Jamal Mecklai: Stability? What stability?

Indian equity markets appear to be banking on political stability after the elections. Several opinion polls have suggested that the Bharatiya Janata Party (BJP) and its allies would come close to the magic number (272), and the expectation is that other opportunistic politicians/parties will hurry in to take the formation to majority in the Lok Sabha.

In particular, a poll by Pew Research, a highly respected US polling agency, released on February 27, has galvanised global investors, for whom stability has become the mantra-a-la-mode. A stable government will be able to unwind the myriad blockages to infrastructure projects that have been created by the exposure of huge corruption in high places; a stable government will be able to address the structural issues keeping our deficits high; a stable government will be able to streamline the numbing process constraints faced by business and citizens; a stable government will be able to create a sounder, fairer social and judicial system so that all Indians can thrive based on their best efforts.

Wonderful — that’s just what we need.

The question, however, is whether even a National Democratic Alliance (NDA) majority, unlikely as it seems, would result in any substantive stability. The deep sickness in the Indian polity is squarely the result of the endemic corruptness of all “old age” political parties and formations, which are so similar that I often fumble in trying to remember whether the BJP formation is called the UPA or the NDA. It is hard to believe that simply achieving a majority would address this fundamental flaw — indeed, it may well make things worse.

Narendra Modi was very astutely described by one of India’s foremost intellectuals as “having only followers and enemies”. He appears to have no friends; nor does he have any partners, with the exception, perhaps, of Amit Shah, who has once again been served a court notice by the Central Bureau of Investigation. Building and sustaining relationships isn’t his strong suit.

Further, he has never shown any ability to build consensus, which is critical to running a democracy. Even within the BJP, he has many, many enemies, loudly apparent in the current seat allocation hoopla. Thus, there will be strong negative undercurrents in even a majority NDA government. Getting things done in such an environment and with Mr Modi’s personality seems a daunting task.

If, as is more likely, the NDA simply gets enough seats to attract “allies” to get to a majority, the situation will be even more difficult. As the adage goes, with friends like these, who needs enemies.

Thus, even if the opinion polls turn out to be close to correct, the resulting government is unlikely to be as decisive and focused as a Narendra Modi-led government is expected/hoped to be. Of course, whether a Narendra Modi-led government would, in any case, be decisive and focused is another question. I note, for instance, that even after 10 years of Mr Modi’s “governance”, businessmen in Gujarat continue to suffer harassment and corruption from sales tax and value-added tax (VAT) inspectors, something the upstart Aam Aadmi Party (AAP) government in Delhi was able to fix in a few days.

Again, it is incomprehensible to me that Mr Modi has not repealed prohibition in Gujarat. Everybody knows that prohibition reduces tax income, increases deaths from spurious liquor – Gujarat holds this dubious record amongst all states – and generates illegal activity and black money. Either Mr                    Modi doesn’t know this, which would make him incredibly uninformed, or he and/or the BJP are benefiting from the black money generated by this “industry”.

The short point is that expecting “stability” after this election is a pipe dream. More likely, there will be a series of short-lived governments — the good news is that each one will see an improving quality of representation as the participation in politics gets more broadly based, following the example being created by the AAP.

While some may see this as a pessimistic scenario, to me this is a hugely positive prognosis. India is finally on the road to becoming a truly representative democracy. The AAP is only the most loudly visible tip of this. There are dozens – no, hundreds – of citizens and citizens’ initiatives that are crawling out of the woodwork with reform on their minds: The Times of India’s manifesto is one example; William Bissell’s book Making India Work is another.

In other words, our medium-term future is looking substantially better, and, in time, the stock market will reflect this. In the short term, too, there are some positives — the recent decline in inflation, for example. However, increasing uncertainty in global markets and the certainty that the current bet on political stability is misplaced will ensure considerable volatility going ahead.

In the short term, buy out-of-the-money puts on the Nifty and donate to the AAP; in the medium term, buy Nifty calls.

jamal@mecklai.com