Category: BJP

Poll Bound: Narendra Modi’s Currency Play Has More Political Value Than Economic Benefit

November 13, 2016
The Narendra Modi government’s decision to demonetise the Rs 500 and Rs 1,000 notes in circulation will have three distinct political outcomes, two of which will be advantageous for the ruling Bharatiya Janata Party (BJP).
The first, and instantly visible, impact of the late evening announcement on Nov. 08 by prime minister Modi himself is a reversal of the news cycle. Dire discussions on the polluted Delhi air and its impact on foreign investment? Gone. The unfortunate ripple effects from the army veteran’s suicide? Buried. Doubts over the BJP’s chances in the forthcoming state elections? Dismissed.
Elections to state assemblies in the first half of 2017 are crucial for the ruling party, especially since they have been smarting from the defeats in Delhi and Bihar in 2015 and West Bengal this year. The battleground states this time include Uttar Pradesh (UP) and Punjab. UP, as things stand, will see a four-cornered battle.
Demonetisation immediately changes the narrative. The BJP has been trying to stitch together a patchwork support base among the Dalits, Muslims and other disenfranchised segments of UP; their votes are crucial to winning the state. Demonetisation will, in some limited fashion, help in providing a new talking point, one that takes potshots at the privileged and mendacious classes.
Given the fact that the government and the Reserve Bank of India now plan to re-introduce the Rs 500 and Rs 1,000 notes, albeit with a new design and enhanced security features, along with the creation of a new Rs 2,000 note, the entire objective of the exercise seems to be targeted at blindsiding counterfeiters, not so much hoarders of cash. Whichever way you look at it—“surgical strikes” on either counterfeiters who aid terrorism or black-money merchants—it is a narrative ripe with opportunity for rhetoric and election sloganeering.
State elections also point to advantage no. 2. The element of surprise will probably inconvenience the other three parties. The use of cash in Indian elections is an accepted fact and some of the parties are rumoured to be large users of cash. This surprise element would have surely nixed their ground-level strategies. In short, it will be back to the drawing board for most of these parties.
It can be argued that this is a problem for even the BJP. Modi emphasised in his speech: “Secrecy was essential for this action. It is only now, as I speak to you, that various agencies like banks, our offices, railways, hospitals, and others are being informed.” But, the question remains: would he have taken such a momentous decision without consulting the BJP’s command-and-control centre, the Rashtriya Swayamsevak Sangh (RSS)? In many ways, strands of such a policy action have been appearing in the media for a while, as editorial advice or even harking back to the example of the USA which discontinued high-denomination currency notes in 1945.
The question over the consultative process gains further momentum when viewed from a political survival standpoint. The demonetisation exercise will adversely affect small traders and shopkeepers, a segment of society which has traditionally remained a strong BJP vote bank. Most businessmen in this segment depend on cash transactions and PM Modi’s move is bound to discomfit their operations. Given this bloc’s importance, there must have been some serious back-room calculations about going ahead with such a measure.
And a calculated move it is. One probable clue lies in the fresh issuance of Rs 500, 1,000 and 2,000 denominations after a brief hiatus. So, if you ignore the short term spike in chaos, inconvenience and rhetoric, the cash economy is bound to make a comeback in a couple of months, albeit in the form of newly-designed currency. That should give the traders and small shopkeepers some succour.
But, it will require the party apparatus to reach out to various trade associations and federations to communicate with them, assuage them, and address their concerns in the short term.
This will be doubly necessary given the other three-alphabet headache that’s hurtling towards small businesses at breakneck speed: GST. The new tax system envisages a complete overhaul of tax assessment, calculation and reporting. That chaos is in the not-too-distant future, it will create huge turmoil with the trading class having to register with the tax authorities, re-skilling themselves in figuring out the new tax structure, as well as chasing tax credits from authorities. As an example, shopkeepers and small businesses in Malaysia took to the streets early this year, frustrated at the complexity involved in complying with GST.
This is political issue No. 3 for the BJP and its spiritual bosses at RSS.
In the final analysis, the whole exercise seems designed to replace, rather than demonetise (which is to suck out completely and abolish), high-value notes. Counterfeiters will be hurt, middle-class families will be discommoded, and some currency hoarders will be disrupted, but the cash economy will return to a new normal in a few months. But, only after the UP elections.
This article originally appeared in Quartz on November 10, 2016, and can also be read here

Is the ‘Modi Premium’ Wearing Off in the Stock Markets?

