http://www.gscgi.ch/en/wealthgram_details/28

1. Gram
Wealth
THE IFA’s
LA TRIBUNE MENSUELLE
DES MEMBRES DU GSCGI
wealthgram@gscgi.ch
www.gscgi.ch
Vol. III
N°28 - Mai 2014
Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch
GOLDEN NUGGETS
•
Expertise in the Global
Mining and Metals Sector
RBC Capital Markets is a premier investment bank,
consistently ranked among the top capital markets
firms around the globe. We are an industry leader in
the mining and metals sector with a global team
of experienced professionals. Our highly ranked gold
and precious metals research covers more than
70 companies, and provides clients with value-added
ideas and insightful information.
rbccm.com

2. GramGram
Wealth
THE IFA’s
LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
Vol. III - N° 28 - Mai 2014
IN GLOBO
Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch
1
•
As India undergoes federal elections with 800 million eligible
voters, what do the contenders for the Prime Ministerial role
mean for its economy? Leading the race are Rahul Gandhi,
the candidate of the Congress Party-led UPA coalition, and
Narendra Modi, the candidate of the Bharatiya Janata Party-
led NDA coalition. Challenging them are Arvind Kejriwal of
the new Aam Aadmi Party, as well as bigwigs from regional
parties who can form a possible Third Front alliance. The new
government, whoever forms it, will inherit an economy which is
in a severe crisis –thewinner’scurse. The Indian economy,which
recently displaced Japan to become the 3rd largest economy in
the world in Purchasing Power Parity terms, is in a very bad
shape currently. GDP growth is at a decadal low, inflation is
stuck at highs,industrial and manufacturing sectors have frozen,
job growth has dried substantially, infrastructure development
has slowed, exports remain sluggish and the fiscal deficit issue
in public finances haunts policymakers.
Election manifestos of the major political parties talk of similar
buzzwords like boosting growth, development, jobs etc. Within
that, some emphasize on certain areas, some in others. If one
has to define the broad vision of the three main contenders
based on the emphasis of its contents, it may not be a hazardous
to estimate Gandhi’s as social welfare-led development, Modi’s
as commerce-led development and Kejriwal’s as clean politics-
led development. India probably needs a dose of all three. It
needs Gandhi’s social welfare schemes since a large chunk of
the population remains at low-income levels unable to afford
basic goods and social services, more so if the country is unable
to create enough economic activity and income opportunities
to enable them to afford these on their own. To take the
economy out of a crisis quickly, economic activity needs to be
enhanced, bringing in more companies to invest and create
jobs. This is where Modi’s track-record in improving Gujarat’s
economy adds faith for essaying India’s revival. India also needs
a clean political system to ensure effectiveness and efficiency
of governance and government services. As Kejriwal puts it –
clean economics cannot exist without clean politics. This would
also help improve India’s image globally.
There are 7 broad areas of concern that come to mind:
economic growth; fiscal deficit and inflation; jobs, skills and
entrepreneurship; industries, investments and infrastructure;
corruption; centralized vs. decentralized management; and
credibility of ultimate delivery. Let us use these areas to dissect
the three contenders as per the contents of their manifestos and
media coverage, and ascertain what they might bode for the
economy.
GDP growth, which ranged ~7-9% during the last decade,
has dipped to a dismal ~5% in the last two fiscal years. Sub-
5% growth does not do justice for a nation of 1.2 billion. This
single GDP growth also does not tell whether growth has been
inclusive. Large swathes of population have been left out in
India’s two-decade old growth story, which many believe to
have been skewed towards certain sections of population.
Poverty rankles deep, economic distress is a major reason for
migration to unplanned urban clusters and perceived socio-
economic imbalances is a reason for incidents of crime. Gandhi
promises returning to 8% GDP growth within 3 years, while
Modi or Kejriwal have not made a quantitative commitment.
