Can NDA Act Swiftly to Un­wind In­fla­tion Loop?

More than GDP growth, re­mov­ing in­fla­tion dis­tor­tions will bring in more FII flows

The Economic Times - - Markets & Finance -

the econ­omy. Then, if there is no co-or­di­na­tion be­tween these po­lit­i­cal groups, each group be­haves like a mo­nop­o­list and tries to max­imise its gains by driv­ing up prices as much as it can. As a re­sult, the econ­omy as a whole is worse-off.

Un­til the 1990s, the pre-dom­i­nant model of cor­rup­tion in In­dia was the cream­skim­ming kind of cor­rup­tion whereby pri­vate com­pa­nies were re­quired to pay an ex­tra per­cent­age of their project out­lay to the lo­cal pow­ers that be. Over the last decade, how­ever, In­dia’s core model of cor­rup­tion ap­pears to have shifted to a dif­fer­ent level whereby var­i­ous po­lit­i­cal-busi­ness cliques cap­ture a large sec­tor in the econ­omy and then sup­press com­pe­ti­tion in the sec­tor in a bid to max­imise their gains.

The good news is that this new model of cor­rup­tion seems to be on the re­treat due to the changes tak­ing place in New Delhi and the RBI:

(1) The Land Ac­qui­si­tion Act looks likely to be amended by the NDA. This could make it eas­ier and cheaper to buy land for in­dus­trial use.

(2) The NDA seems likely to ad­dress the dis­tor­tions in In­dia’s food reg­u­la­tions aris­ing from: (a) con­stant hikes in the min­i­mum sup­port prices for sta­ples, (b) the hoard­ing of grains by the Food Cor­po­ra­tion of In­dia; and (c) from the state-level APMC Acts. Even if two out of these three mea­sures are taken, food in­fla­tion (which ac­counts for 50% of CP) will throt­tle back.

(3) The RBI gover­nor seems keen on pre­vent­ing PSU banks from be­ing gamed by un­scrupu­lous pro­mot­ers. If he’s suc­cess­ful, this could lower the cost of cap­i­tal in In­dia be­cause the gam­ing of PSU banks by un­scrupu­lous pro­mot­ers is a key rea­son for In­dia’s el­e­vated cost of cap­i­tal. Fur­ther­more, for the first time in its his­tory, the RBI has an­nounced an ex­plicit in­fla­tion tar­get (al­though it re­mains to be seen whether the fi­nance min­istry en­dorses this tar­get).

(4) The rise of ‘check & bal­ance’ in­sti­tu­tions in In­dia (such as the RTI, CAG, Lok Pal and so­cial me­dia) is mak­ing it harder for the cliques to “cap­ture” spe­cific sec­tors and then push through price hikes.

Three ma­jor shifts in prof­itabil­ity are

The good news is that the new model of cor­rup­tion driven by col­lu­sion seems to be on the re­treat due to the changes tak­ing place in New Delhi and the RBI

on the cards. The un­wind of the “Cor­rup­tion, Com­pe­ti­tion, In­fla­tion” tri­an­gle is likely to lead to three ma­jor shifts in prof­itabil­ity (and hence, mar­ket cap) over the next five years: Shift 1: From top pri­vate sec­tor banks to PSU banks. Over the last five years, po­lit­i­cally con­nected com­pa­nies have sys­tem­at­i­cally bor­rowed money from PSU banks and gone into ar­rears even as they stay abreast of their com­mit­ments to top pri­vate sec­tor banks. RBI’s de­ter­mi­na­tion to stop this ar­bi­trage au­gurs well for large PSU banks and could raise con­cerns vis-a-vis the large pri­vate sec­tor banks. Shift 2: From in­ter­me­di­aries in the food sup­ply chain to farm­ers, con­sumers and agrotech com­pa­nies. Due to var­i­ous reg­u­la­tory dis­tor­tions, po­lit­i­cally con­nected mid­dle­men cream away 70% of the re­tail price of food­stuff. As these dis­tor­tions are re­duced, not only will con­sumers get a bet­ter deal, but farm­ers’ in­comes should rise. As that hap­pens, they will, in all like­li­hood, buy bet­ter qual­ity seeds, pes­ti­cides, fer­tilis­ers, etc and give a fil­lip to the agrotech sec­tor. Shift 3(a): From do­mes­tic mo­nop­o­lists in B2C sec­tors to light in­dus­trial ex­porters. A closed and cor­rupt econ­omy with high in­fla­tion is an ideal home for an es­tab­lished con­sumer brand as it’s able to pro­tect its mar­gins and gen­er­ate su­per­nor­mal RO­CEs. How­ever, as cor­rup­tion and in­fla­tion abate, these “cham­pion” fran­chises could come un­der pres­sure. Si­mul­ta­ne­ously, as the econ­omy be­comes more ef­fi­cient, light in­dus­trial ex­porters should find them­selves in a bet­ter po­si­tion to win mar­ket share abroad. Shift 3(b): From do­mes­tic mo­nop­o­lists in B2C sec­tors to MNCs in the cap­i­tal goods sec­tor. The lo­cal teams of most multi­na­tion­als sim­ply do not have the man­age­ment author­ity to grease the nu­mer­ous palms that seek lubri­ca­tion in New Delhi and else­where. In a less cor­rupt econ­omy, sev­eral of these fir ms which have in­stalled ca­pac­ity and cred­i­ble tech­nol­ogy in In­dia could blos­som. More than a boom in GDP growth, what will bring FII and FDI flows surg­ing back into In­dia are signs that the in­fla­tion-in­duc­ing dis­tor­tions that had be­come cen­tral to eco­nomic life in In­dia are be­ing tack­led by the new gover nment. The NDA has talked the talk on this sub­ject. Can it walk the walk? (The view ex­pressed here is his own and

not that of Am­bit Cap­i­tal)

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