The counter view, if the elephant starts moving

Yesterdays election results obviously were not taken positively by the markets as the leading party of the UPA at the centre did not perform well and the goldilocks scenario of the Samajwadi Party having to depend on the Congress for forming a government in Uttar Pradesh did not play out.

This has led to apprehensions that the reforms will go into the backseat and Fiscal consolidation will not happen. As a result the country will not move forward.

However it is important at this stage to analyze why the voters have voted as they have and what the long term implications are. Over the last two years most people in the country have been tired of the continuous news flow on corruption and scandals. This has obviously had a clear impact on the election results where the frustration of people has come out. This is especially true in a scenario of high inflation and high interest rates. Inflation has hit people across the board and the lack of growth initiatives has also hurt the industrialists, businessmen, richer folk etc.

Taking a negative view of the election results when people came out in record numbers to vote for change is a very narrow view to take. The important takeaway from the election results is that the people of Indiawant development now and an improvement in their quality of living. Freebies, subsidies, announcements of free giveaways have a limited impact as that has become an old strategy and it does not have a lasting impact. What will a person do with a computer or a gas stove or a TV if there is no electricity? The freebie like loan waiver, offering reservations etc does not impact things beyond a few days. It is building strong infrastructure, improving the quality of life of people, providing them with proper water supply, sanitation, educational facilities, improving productivity of agriculture and businesses is what matters in today’s India. Look at the results of a small state of GOAwhere the members of the minority community have voted for the supposedly communal BJP. That is because people were frustrated with the state of affairs of misgovernance and lack of development. This thinking process of people is now across the board in both Urban and Rural areas. Look at the results in a state like Punjab where the same party has never come back to rule after its 5 year term. Here also the focus and campaign on the development platform got the ruling party back into power. The corruption issues and total paralysis of governance at the centre has obviously impacted the fortunes of the Congress at the state level also. The other side led by the Akalis was perceived to have more credibility on their campaign on development and it is said that the Heir apparent in Punjab has also been influenced and guided by the Gujarat model of development.

In any case enough on political analysis, a whole lot of which all of you would have seen and heard over the last couple of days. The key point in my view is that this is not a negative verdict but a positive verdict for change and development. Indiagrew at the rate of 8-9% during the period 2004-2007 without blockbuster economic reforms. Given the demographics of the country and the drive of people to do better and prosper the government just needs to be a facilitator. As such there are no reforms required for developing the infrastructure of the country. Environmental and land acquisition approvals have to be given fast enough and the pricing model has to be stable and fair. No legislative approvals are required to move on this front. Awarding road projects, starting Metros in large Indian cities, improving the state of the power sector & both urban and rural infrastructure does not require any reform measure. The parliament does not control fuel, fertilizer, utility prices. It is just a matter of governance. Moving fast on the Delhi Mumbai Industrial Corridor also does not require any legislative approval. Improving farm productivity, storage and value addition in farm products & also reducing farm product wastage just requires administrative reforms. The key point being that India, with its current per capita GDP and demographics can continue to grow at 8% per annum for several years if the government just facilitates and does not take any major steps towards the next generation “Economic Reforms”. If just 20-30 Metro projects take off across the bigger Indian cities that by itself will create a strong impetus for growth.

India is often depicted as the “Elephant” (not to confuse with Mayawati’s elephants). The state of Uttar Pradesh is the mini elephant within the gamut of the bigger one i.e. India. This state with nearly 20% of India’s population as well as Seats in the Indian parliament is a big laggard in terms of growth as well as per capital GDP. Its neighboring state of Bihar which was even further behind has moved forward significantly over the last 5-6 years. Still even after so much of the same the percapita GDP of Bihar is still less than 40% of the national average of USD 1500. The winning party of the current elections in Uttar Pradesh has come to power on the plank of development. The annual growth in GDP of Bihar over the last 3-4 years has been in the region of 14% on an average. However despite all this improvement the per capita GDP of BIHAR is still the lowest in the country. There is still a long way to go.

As such if over the next couple of years this sleeping elephant awakens to move forward its contribution to the overall growth of the country’s economy will be huge. The new generation of the Samajwadi Party led by Akhilesh Yadav promises as much. The demographics of Uttar Pradesh mimic that of Indiaand the aspirations of the people of the state also are as that of all other Indians. It is a huge agrarian state, but has not been able to move forward much on industrialization except for the sugar sector which is again agrarian based. The GDP of the state of Uttar Pradesh was USD 128 billion last year out of the total GDP of Indiawhich was more in the region of USD 1.6 trillion. As such it was just 8% odd of the country’s overall GDP. However potentially it can be 15% if not 20% of the overall GDP.

The key is that whether one is cynical or hopeful. I believe this is the time to be more hopeful than cynical. Typically we have seen that in this country the central government wants to move forward, but the state government do not want to move forward. The main reason for this obviously has been that most of these governments have believed that it is caste, religion equations or offer of freebies that will get them back into power. However it is very clear that things have now changed on the ground and will change further over the next few years as the aspirations of people grow and the level of literacy moves up. The record voter turnout in these elections is also an indication of the move towards change.

 

As I had mentioned earlier the short term trend of the market will be impacted by the results of the elections. However this doe
s not; in any way threaten the long term trend. On top of that we have seen the correction in the global markets also start at the same time. As such it has become difficult to decipher whether the correction is due to local or global factors. The downside from the current levels looks limited, however with the next week being full of huge amount of data flow and events the markets might decide to wait for them to get over. The downgrading of GDP growth target by Chinahas also led to a correction in commodity oriented stocks. The final big event on Greecein the near term is also scheduled for the 8^th of March which is creating some volatility in the markets. The rise in crude oil prices due to the Iranissue has also caused some consternation due to its impact on global recovery. Global markets also were ripe for a correction after a strong up move and a further 4-5% correction in most global markets is possible.  However, long term prospects still remain constructive and the markets should move forward after its corrective phase. Market valuations continue to be attractive and the current corrective phase provides an opportunity to buy high growth stocks as cheaper valuations.