Between the broadcast of exit poll results and the vote count four days later, the markets stepped up to pronounce their own verdict on the general election to the Lok Sabha.
Never secretive about their preferences, the markets reacted in excitement and joy — a key index registering its greatest single-day gain in a decade — to confident predictions of a second term for Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP). Among the star performers in that flurry on the markets were Maruti Udyog, the State Bank of India (SBI) and that ubiquitous presence in every corporate honours list, Reliance Industries.
Maruti Udyog had at the time just reported a decline in sales over financial year 2018-19, perhaps the sharpest in recent years. SBI is in the forward ranks of the “bad debt” problem that has hobbled Indian banking for years without solution. And even mighty Reliance, with its limitless political clout and deep reserves, is not immune to a downturn, long- and short-term.
Maruti’s sales slump was part of a wider story, of almost equally pronounced decline across all automobile industry sectors. Commercial vehicle sales are generally regarded as a bellwether of overall economic well-being. And the two-wheeler industry in recent times has prospered when rural living standards have been robust.
The declines in these two sectors indicate a widespread malaise. Indeed, the Index of Industrial Production (IIP), an overall measure of economic buoyancy, fell by a tenth of a percentage point in the year ending March, to its lowest in close to two years.
The index for capital goods, which reflects the investment climate and offers a pointer to future growth prospects, is in decline as is commercial credit growth. After recent controversies over a new national income series that seemed to boost the Modi government’s claims to delivering a solid growth stimulus, all other elements of the picture are coming together, suggesting an economy heading into a slough.
Earlier warning signals of economic inclemency, such as an official estimate that unemployment was at its highest in 45 years, were dismissed on specious grounds. The new government will have to do better, beginning with revising the extravagant growth estimate of 7 per cent for the year gone by.
The industrial slump and the challenges SBI faces, are interrelated aspects of an issue that Arvind Subramanian, former Chief Economic Adviser to the Modi government, describes as the “twin balance sheet problem”. Corporate balance sheets awash in unsustainable debt, need to be cleaned up urgently. The recourse so far has been for banks to capitalise unpaid interest, so that the debt owed by defaulting corporate entities mounts rapidly, while prospects of repayment recede. This keeps the accountants happy in the short-term, but causes a rapid build-up of non-performing assets (NPAs) and potential insolvency.
That strategy of just postponing the reckoning was recognised to be infeasible early in the Modi government’s tenure. From about 2015, the Reserve Bank of India (RBI) has been insisting on early recognition and sequestration of NPAs. The Budget for 2016-17 went one step ahead by enacting an Insolvency and Bankruptcy Code (IBC) to quickly resolve the bad loans problem, once it was recognised in its true magnitude.
The deadlines were tight, but nothing quite worked as anticipated. As vividly illustrated in the recent default of Jet Airways, promoters are never amenable to admitting defeat. Meanwhile, banks are under pressure to keep the wheels turning by throwing good money after bad. The rest of the process envisaged, such as conversion of loan to equity and then a potential transfer of ownership, has not even begun.
In the circumstances, temporary and short-term succour comes through the external account. Mirroring the gap between investment and saving, India’s current account deficit has widened in recent years, and not just because of energy import and the national obsession with gold. Exports have weakened after a brief phase of strong growth and, even if imports too have, the gap has been widening.
After India’s supposed airstrike on terrorist staging posts deep within Pakistan in late-February, much of the world worried, while the markets celebrated.
The bellicose rhetoric that followed from the Prime Minister and his surrogates served as a tonic to the markets. By mid-March, stock markets were riding a crest with a strong inflow of portfolio investment. Among the factors cited by market analysts was the expectation that the heightened mood of paranoia would provide a significant assist to Modi’s re-election bid.
How, if at all, the incoming administration chooses to requite its obligations to the markets after it assumes office will determine much of the future course of the economy.
The markets can be unforgiving, especially since they are highly leveraged with volatile capital, which could flow out at the least hint that deeper structural problems are being addressed. Whether the intellectual and political capital exists to negotiate this tightrope remains the great unknown.
Sukumar Muralidharan teaches at the school of journalism, OP Jindal Global University, Sonipat
Twitter: @sukumar_md