May 27, 2015

As Modi completes one year in office, a sense of despondency pervades the customary reviews that ritually accompany such an event. Rumblings of discontent have emerged from various stakeholders and stock markets have taken the lead in signalling disappointment with his performance.

As Prime Minister Narendra Modi completes one year in office, a sense of despondency pervades the customary reviews that ritually accompany such an event. Rumblings of discontent have emerged from various stakeholders, including Corporate India. But it is the stock markets that seem to have taken the lead in signalling disappointment with his performance.

The bellwether index S&P BSE Sensex, comprising 30 stocks, has witnessed a major erosion in values over the past few weeks. From its all-time peak of 29,681.77 points achieved on January 29, 2015, the Sensex hit a low of 26,599.11 on May 7: a sharp drop of 3082.66 points (or 10.38%) in slightly over three months.
The capital market’s rebuff is symbolic: it tries to aggregate what’s going on in different parts of the economy and transmits its sentiment through one single number. And going by its recent behaviour, there seems to be plenty that is wrong, or perceived to be wrong.
Foreign portfolio investors, an influential investor segment in the capital markets, are a visibly disgruntled lot and they have been letting off steam by selling en masse. In the first 10 trading days in May (till May 18), FPIs were net sellers to the extent of $2.306 billion. FPIs enjoy disproportionate influence over Indian capital markets, primarily because they bring larger volumes to bear than domestic institutions. Low retail participation in the capital markets — either directly or indirectly — also keeps Indian markets shallow.


Tax uncertainties

These FPIs decided to head for the exit because of continuing tax uncertainty. Finance minister Arun Jaitley’s 2015-16 Budget had unequivocally clarified that tax will not be levied on the capital gains of FPIs in the current year. But, unfortunately, there was no assurance that past cases won’t be re-assessed. And, true to form, tax authorities sent notices to various FPIs to pay up for past gains. That precipitated widespread resentment, with some FPIs even going to court and, of course, venting their spleen by selling Indian stocks.
The minister, presumably rattled by the exodus and the bad publicity all this was generating, has gone out of his way to placate FPIs. Apart from putting all reviews and fresh cases on hold, he resorted to the time-tested stalling tactic: he appointed a committee. In effect, he has kicked the can down the road and bought some time. This incident also illustrates how FPIs have emerged as a crucial constituency, with an uneven share-of-voice.
Unsatisfactory corporate results is the other reason why Sensex is volatile. Many companies — especially in the mid-cap segment — have reported disappointing results for 2014-15, signifying that demand for goods and services continues to remain weak. A report in Mint has highlighted how Q4FY15 sales of 142 companies included in BSE-500 (and for which results were available) has grown at the slowest pace in 16 quarters since Q1FY11.
This is evidence that the economy is still far from recovery. The Index for Industrial Production has grown by only 2.8% during 2014-15. Consumer durables manufacturing contracted by 12.5% during the year, compared with 2013-14, signifying the lack of purchasing power in the economy.
Matters have been made worse by the unseasonal rain in many parts of the country this year, destroying hectares of standing crop, which typically comes to the farm markets in April. This is likely to further dampen demand for consumer goods in the rural areas. The stock markets are also trying to capture this trend.


Oil prices fall opportunity lost

One can argue that this is sheer bad luck and the government cannot be held responsible for this catastrophe. While that is true, it is also a fact that the government didn’t rush to reap the dividends of fortuitously low oil prices when it came to power. Since then oil prices have climbed 50%, spooked by the continuing West Asian crisis and some shale oil wells in USA shutting down.
There could be another charitable explanation for the unusually turbulent Sensex: that expectations from PM Modi might have raced way ahead of reality, especially after the depressing paralysis that gripped the economy in UPA-II’s second term. The common beef (pun intended) is that even the current BJP-led government has plumped for incrementalism, rather than bold policy measures they had promised.
There are two sides to this debate and both can be deemed valid. But, what is undeniably true is that the stock market has already started discounting PM Modi’s premium, even before he completes a full year in office. And, though the Sensex is still up 14.78% from where it was a year ago — it closed at 27,687 on May 18, 2015, compared with 24,121.74 on May 16, 2014 — it seems that market participants have already watered down their expectations and moderated their hopes about a magical, almost fantastical, turn-around in the economy.


