In a pre-budget special on India less than two months ago (Feb. 24, 1999) Developing Trends boldly predicted that: economic reforms were in the offing, interest rates were set to decline, the stock market was set to rally (and one should be 3 units long as opposed to the “normal” one unit), the rupee would continue its stable run, and that political uncertainty did not matter – indeed, the more political uncertainty there was, the more reform oriented would the major political parties become. All of the above forecasts have come out to be accurate – the uncertain BJP government announced a complete reform of excise taxes, and partial reform of customs taxes; the Reserve Bank of India (RBI) cut interest rates by effectively more than 1 percent; the stock market rallied 15 percent, and the rupee stayed stable at 42.5, indeed marginally strengthened to 42.4.
Until the proverbial fat lady began to sing! On April 4, Dr. J Jayalalitha, the mercurial, enigmatic (and confused?) leader of the AIADMK, a major ally of the ruling Bharatiya Janata Party (BJP), broke off her relationship.
These latest political developments have now brought the “final” Oxus forecast into play – political uncertainty. We did not think that we would be tested so soon on our forecast – but we have. What now?
It is our view that this present political uncertainty will result in a greater political certainty in the very near future. It is also our forecast that the BJP will survive the confidence vote scheduled for next week. However, the chances of a general election in the fall (around October ’99) have considerably gone up. But the “certainty” is in the continuity of economic reform policies, and the continuing irrelevance of Indian politicians – a la Italy.
The Indian budget for the fiscal year 1999-2000 (April to March) will be presented on Feb. 27 by the Finance Minister, Mr. Yashwant Sinha. Unlike the West, budget documents in developing countries, and especially in India, are a major policy exercise. They can, and do, change the fortunes of the economy. And they are politically potent as well. This year’s budget is the second presented by the ruling Bharatiya Janata Party (BJP), the first having been presented on June 1, 1998.
Budget time is also occasion for hyperbole, as analysts analyze expectations in terms of “the most critical budget” or a “do-or-die” budget etc. Oxus believes that the second hyperbole is actually representative of the political reality. Of the fifty odd budgets presented, this will be only the eighth presented by a non-Congress government, and only the second presented by a non-Congress non-Congress- clone government. The first truly non-Congress budget, and the first BJP budget, was a disaster; and the political fortunes of the BJP declined with the economy and culminated in its spectacular defeat (at the hands of the Congress) in state elections in November. If the BJP messes up again, it is likely to be curtains for them, at least until Congress messes up the economy again! So, the budget is critical, for BJP’s fortunes, and those of India.
This issue of Developing Trends, while being an India budget special, is nevertheless concerned more with politics – of the BJP, Congress and economic reforms. Also discussed is the common (but lazy and incorrect as it turns out) refrain that political instability is bad for economic reforms. Analysis of such instability since 1984 suggests that the most important danger for implementation of economic reforms is political complacency, which comes from political stability.
It pays to know about the election results before they happen. Which is why market players go to great lengths to derive information about who is going to win, and what policies such winners are likely to follow. At Oxus, and with our flagship newsletter, Developing Trends, we have consistently believed in the adage "to know politics is to profit from the market". Hence, this Special Issue on the forthcoming national (Lok Sabha or LS) elections in India.
While opinions matter, an analytically based opinion may be even better. The present election is being fought by two major alliances – the incumbent Bharatiya Janata party (BJP) alliance now termed the National Democratic Alliance or NDA, versus the 114 year old Congress party led alliance. The Prime Ministerial candidate of the BJP is the present PM, Mr. Atal Bihari Vajpayee, while the Congress party is led by the widow of a former PM, Mr. Rajiv Gandhi.
The clash is more between competing personalities than between competing ideologies. However, there is an ideological component – the Congress party believes that it is always preferable to be ruled by a member of the Nehru-Gandhi family. In this regard, there is the somewhat pathetic sight of Sonia Gandhi being accompanied by her two children on her campaign trip with no Congress leader anywhere in sight! Where have all the leaders gone…
The fact that it is a personality battle is actually good news for the markets. As Oxus has consistently been arguing for the last year, India has moved into the policy certainty phase while political uncertainty still remains. Both the major groups – BJP+ and Congress+ - believe in economic reforms; indeed, the only uncertainty is about who will push reforms faster. But political uncertainty is still present – or is it ?
This is Developing Trends (DT) second anniversary issue of the Asian financial crisis. In the issue dated August 24, 1998 we stated: “The Chinese word for crisis means both danger and opportunity…China will not devalue its currency in the near future…The dollar has topped against the Asian currencies…the dollar has also topped against the majors...the world economy is likely to emerge from its trough soon…No matter what the criteria, Asian equity values are at extremely attractive, and yes, rock bottom levels…the Indian rupee is likely to be a non-event – buy Indian debt and stock market ”. Oxus was just a trifle bit early, as the Long Term Capital Management crisis hit the markets in September 1998. The Asian markets soon made us right by rallying, by shocking amounts, in both currency and stock markets, from Oct. to Dec. 1998. In late December 1998, Developing Trends again issued a strong recommendation to stay long, and buy, the Asian financial markets. In addition, we made a case for becoming overweight the Indian stock market, and remaining flat $/rupee. “Oxus now believes that clients should not only go long the Indian market, but that they should do so aggressively.” The events in the financial markets have vindicated our recommendations. But what about the real economy ? Are not markets going through irrational exuberance again ? Were not the markets wrong about East Asia in 1996 and early 1997? Why won’t they be wrong again?
