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Musings from the political capital
Politics – expect more uncertainty and turmoil
Mid-term elections possible but not probable
Politics could remain an overhang on the equity markets
Several government initiatives – PMGSY, RTE, NRHM – progressing well
Our recent interaction with policy makers and political journalists gave us interesting insights
into their thought process in light of the increasing political turmoil and public discontent.
While our takeaways do not provide much room for immediate optimism, there are several
silver linings – in terms of rapid progress in some of the infrastructure initiatives and some
social sector schemes.
Politics: More uncertainty and turmoil
After revelation of a slew of scams and failure to execute any reform measures, the UPA
government has exhausted the political capital acquired after its unprecedented electoral
mandate in 2009. Recent surveys point to significant decline in public mood towards the
government.
Policy momentum could remain slow…
As the government is focused on political survival, pro-growth policy measures are unlikely
for the rest of the government’s tenure. The opposition may be expected to benefit in such a
political environment but it seems to lack the sagacity to capitalise on the government’s
weakness. While probable, mid-term elections are unlikely as no political party seems to be
prepared for it. As such, politics could remain an overhang on the equity markets in the
medium term.
… but its not all gloom and doom
Despite the increasing political dysfunctionality, several government initiatives are
progressing well, particularly the rural roads programme (PMGSY), National Rural Health
Mission (NRHM) and Right to Education (RTE). Furthermore, with the shift in public
priorities, improving governance and delivery of public services have become a political
imperative at the state level. Even the traditional laggard states like Chattisgarh and Bihar
have improved their governance.
DMIC: A new paradigm in urbanisation
Urbanisation and industrialisation had hitherto been neglected by the Indian policy makers.
The Delhi Mumbai Industrial Corridor (DMIC) plans to set up seven manufacturing cities
along the Dadri to the JNPT railway freight corridor. The public sector will acquire land, plan
and fund trunk infrastructure and obtain environmental and other clearances, while the
private sector will set up manufacturing units. A trust fund of USD$5b has been set up for
the purpose.
Equity markets could continue to underperform in the near term
The combination of macro-economic headwinds, earnings downgrades, continuing political
headwinds and India’s valuation premium relative to Asia ex-Japan (20-25% P/E premium
based on BNPP and FactSet consensus estimates) appears to portend further
underperformance by India. We believe the valuation of the Indian market could bottom at
12.5-13x FY12E P/E (from 14.5x now), implying a floor level of 16,500-17,000 for the
Sensex.
We met up with several policy makers in Delhi
In a two-day trip to Delhi, we met up with several policy makers and political journalists
to gauge their thoughts on the future course of government policy in light of the
increasing political turmoil and public discontent.
1 Dr Narendra Jadhav (Member, Planning Commission; Member, National Advisory
Council (NAC) and Former Chief Economist – RBI)
2 Dr N C Saxena (Member, NAC; Former Secretary – Planning Commission)
3 Amitabh Kanth (CEO, Delhi Mumbai Industrial Corridor Development Corporation)
4 M J Akhbar (Editorial Director, India Today & Headlines Today)
5 Sunil Jain (Journalist, Financial Express).
In summary, our interaction with policy makers and journalists makes us believe that
there will be more political uncertainty and social turmoil over the next few years.
However, there is room for optimism. Certain government policies, particularly those
designed to ensure ‘inclusive growth’ – NRHM and Right to Education – and
infrastructure – rural roads (PMGSY) and Delhi Mumbai Industrial Corridor (DMIC) –
seem to be progressing well. The key takeaways from our discussions are:
1 With a succession of scams and the lack of policy execution, the UPA-II
government’s approval ratings have declined.
2 With its political capital depleted, the government could increasingly focus on
political survival. As such, there may be minimal policy tailwinds for the rest of the
government’s term.
3 Mid-term elections possible but not probable. None of the major political parties
seem prepared for the elections.
4 Contrary to popular perception, the NAC does not seem to be a homogenous body
of strongly leftist thinkers. Several members have push back against populist overreach.
For instance, some NAC members appear to be paying attention to curbing
fiscal profligacy. Even on agricultural land acquisition, the NAC’s definition of
“public projects” appears to be broad (any project that generates employment),
enabling land acquisition by private sector for manufacturing facilities.