Courtesy:



and then subsequently reprinted in 

Working The Budget: Before India Goes Business As Unusual, Fix Patchwork Policies

August 2, 2014
One of the promises made by the BJP in its election campaign was to change the mode of governance. This pledge found resonance with voters because the dominant mode of governance and service delivery was felt to have been appropriated by the privileged, which included the politician-bureaucrat-businessman nexus. Narendra Modi’s rhetoric of “minimum government, maximum governance” promised to upend the superstructure. This meant giving the short shrift to business as usual.
But it would appear that it’s not so easy to extirpate the old ways of doing business. The decision to impose a punitive capital gains tax on debt mutual funds (MFs) has classic Indian bureaucratic response to market initiatives written all over it. Household and corporate savings have been exiting bank deposits and heading for fixed maturity plans (FMPs) and debt MFs. The government wanted to stop this because there was a tax arbitrage at play here. But what they failed to see is that there is also an issue of real returns here.

The problem is simple: interest income from bank deposits attracts income tax. After deducting tax and the rate of inflation from interest income, the real return received by depositors is negative in most cases. There are two options thereafter for investors: move their funds to physical assets, such as gold or property, or move to more efficient financial instruments. Since investment in FMPs and debt MFs qualifies for lower taxes, many depositors forsake bank deposits in favour of debt MFs.

The tax arbitrage could be eliminated by improving the real returns provided by bank deposits. In the short term, this can be achieved by aligning tax breaks on bank deposits and debt MFs. But this may be unrealistic and could create an undesirable precedent. In the longer run, though, the only way to provide positive real returns is to ensure that inflation doesn’t erode returns.

While the arbitrage opportunity has now been plugged, there is still no guarantee that all the money invested in debt MFs or FMPs will necessarily return to bank deposits. What the government does not realise is that the money moving from bank deposits to debt MFs stays in the system and is still available for productive investments; money that moves away to physical assets is lost to the economy.

In the end, to foster savings in the economy, the government will have to take a call on what kind of tax breaks it wants to provide on which kinds of financial instruments. The additional Rs 50,000 deduction from income allowed for investment in certain specified instruments suffers from the same syndrome: most of the instruments included in the list yield only negative real returns.

On another note, finance minister Arun Jaitley in his Budget exhibited some concern for the health of his fellow citizens by imposing a punitive levy, the so-called “sin tax”, on cigarettes. Excise duty has shot up from 11% to 72%. But the levy is limited to only cigarettes of 65-mm length and below. So, the message from the government: cigarettes over 65mm length, the “king-size” brands, are safer than the smaller ones.

What about competing tobacco products? The tax on gutka and chewing tobacco has been increased from 60% to 70%. But on pan masala, the duty has gone up from 12% to only 16%. What gives? This is policy, wittingly or unwittingly, creating a new arbitrage window. There have been reports over the last couple of years, ever since states started banning gutka sales, that these sachets of oral tobacco have been masquerading as pan masala. There is now a tax incentive for gutka to impersonate pan masala. Anybody doing research on the “law of unintended consequences” is sure to find a wealth of material in Indian government policy pronouncements.

If it was public health that was causing Jaitley anxiety, it is intriguing why he spared beedis. Perhaps political expediency requires courting some large beedi manufacturers, whose support is crucial for the upcoming state assembly elections.

Jaitley’s arithmetic for estimating revenue and expenditure numbers for 2014-15 have also invited some degree of scepticism. Even if we tamp down on the cynicism, it is clear that a meaningful Budget can be presented only in February 2015.

