a strategic time interval between India’s victory in the cricket world cup and the beginning of a month-long carnival of uniquely Indian provenance – called the Indian Premier League of cricket – the anti-corruption campaigner Anna Hazare led a virtual insurrection of the middle-class, demanding a legislation to deal with official malfeasance that would have virtually handed over dictatorial powers to an unelected council of the virtuous. That mass referendum through the media, disavowing all residual trust in the UPA dispensation was carried out one more time and with more devastating effect in August that year, by a newly constituted social coalition that gathered under Hazare’s benign gaze. The illusions were crumbling and Manmohan Singh and his entire leadership team, left floundering for a credible response that would salvage public confidence.

Political and economic managers of the UPA from then on proved increasingly reluctant to emerge from the cocoon of comforting formulaic thinking into which they had withdrawn. But as elections neared, the compulsion to stick with populist commitments unveiled in the UPA’s first years grew stronger. In July 2013, the UPA pushed through a presidential ordinance making food security a basic entitlement for every Indian citizen. Late the following month, both houses of parliament passed the relevant law. The markets went instantly into a swoon and the rupee plunged to a new low. Arun Shourie, the BJP ideologue who oversaw the disinvestment process as a minister in Vajpayee’s cabinet – whether out of anxiety at the political capital that the Congress could harvest or out of sincere commitment to fiscal prudence – called for the food security bill to be scrapped.

The Congress response to a deep erosion of faith from its middle-class constituency, spoke of a stoic determination to risk the alienation of this most voluble strata, weather the adversities of a bad press, and stake its political future on the potential electoral rewards of staying the populist course. This has been one of the dominant themes of the elite insurrection against the UPA: that the effort of the productive sections which have put India on the world map go unrecognised while the political class – as the now common term of art puts it – entrenches itself firmly in the seats of power on the strength of a clientelist relationship with the poor. A highly liberalised tax regime has been an integral part of the economic reforms package since 1991. Tax compliance has perhaps increased but so too has the sense of entitlement. The Indian middle-class has begun demanding proportionate attention to its specific interests for all the tax rupees that it pays.

If an alternative discourse emerged, it remained on the fringes. From early-2012, the UPA began to be seen as sunk in terminal paralysis, pulled in opposing and mutually contrary directions because of the diversity of constituencies it had to serve. The elite discourse then seemingly switched towards identifying and promoting the political leadership that would be responsive to its needs. When Narendra Modi travelled to Delhi in April 2013, he encountered demonstrations on the streets, but enraptured crowds within the halls where he addressed gatherings of the elite. And at a policy dialogue organised by a media house that had just passed into the control of the country’s biggest industrial conglomerate – Reliance Industries Ltd – he was given an hour on stage to put forward his perspectives for the future. This was followed by a setpiece interview in which he came up with all the right answers: pouring subtle scorn on the Planning Commission which is regarded in business circles as a useless inheritance of the days of centralised bureaucratic planning, talking up the benefits of foreign direct investment in various sectors, including defence, and making a case for reform of the labour laws to enable rapid changes and turnover of factory workers and office staff. There were few of the hard edges of Modi’s early political persona on view. Just the seemingly inclusive rhetoric of development that nobody can quite challenge without sounding like a person right out of the dark ages.