Dr Narendra Jadhav (Member, Planning Commission; Member,
National Advisory Council)
The 12th Five Year Plan (2012-17) will have a broader focus – “faster, more
inclusive and sustainable growth – than the 11th plan, which focused on
infrastructure. The aim is to publish the approach paper to the 12th Plan by end-
November and the full plan document by 1st April 2012.
The NAC is a body formed to address the ‘deficit of vision’ for the social sector.
Contrary to conventional wisdom, it is not a homogenous body of bleeding hearts.
There are significant differences of opinion among the NAC members. For
instance, the current proposal in the National Food Security Bill (NFSB) to provide
above poverty line (APL) families with 5kg of grains per person at no more than
50% of minimum support prices splits the difference in the views of the activists
(universal entitlement to all households at INR1-2-3 for millets-wheat-rice
respectively) and that of the economists (no subsidised food grains to APL
families).
Public Distribution System (PDS), through which the government distributes
subsidised foodgrains to the poor, needs to be significantly reformed to enable it to
distribute much large entitlements under the NFSB.
The government estimates that there are around 65 million actual BPL families,
while the number of BPL cards issued is 120-130 million. To minimise leakages
and ensure portability, the government wants to issue biometric smart cards to
households. This would enable a household to purchase its low price foodgrain
requirement from any fair price shop, and would not tie a household to a particular
fair price shop.
N C Saxena (Member, National Advisory Council: Former
Secretary, Planning Commission)
With its failure to meet the Millennium Development Goals, the Government of
India has increased its involvement in social sector, even in the areas that have
been allocated to the states by the Indian constitution.
One of the biggest problems in improving social sector performance is the lack of
monitoring. The government, for example, does not know which states have
improved their record in child nutrition.
The Unique ID (UID) is not a silver bullet to improve delivery and efficiency of
public services:
Given India’s scale, it is difficult to universalise the UID; and
UID cannot be used to identify deserving beneficiaries for government
schemes. The Indian government lacks the administrative capacity to identify
the deserving beneficiaries.
Cash transfer of subsidies is difficult in the Indian context:
Given the lack of financial inclusion (the number of rural branches has
declined), it is difficult to transfer cash widely; and
Rural population is not habituated to using debit cards for transactions.
Rural employment scheme (NREGA) is a ‘bad idea’ as it does nothing to improve
agricultural productivity or create durable assets.
The NAC is not opposed to land acquisition for ‘public purpose’ (defined as a
project which generates employment).
The NAC has proposed that the New Acquisition Bill sharply increase
compensation paid to land-owners (6x registered price of land) if state uses
eminent domain to acquire land. For the first time, households whose livelihoods
depend on the land acquired (eg. tenant farmers and share croppers).
As land acquisition is in the concurrent list of the Indian constitution, the central
government can set rules binding the minimum level of compensation if the state
uses eminent domain to acquire land.
Amitabh Kanth (DMIC)
Urbanisation has been ignored by independent India. Last new city – Chandigarh –
was set up in the 1950s.
The DMIC plans to set up seven large manufacturing cities (one each in Uttar
Pradesh, Rajasthan, Madhya Pradesh, Haryana and Gujarat and two in
Maharashtra) in its first phase along the dedicated freight corridor. The DMIC plans
to complete the trunk infrastructure in all the cities by 2019.
The respective state governments will acquire land, while the DMIC will develop a
master plan for these cities and construct the trunk infrastructure using PPP. The
private sector will then be invited set up manufacturing units within these cities.
A revolving fund of USD5b has been set up by the central government for urban
planning, land acquisition, obtaining environment and other clearances. The fund
will be leveraged by borrowing of multilateral development institutions like World
Bank and ADB.
Almost 70% of the land acquisition of the planned city of Dholera, Gujarat, is
complete. The size of the proposed city (540 sq km) makes it the biggest planned
urban development in the world.
Political journalists
The ruling UPA government has exhausted its political capital after a succession of
scams and failure to execute any bold reform measures.
Recent surveys point to 7-8ppt swing in public approval away from the UPA.
With its focus shifting to political survival, proactive pro-growth policy measures for
the rest of the government's term are unlikely.
While it remains a possibility, mid-term elections are unlikely. No political party
(including the NDA) is prepared for the polls.
Because of the loss of public trust in the political establishment, populists (such as
civil society activists or religious leaders) have emerged to fill the void.