Published in The Economic Times on August 2, 2014: goo.gl/sKzcta

Threats: An Age-Old Tactic To Garner Votes

April 21, 2014
Nothing works like threats. Didn’t somebody say something like that, in some movie? Well, life’s imitating art out here in Election-land.
Election season gets the worse out in Indian politicians (actually, it could be any politician but my knowledge is limited to desi chaps). #Elections2014 are no different. There are no issues, campaigns are bereft of ideas and stump speeches are usually full of invectives and expletives. The manifestos are photocopies of each other, the candidates selected by the two central parties feature the usual rogues’ gallery. They draw their support from smaller parties that wear mendacity on their sleeves.
It is, therefore, not unusual that most parties have resorted to threatening voters. The message is short, dire and bone-chilling.  Every political party is doing it. Complaints are pouring into the Election Commission. Here are just a few examples.
Sharad Pawar’s nephew Ajit Pawar has embarrassed his uncle’s Nationalist Congress Party by trying to browbeat voters from a West Maharashtra village into voting for his cousin Supriya Sule. The alternative: we’ll cut off water supply to the village. Can he deliver on the threat? He is Maharashtra’s deputy chief minister, as well as minister for water resources. He has the habit of putting his foot squarely where he shouldn’t: once, when faced with complains of water shortage, he retorted by asking whether he should pee into the dams if there was no water in them. He obviously denies ever having made any of these statements.
Bhartiya Janata Party’s far right, feeling somewhat neglected and forlorn, has started asserting itself. One obscure chap from Bihar — Giriraj Singh — recently trotted out the old chestnut again: he exhorted all those opposing BJP’s PM candidate Narendra Modi to migrate to Pakistan. The BJP leadership seemed a bit red-faced, but Giriraj remained unrepentant. 
And then, as if in a competition to better that, leader of Vishwa Hindu Parishad — a BJP compatriot party — Pravin Togadia suddenly roared on Sunday that people belonging to minority denominations should be evicted from residential areas populated by the majority.
Actually, both Giriraj Singh and Pravin Togadia seem to be acting out a common strategy — shepherding back the potential far-right elements who had probably started drifting during the past few weeks. It is possible that Modi’s narrative (as well as BJP’s under Rajnath Singh) had shifted from hard-core Hindutva to a slightly more ameliorative tone. Those occupying the centre and the left might not have noticed the change, but for those dreaming of a khaki-coloured future regime this might be palpably disturbing.
Threats — subliminal or even overt — are common during elections. The Congress used it to great effect during the 1984 general elections. Advertising agency Rediffusion used a subtle (and not-so-subtle) communications campaign to plant horrific images of violence and terror in the voter subconscious.
So, which threat is more effective? The answer, my friends, will be known on May 16, 2014.

Finals Are In 2016; Next Year Is Just The Semi-Final

October 29, 2013
Last time I said it, it sounded like a terrible cliche. But, the six months that lie between now and the general elections scheduled for March-April 2014 do indeed seem like a lifetime. And, despite the fact that a major indicator — results of the elections to four state assemblies in November and December, 2013 — is still in the works, some indications of the April 2014 hustings are already acquiring a distinctive shape.
So here is the prognosis (and I reserve the right to update it as the months roll out): 2014 will be more like a semi-final and the final will be played out only in 2016. Which means the new government — whichever combo it is — will not survive for too long. It will be done in by its own inherent contradictions, much like some of the previous short-lived formulations.
There is a piece in FirstPost already hinting at it (read it here) also, though the overall thrust of the piece is about the souring relations between the Gandhi family members and prime minister Manmohan Singh. But, we’ve already covered it in an earlier posting about how and why the ordinance was canned by Rahul Gandhi.
So, why am I expecting an anti-climax in 2014?
Look at it this way. Narendra Modi and his followers are desperately trying to convert the elections into a presidential format — an exclusive battle of wits between him and Rahul Gandhi, or NaMo versus Raga, somewhat like the next highly-billed heavyweight bout at Las Vegas. BJP hopes this format will help it iron out some of the wrinkles presented by a fractured Indian polity, notably the rise of regional parties and coalition politics of the past 20 years. From all available accounts, the Modi camp wants at least 200 seats and the only way to go about it is to pitch him mano a mano with the leader of the ruling party.

Narendra Modi (left) and Rahul Gandhi (Photographs courtesy PTI Photos)
Yet, too many regional issues might still take precedence. For instance, the Telangana-Seemandhra fissures will surely be priority Number One for the Andhra voters, Delhi be damned. So, despite Chandrababu Naidu hitching his wagon to the NaMo star early in the race, Jagan Reddy might be holding most of the aces. In Bihar, while Lalu has been put away, the usual concerns of poverty, lawlessness, entitlements, etc will still dominate the campaign rhetoric. Uttar Pradesh will be battling the after-effects of the Muzzafarnagar riots. Post Phailin, voters in Orissa are still picking up the pieces. Mamata will bring a number of MPs from West Bengal to the negotiating table, even if they’re a diminished lot. In Maharashtra, Raj Thackeray’s MNS and Sharad Pawar’s National Congress Party are both gearing up to corner as may negotiating chips as possible.
These factors have already been put into play and the BJP’s attempts to turn this election into a NaMo-versus-RaGa spectacle might not yield any dividends. At least, not yet.
Congress, on the other hand, leaves behind a terrible record of governance. Their feeble attempt to win votes through the cash entitlement route can be a winner but not if some other narrative overwhelms it. And, BJP is trying to do just that with its unwavering focus on corruption during the UPA years. Congress has also conveniently found its straw-man in Manmohan Singh, and is fervently hoping that RaGa’s family connections (hence his continuing references to his father’s and grandmother’s assassinations), his faux earnestness and his boyish charm will win the day.
However, both NaMo or RaGa will have to contend with a number of regional satraps with increased negotiating power. Expect a flurry of post-poll arrangements, tie-ups, understandings. And, this is likely to erode the decision-making powers of whichever government occupies the corner office. This is not an altogether welcome development, given that the country is looking forward to some decisive actions, some measures that will help nudge the economy back into growth mode.
Alongside, expect prolonged and public bickering over who gets which ministry. Most political parties still view governance as an entitlement to loot. This is evident from the fact that most leaders have inducted their sons and daughters as their successors. This rather unseemly squabbling over fish-and-loaves of office will also be another reason for the dissolution of the government in power.
On to 2016 then. In the meantime, enjoy the show. And keep an eye on that chap called Arvind Kejriwal. He seems to be just warmin’ up.