Expectation from Gandhi about reviving growth is biased by
the dismal track-record of UPA since 2009-10. While this
period coincided with the global slowdown, policy slowdown
and corruption were also major factors. The main reason for
India’s inflation is pegged to be supply-side inadequacies rather
than demand. This inflation is now feared to be structural
given that policy paralysis slowed investments into productive
assets/infrastructure, which could have addressed those supply-
side inadequacies. However, a fresh leadership under Gandhi
might overcome these handicaps. Kejriwal asserts a business-
friendly image, stressing his priority to increase participation of
the private sector to bolster economic growth. However, the
private sector has gone into a cocoon as far as committing fresh
investments are concerned, and the government has to initiate
commitment by making public expenditure first. However,
India’s fiscal situation is weak due to subsidies and social-welfare
schemes, and the ability to maneuver for public expenditure
plans is limited. In fact,this is a challenge Modi faces too. There
are expectations from him of taking India back on the growth
path based on his track-record in Gujarat. Reviving growth is
where Modi’s candidature shines. He might start by clearing
the stalled projects quickly to initiate some action, however
these projects will take time to fructify. Moreover, the reason
for stalling of some of the projects is related to the provincial
governments which might take time. Weather uncertainties
regarding El Nino may impact crop output, keeping inflation
and interest rates under pressure – non-conducive for growth
revival. The Rupee stabilized in the 2nd half of FY2013-14 on
the back of record inflows from foreign portfolio investors. But
What India’s leading Prime Ministerial candidates mean for its Economy…

3. GramGram
Wealth
THE IFA’s
LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
Vol. III - N° 28 - Mai 2014
IN GLOBO
Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch
2
•
this money is fickle in nature and can move out if the realization
of actual growth gets delayed beyond a few quarters. That might
depreciate the Rupee, unless Modi can counter that in record-
speed by bringing in foreign direct investments into projects to
revive growth.
Managing the fiscal deficit and inflation are critical challenges.
The current Finance Minister says the fiscal deficit is now under
control, though the attributable reasons include cutting public
expenditure, rolling over of subsidies to the next year and forced
dividends from public sector companies. However, social-
welfare plans of all three candidates can put public finances and
fiscal deficit under pressure in coming years. While the mega
social-welfare plans like rural employment guarantee, food
security etc are synonymous with Gandhi’s UPA, even Modi
and Kejriwal have populist social plans in their manifestos. All
these three candidates promise access to electricity, sanitation,
drinking water, education and affordable healthcare, as well
assistance for low-cost ‘pucca’ housing for all citizens. Modi
and Gandhi talk of education and entrepreneurship assistance
for backward/minority communities and financial support to
unorganized sector/destitute. Interestingly, Modi also includes
Madrasa modernization. One expects Gandhi to continue the
UPA legacies like the rural employment scheme (which is ~1%
of GDP), expand the food security schemes, apart from his plans
to make healthcare expenses 3% of GDP and investments into
science and technology 2% of GDP. While critics argue such
social plans are non-asset creating and a fiscal strain, the rural
community and the low-income urban community has been left
out of India’s skewed economic growth and there was a need to
enhance their affordability for social services. Reviving rural
demand is where Gandhi’s candidature shines. The increase in
the rural community’s purchasing power due to UPA’s schemes
can also be credited as a reason of why rural-India is an attractive
target market today for Corporate India across consumer sectors.
While Modi and Kejriwal stress the need to revive the actual
rural economy, but there is no clarity on how they propose to
do so – through increasing economic opportunities or by doling
out social benefit packages. Modi has raised the topic of skill-
creation time and again, and this might enhance opportunities
for economic activity. Promises by Modi and Kejriwal also
include paying 50% over the input cost for crops to farmers - a
rather populist move,while Kejriwal proposes to stop contractual
employment so that they get employment-related social benefits.
So, Gandhi alone may not be guilty of fiscal indiscipline, as
many imagine it to be. But how do they propose to counter
fiscal strain with sources of revenue? Gandhi proposes soonest
implementation of the Goods and Service Tax Bill and Direct
Tax Code to improve tax revenues, Kejriwal’s is to increase
tax compliance and a progressive tax structure and Modi’s is
a rationalized tax regime. But Modi has plans for countering
inflation, which impacts people’s affordability for basic goods/
social services, thus reducing the need for social schemes in the
first place. Modi’s approach on inflation are measures to stop
hoarding and black marketing, unbundle Food Corporation’s
activities, evolve a single agriculture market and use technology
for faster dissemination of actual prices. Incidentally, nobody
has raised the issue of disinvestment,except occasional mentions
by Modi and Kejriwal that the government has no business to
be in business.
Job creation and entrepreneurship are areas all of them have
addressed. Gandhi promises creating 100 million new jobs,
improving university and secondary education infrastructure,
scholarships/jobs for backward communities, bringing in
marginalizedsectionsofyouthandskillvouchersforunemployed
graduates. Gandhi does mention an entrepreneurship fund, but
that is only for certain communities. Both Modi and Kejriwal
emphasize the need for skill-enhancement and entrepreneurship
atamoreholisticlevel. Moditalksofimprovingentrepreneurship
and artisan skills for small-scale industry development and
setting up a nationwide incubation programme for innovation
and entrepreneurship. He aims to develop the labour intensive
sectors, modernize retail and agriculture employment base
and transform the employment exchanges into career centers.