Consequently, there may be more social turmoil over the next few months
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Musings from the political capital
Politics – expect more uncertainty and turmoil
Mid-term elections possible but not probable
Politics could remain an overhang on the equity markets
Several government initiatives – PMGSY, RTE, NRHM – progressing well
Our recent interaction with policy makers and political journalists gave us interesting insights
into their thought process in light of the increasing political turmoil and public discontent.
While our takeaways do not provide much room for immediate optimism, there are several
silver linings – in terms of rapid progress in some of the infrastructure initiatives and some
social sector schemes.
Politics: More uncertainty and turmoil
After revelation of a slew of scams and failure to execute any reform measures, the UPA
government has exhausted the political capital acquired after its unprecedented electoral
mandate in 2009. Recent surveys point to significant decline in public mood towards the
government.
Policy momentum could remain slow…
As the government is focused on political survival, pro-growth policy measures are unlikely
for the rest of the government’s tenure. The opposition may be expected to benefit in such a
political environment but it seems to lack the sagacity to capitalise on the government’s
weakness. While probable, mid-term elections are unlikely as no political party seems to be
prepared for it. As such, politics could remain an overhang on the equity markets in the
medium term.
… but its not all gloom and doom
Despite the increasing political dysfunctionality, several government initiatives are
progressing well, particularly the rural roads programme (PMGSY), National Rural Health
Mission (NRHM) and Right to Education (RTE). Furthermore, with the shift in public
priorities, improving governance and delivery of public services have become a political
imperative at the state level. Even the traditional laggard states like Chattisgarh and Bihar
have improved their governance.
DMIC: A new paradigm in urbanisation
Urbanisation and industrialisation had hitherto been neglected by the Indian policy makers.
The Delhi Mumbai Industrial Corridor (DMIC) plans to set up seven manufacturing cities
along the Dadri to the JNPT railway freight corridor. The public sector will acquire land, plan
and fund trunk infrastructure and obtain environmental and other clearances, while the
private sector will set up manufacturing units. A trust fund of USD$5b has been set up for
the purpose.
Equity markets could continue to underperform in the near term
The combination of macro-economic headwinds, earnings downgrades, continuing political
headwinds and India’s valuation premium relative to Asia ex-Japan (20-25% P/E premium
based on BNPP and FactSet consensus estimates) appears to portend further
underperformance by India. We believe the valuation of the Indian market could bottom at
12.5-13x FY12E P/E (from 14.5x now), implying a floor level of 16,500-17,000 for the
Sensex.
We met up with several policy makers in Delhi
In a two-day trip to Delhi, we met up with several policy makers and political journalists
to gauge their thoughts on the future course of government policy in light of the
increasing political turmoil and public discontent.
1 Dr Narendra Jadhav (Member, Planning Commission; Member, National Advisory
Council (NAC) and Former Chief Economist – RBI)
2 Dr N C Saxena (Member, NAC; Former Secretary – Planning Commission)
3 Amitabh Kanth (CEO, Delhi Mumbai Industrial Corridor Development Corporation)
4 M J Akhbar (Editorial Director, India Today & Headlines Today)
5 Sunil Jain (Journalist, Financial Express).
In summary, our interaction with policy makers and journalists makes us believe that
there will be more political uncertainty and social turmoil over the next few years.
However, there is room for optimism. Certain government policies, particularly those
designed to ensure ‘inclusive growth’ – NRHM and Right to Education – and
infrastructure – rural roads (PMGSY) and Delhi Mumbai Industrial Corridor (DMIC) –
seem to be progressing well. The key takeaways from our discussions are:
1 With a succession of scams and the lack of policy execution, the UPA-II
government’s approval ratings have declined.
2 With its political capital depleted, the government could increasingly focus on
political survival. As such, there may be minimal policy tailwinds for the rest of the
government’s term.
3 Mid-term elections possible but not probable. None of the major political parties
seem prepared for the elections.
4 Contrary to popular perception, the NAC does not seem to be a homogenous body
of strongly leftist thinkers. Several members have push back against populist overreach.
For instance, some NAC members appear to be paying attention to curbing
fiscal profligacy. Even on agricultural land acquisition, the NAC’s definition of
“public projects” appears to be broad (any project that generates employment),
enabling land acquisition by private sector for manufacturing facilities.