The Ordinance Gambit: Strategy Or Tactic?

October 3, 2013
All in all, Congress must be licking its chops for seemingly executing a neat political strategy. But there could be some deleterious collateral damage lurking in the shadows. It now turns out Manmohan Singh will have to become the fall guy for having persisted with an ordinance that allowed elected legislators with criminal convictions to continue in Parliament.

For those who tuned in late, the Cabinet passed an ordinance on September 24, 2013, called Representation of the People (Amendment and Validation) Bill, 2013. The ordinance sought to negate a Supreme Court ruling of July 10, which said that legislators would be disqualified immediately if convicted by a court for a sentence of two years or more. The immediate concern for rushing ahead with an ordinance – instead of waiting for Parliament to reconvene – was apparently the imminent sentencing of RJD chief Lalu Prasad Yadav (an important ally for Congress ) and Congress politician Rasheed Masood. The BJP – which was ambivalent initially –  weighed its assets against its criminal liabilities and figured opposing the ordinance made more sense.

Then as suddenly as the ordinance was sprung on an unsuspecting public, Congress vice-president Rahul Gandhi parachuted into a press conference being addressed by Ajay Maken and announced his displeasure with the ordinance. He called the ordinance “a complete nonsense” and suggested that it be “torn and thrown away!” There was a collective gasp from across the country because this comment was made when the prime Minister was in USA. As soon as he returned, in a show of amazing alacrity, the same Cabinet withdrew the ordinance on October 2. (for a complete chronology of events, read here)

Manmohan Singh & Rahul Gandhi in happier times. Pix courtesy of AFP

What does all this indicate? Here are a few stray thoughts and my take on the entire episode:

* This was a deliberate ploy. It was planned and executed to make Rahul Gandhi come out smelling like roses. The casualty will be the Cabinet members, who are all older than the young party vice-prez. The upshot, as Congress poll managers would want it to appear: the geriatric Cabinet wanted to protect status quo but the vigilant youth forced the change.  This hypothesis seems credible because one suddenly noticed Congress party lightweights, considered to be members of RG’s charmed circle, openly tweeting against the ordinance even before the dramatic press conference (read it here). It seems unlikely that, under normal circumstances, they would have had the gumption to openly criticise an ordinance cleared by the Cabinet. Unless of course they had instructions from somebody senior in the party.

* The party went ahead with the ordinance in the belief that all parties would support it. But, with elections so near, BJP stole some of the television thunder by publicly venting their ire against the ordinance. They even met the President to express their disappointment with the proposed legislation. Public mood seemed to be turning against the ordinance; there were rumblings within other political parties too. Civil society was agitated. Sensing that the mood was turning, Congress must have decided to turn the liability into a show of virtue.

The collateral damage could be Manmohan Singh who comes out of this episode looking rather sheepish and servile. He also emerges as a political relic, charging down the road with a legislation that favoured a venal brand of politics. He is also likely to be branded – subtly of course – as the man who was responsible for wrecking the economy and somebody who now must make way for the impatient and ambitious youth.  This is unfortunate and undeserved for MMS – it’s like a bum ride into the sunset for somebody who went through public life with his probity and value system intact.


But there could be one proverbial fly in the ointment – the deliberate slight to Manmohan Singh still raises issues about dynastic politics. This may not go down well with young voters and, as sure as the sun rises from the east, the Opposition isn’t likely to let this opportunity slip away. In the end, it will be interesting to see who and what influences the young finger on the button.