Kejriwal promises a conducive entrepreneurship ecosystem
by ensuring access to capital, information, infrastructure and
increasing opportunities for skilling and learning and talks of
countering economic distress-led migration by enhancing small-
scale enterprises and traditional industries. A push towards
entrepreneurship and skill creation can help enhance the
economic output and public finances. In fact, these are critical
for a country of India’s size. Not many Prime Ministers in the
world face the task of mobilizing employment opportunities for
few hundred million citizens.
The need for the UPA to balance coalition politics took its toll
on the speed of reforms. This,along with environment clearance
issues, policy delays and inflation slowed down the investment
cycle by companies. Tight monetary policy kept the cost of
What India’s leading Prime Ministerial candidates mean for its Economy…

4. GramGram
Wealth
THE IFA’s
LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
Vol. III - N° 28 - Mai 2014
IN GLOBO
Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch
3
•
borrowing high. Infrastructure slowed due to regulatory delays,
challenges of public-private partnership model and long-term
funding. New projects froze and a number of existing projects
are stalled. Sanctioning of approvals slowed, as ministers and
bureaucrats preferred not to give any decision rather than risk
getting embroiled in any scam. In this environment, Gandhi
aims to build upon the success of the Cabinet Committee on
Investments, which has made some headway in moving stalled
infrastructure projects in recent months. He aims to speedup the
completion of the industrial corridors and freight corridors, set
up a national manufacturing policy to make it 22% of GDP by
2022 and enable a single-window clearance for manufacturing
projects. Modi aims to create an enabling environment for
businessviasingle-windowclearancesystemsforfasterapprovals,
time-bound environment clearances, investments into logistics/
infrastructure, etc. These are major expectations that companies
have from Modi, given his track-record in Gujarat’s industrial
and infrastructure development. But two challenges that Modi
might face here are activism by opposition (something which
members of the NDA alliance have also done in recent years) and
managing coalition brinksmanship. Gandhi and Modi also talk
of high-speed rail connectivity, developing urban clusters/cities,
road connectivity and also of supporting greenfield industrial
townships and global hubs of manufacturing respectively.
Kejriwal’s focus is on an ‘honest enterprise’,free from corruption
and crony capitalism. He talks of streamlining regulatory
processes,fostering healthy competition in the market economy,
curb monopolistic tendencies and ensuring active participation
from the private sector. All three also talk of infrastructure
development in urban and rural areas,irrigation areas,renewable
energy etc. Modi adds improvements to agri-rail network,while
Kejriwal adds agro-processing. Kejriwal’s stress on monopolistic
tendencies might have some relevance. There has been talk of
‘big-businesses’ being friendly to Modi due to the incentives
extended to get them to invest in Gujarat in very large-scale
projects. Some of these incentives are cost advantageous for the
large companies. Hence, such incentives might end up making
the big guys bigger, while marginalizing out the small players.
It might also be pertinent to add that they are all open to
foreign direct investments, except on the contentious issue of
FDI in multi-brand retail of which Gandhi is the only flag-
bearer. Nevertheless,Modi has broached relevant terminologies
like value-chain and value-addition, which leads to the belief
that his economics-first approach would lead India to deepen
two-way linkages with countries (including India’s neighbours),
even if it means importing something at a competitive cost
which is also produced locally (at a higher cost), so that India
can end up producing something in the eventual value-chain of
that product. This expands scope for business and is in mutual
benefit of both countries. If local businesses can innovate and
produce at comparable costs, that is their credit. There seems an
element of economics-first in Modi, whereas the UPA has not
shown concrete results in deepening foreign trade/investment
despite its engagements, especially with neighbours. So far,
Kejriwal seems inexperienced in this.
Corruption is a plague keeping the economy from realizing its
efforts in entirety. Combating corruption is where Kejriwal’s
candidature shines. His plans for an effective Jan Lokpal
Bill (citizen’s ombudsman), targeting the black economy and
transparency in governance processes might be useful in
increasing the government’s productivity and maximizing
the benefits flowing to the citizens post-systematic leakages.