Dr Narendra Jadhav (Member, Planning Commission; Member,
National Advisory Council)
The 12th Five Year Plan (2012-17) will have a broader focus – “faster, more
inclusive and sustainable growth – than the 11th plan, which focused on
infrastructure. The aim is to publish the approach paper to the 12th Plan by end-
November and the full plan document by 1st April 2012.
The NAC is a body formed to address the ‘deficit of vision’ for the social sector.
Contrary to conventional wisdom, it is not a homogenous body of bleeding hearts.
There are significant differences of opinion among the NAC members. For
instance, the current proposal in the National Food Security Bill (NFSB) to provide
above poverty line (APL) families with 5kg of grains per person at no more than
50% of minimum support prices splits the difference in the views of the activists
(universal entitlement to all households at INR1-2-3 for millets-wheat-rice
respectively) and that of the economists (no subsidised food grains to APL
families).
Public Distribution System (PDS), through which the government distributes
subsidised foodgrains to the poor, needs to be significantly reformed to enable it to
distribute much large entitlements under the NFSB.
The government estimates that there are around 65 million actual BPL families,
while the number of BPL cards issued is 120-130 million. To minimise leakages
and ensure portability, the government wants to issue biometric smart cards to
households. This would enable a household to purchase its low price foodgrain
requirement from any fair price shop, and would not tie a household to a particular
fair price shop.
N C Saxena (Member, National Advisory Council: Former
Secretary, Planning Commission)
With its failure to meet the Millennium Development Goals, the Government of
India has increased its involvement in social sector, even in the areas that have
been allocated to the states by the Indian constitution.
One of the biggest problems in improving social sector performance is the lack of
monitoring. The government, for example, does not know which states have
improved their record in child nutrition.
The Unique ID (UID) is not a silver bullet to improve delivery and efficiency of
public services:
Given India’s scale, it is difficult to universalise the UID; and
UID cannot be used to identify deserving beneficiaries for government
schemes. The Indian government lacks the administrative capacity to identify
the deserving beneficiaries.
Cash transfer of subsidies is difficult in the Indian context:
Given the lack of financial inclusion (the number of rural branches has
declined), it is difficult to transfer cash widely; and
Rural population is not habituated to using debit cards for transactions.
Rural employment scheme (NREGA) is a ‘bad idea’ as it does nothing to improve
agricultural productivity or create durable assets.
The NAC is not opposed to land acquisition for ‘public purpose’ (defined as a
project which generates employment).
The NAC has proposed that the New Acquisition Bill sharply increase
compensation paid to land-owners (6x registered price of land) if state uses
eminent domain to acquire land. For the first time, households whose livelihoods
depend on the land acquired (eg. tenant farmers and share croppers).
As land acquisition is in the concurrent list of the Indian constitution, the central
government can set rules binding the minimum level of compensation if the state
uses eminent domain to acquire land.
Amitabh Kanth (DMIC)
Urbanisation has been ignored by independent India. Last new city – Chandigarh –
was set up in the 1950s.
The DMIC plans to set up seven large manufacturing cities (one each in Uttar
Pradesh, Rajasthan, Madhya Pradesh, Haryana and Gujarat and two in
Maharashtra) in its first phase along the dedicated freight corridor. The DMIC plans
to complete the trunk infrastructure in all the cities by 2019.
The respective state governments will acquire land, while the DMIC will develop a
master plan for these cities and construct the trunk infrastructure using PPP. The
private sector will then be invited set up manufacturing units within these cities.
A revolving fund of USD5b has been set up by the central government for urban
planning, land acquisition, obtaining environment and other clearances. The fund
will be leveraged by borrowing of multilateral development institutions like World
Bank and ADB.
Almost 70% of the land acquisition of the planned city of Dholera, Gujarat, is
complete. The size of the proposed city (540 sq km) makes it the biggest planned
urban development in the world.
Political journalists
The ruling UPA government has exhausted its political capital after a succession of
scams and failure to execute any bold reform measures.
Recent surveys point to 7-8ppt swing in public approval away from the UPA.
With its focus shifting to political survival, proactive pro-growth policy measures for
the rest of the government's term are unlikely.
While it remains a possibility, mid-term elections are unlikely. No political party
(including the NDA) is prepared for the polls.
Because of the loss of public trust in the political establishment, populists (such as
civil society activists or religious leaders) have emerged to fill the void.
Consequently, there may be more social turmoil over the next few months
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