India shining is a reason to worry

The ground realities are very different from what the feel-good story tells us

MUMBAI: Two articles caught my attention recently. One was a piece in a UK newspaper that said a media group was going all over the town with an India poised campaign and the second was The Economist asking “Is India Overheating?” on its front cover.

The piece in the newspaper talked about the wealth being created in India with high GDP growth and stock market returns etc, but also that poverty didn’t seem have to have reduced at all. Statistics may point to a reduction in poverty, but visitors still see it stark in the urban and rural areas alike, making them question the benefits accruing from all that economic growth.

The Economist, on the other hand, talked about high growth coupled with rising inflation and lack of infrastructure, especially social infrastructure, and the fact that much more spending was needed for schools, hospitals etc if the country was to really grow and prosper.

The key message in both the pieces was the same - that while India is in focus on account of the returns it is offering to those investing in the country, there is still a long way to go for the country to attain a powerhouse status. This is true, but instead of trying to explain in so many words, the reporters would have been better off just doing a small calculation on how the asset boom has impacted the general Indian population.  

It is a fact that the asset price boom has enriched foreign investors and Indian promoters, while the general public and domestic institutions, including mutual funds, haven’t quite benefited.

A study of the ownership pattern of the top 100 companies by market capitalisation (leaving out government-owned companies) will show that at least 75% of stock ownership is distributed between the promoters and foreign investors, while the rest is divided between the local public and institutions, including mutual funds. This clearly shows that wealth is becoming more concentrated.

Feel-good media campaigns are a reason to worry rather than celebrate, given that the ground realities are very different. Didn’t the ‘India shining’ campaign see the last ruling party lose its mandate?

On the face of it, the India story reads well now. The economy is growing at 9.2% per year. The stock markets are at all-time highs. There is a huge feel-good factor with Indians buying houses, cars, consumer durables etc. Yet, the ruling party is concerned about its prospects in the state elections, coming up in a couple of months. The reason?

The “voter” is now paying higher prices for food; he is not able to afford housing, and despite paying higher costs for everything, he is still faced with power cuts, bad roads and water problems.

This augurs ill for reforms. As such, the ruling party has not initiated any hardcore reform. And if there is any hint of a debacle, reforms would be set back further.

Also worrying is the fact that in case there is a threat to the growth forecast due to factors like the monsoons, global economic slowdown, China soft or hard landing etc, there will be a huge price to pay in terms of fall in asset prices. This is again a politically sensitive issue, where the government will have to answer the retail investor. And god forbid any scam or accounting scandal happen.

Investors would do well to step back and study the implications of politics on reforms under the present circumstances before placing their bets.