But the issue here is the time required to clean the system as
Kejriwal envisions it, and whether people have the patience
to wait that long - especially now in a crisis when majority of
them are reeling under years of income stagnation and price rise.
Modi also talks of Lok Pal and transparency, while Gandhi also
mentions corruption and black money. All of them have plans
for speeding up the judicial process and ensuring women’s safety,
which are essential. They are also keen to leverage technology
for governance, which means faster, accurate delivery of public
services. These include processing of passports, licenses
as well as ambitious network connectivity plans. Gandhi
envisions digitization of rural land records and a disaster
management communication system. Modi and Kejriwal plan
to use technology for healthcare delivery and skill imparting,
respectively. All these areas of governance are critical for India,
and technology can help create some transparency, though its
effective implementation remains a concern.
Not many Prime Ministers in the world face the gigantic task
of managing a country of 1.2 billion people, where ethnicities,
cultures,mind-setsandmannerismschangeeveryfewkilometers.
Would a decentralized management style or an autocratic style
be better to govern India? Kejriwal has advocated empowerment
of decision-making and functioning to the grassroots-level
blocks (Gram Sabha). This would bring the people directly into
the governance process. It might mean development effort
What India’s leading Prime Ministerial candidates mean for its Economy…

5. GramGram
Wealth
THE IFA’s
LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
Vol. III - N° 28 - Mai 2014
IN GLOBO
Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch
4
•
is better directed, leakages are minimized and benefits are as
per the region’s need. In Kejriwal’s model, local communities
would have a role in managing the region’s natural resources,
get revenue-sharing and a say in the displacement of people.
But the challenge is operational success, as implementation
can get delayed due to in-fighting amongst members of the
local community. In contrast, some believe Modi to have an
autocratic style of management. Whether this is baseless or
merits discussion is separate, the question is would an autocratic
style be more apt to stabilize a ship which is currently in a crisis.
Currently, it is imperative for the economy to get on track and
excessive decentralization might just delay that process. But
autocracy also has another side. Opinions of critics might not
get an ear and dissent might not be tolerated. For example:
media reports allege land was given to big industrial houses at
subsidized rates in Gujarat. If this is indeed true, it indicates
the land owner either received minimal compensation for his
asset, or the State put itself in fiscal pressure if it compensated
the owner separately. But the other side of the coin is that it
is equally important to get big businesses to invest into long
term commitments as it creates jobs and demand for ancillary
products/raw materials - critical for economic growth. As far
is Gandhi is concerned, the UPA regime had set up a National
Advisory Council to achieve its agenda. However, this council
is believed to have largely failed as it spent on non-asset creating
social projects without enhancing economic opportunities,
despite creation of empowerment across the social strata being
an essential need for India.
Credibility of ultimate delivery is where Modi’s track-record
outranksthatofGandhiandKejriwal,especiallywhentheIndian
economy is undergoing its worst crisis in recent years. Modi’s
work in converting Gujarat into one of India’s most developed
states (across industry, agriculture and services) has built this
credibility. In contrast, the depth of Gandhi’s involvement in
the UPA between 2004-2014 has been unclear, and the opinion
of some is that he might still be inexperienced for the top-role.
There is a similar issue of experience-deficit that people opine
about Kejriwal, especially after his rather abrupt end to Delhi
state’s Chief Ministership within 49 days of rule in January-
February 2014. What Gandhi and Kejriwal are missing is a
track-record of demonstrated achievements, which Modi has
tactfully built over the last decade and is now leveraging to
build his credibility for the role of Prime Minister. When the
economy is in crisis, there seems a human tendency to repose
faith in experience. However, there are interesting observations
regarding his Gujarat track-record as well. Growth rates in
state-wise net domestic product shows Maharashtra, Delhi,
Tamil Nadu and Haryana did just as well during the last decade
– even bettering Gujarat in some cases. Rajasthan and Bihar
bettered Gujarat in Industrial sector in last 4 years. Rajasthan,
Bihar and Madhya Pradesh beat it in Agriculture, while Bihar,
Haryana, Maharshtra and Madhya Pradesh beat it in Services.
In conclusion, the challenges are immense. As mentioned earlier,
India possibly needs a dose of all the three but will get only
one. The question, which is the most urgently required, which
would ensure holistic development and which that would keep
its image clean.
What India’s leading Prime Ministerial candidates mean for its Economy…
Sourajit AIYER
sourajitaiyer@gmail.com
The author is a finance professional.
Views expressed are entirely personal
and not representative of any entity.