Can NDA Act Swiftly to Unwind Inflation Loop?
More than GDP growth, removing inflation distortions will bring in more FII flows
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)