Here's an extract (click for larger image).
Q.1: As a financial expert, how do you define the relationship between politics and the capital market?
All public policy is driven by an overarching political ideology. The type and quality of public policy then determines the depth and extent of capital markets, investment opportunities in a society, and the security of investment and its returns. Good public policy gives businesses the assurance to invest in a timely manner; bad policy increases risk and drives away capital.
India is a very risky place to invest capital, its government bonds being rated Baa3 by Moody’s, and India ranked 134th in world in terms of ease of doing business. Further, there is significant nexus between politics and business in India, which means super-normal profits are being made in some businesses, at the expense of a smoothly functioning capital markets. As a result of its ideological preference for socialism, India also remains one of the world’s poorest nations.
Q.2: How is the performance of a political party, especially the BJP, going to affect the market sentiments?
In general, markets need nothing from a government: only that the government perform its core functions and provide infrastructure. That refocusing of government into its defence, police and justice – while stepping out of almost all other functions – will dramatically boost market sentiment.
BJP is no promoter of enterprise. It did not reform governance or the economy during its last opportunity to govern India, and I do not expect anything better this time around. BJP’s opposition to FDI in retail is inexplicable, given it is not government’s money that is risked. If a foreign retailer fails, its stakeholders will suffer. Chanakya particularly emphasised the role of imports and foreign investment in an economy. BJP claims to be rooted in Indian traditions, but ritually refuses to accept the core message of Arthashasta.
Neither of the two major parties have displayed an understanding of the systemic problems in India’s colonial governance framework. All over the world, good economic analysis of incentives drives public policy and governance. We need parties that can understand modern economics and governance.
Q.3: What is your analysis, how is the market going to perform in the run-up to the General Elections?
I believe the market will be particularly wary about the new socialist party: AAP. Arvind Kejriwal and Yogendra Yadav are well to the left of Congress and BJP and have a regressive agenda (already displayed in Delhi) that will set back India’s economy by many decades, were AAP to have any role in India’s future policies.
The silver lining in this bleak situation is the National Liberal Front which is offering world-best policies to India. Much will depend on which set of parties: the socialist or the liberal, gain a foothold in the Indian mind.
Q4: Foreign brokerage houses like Nomura, Goldman, and CLSA had earlier backed Narendra Modi, claiming that a government led by him would be better for the country as far as investments and capital gains are concerned. What is your take on this?
Investors are likely to be disappointed with Modi. He has not once articulated any governance reform agenda. My view is that no leader in India understands good policy, nor is able to communicate such policy to the people. As a result, populist policies continue to play a key role in politics.
I am willing to assert that India is unlikely to rise higher in world ranking of ease of doing business under either Congress or BJP, and will definitely plummet under AAP. India’s only hope is the National Liberal Front, but that is a totally new group, and its political performance is untested. Ultimately, India will need a leader who can explain good policy to the people.
Q.5: How has Modi become a market favourite when there are critics who slam Modi for inflated growth projections in Gujarat?
Modi is good at propaganda, which fools a lot of people. I do not look at propaganda but at the actual policies of various parties. I do not see any signs of improvement under Modi.
Q.6: How do you evaluate the post-poll market scenario, if the Congress returns to power in the event of BJP's failure?
If the Congress returns to power, expect more of the same. India will continue to muddle along at the bottom of the world. Congress is definitely not a reformist party (despite the liberalisation that was forced upon it by IMF). Its DNA is deeply socialist. And its aristocratic, dynasty mentality means that the few capable people within the party are forced to play second fiddle to the dynasty.
Q.7: What are the major challenges in front of us? How can we confront it to arrive at a better GDP figure? Give us a sense of the market behaviour.
India’s challenge is only one: to make its government perform its core functions well, and to stop the government from blocking enterprising Indians. This is an ideological challenge, marking a shift from socialism to capitalism (as properly understood).
India needs what Gurcharan Das calls a strong liberal state. The rule of law would be the primary focus of such a state. Unfortunately, our governments prefer to do everything else but govern. Chanakya’s core message was that the ruler should run a strong and systematic government, with the people left alone to engage in enterprise under a low tax regime. Free trade and good regulation was a vital recommendation of Chanakya. That message has been turned upside down by the socialists who would rather copy Western ideas than India’s own.
Q.8: Do you think populist measures like the Food Security Bill will leave the country in a financial mess?
The Food Security Act is a fundamentally wrong way of achieving the objective of providing poor with access to food.
To achieve the legitimate goal of poverty eradication, a direct transfer scheme for the poor is not only feasible but is the only defensible option. Once the poor are provided with relevant purchasing power, the market will automatically make available food to them.
Instead, the government believes in directly managing the supply and demand of food, with the associated transaction costs and corruption. This also distorts the price system. These distortions cause even greater harm than the cost of the food. Overall, this is one more irresponsible socialist action that is entirely bereft of basic cost-benefit analysis.
Q.9: What are the main bonanzas that the capital market is expecting in terms of judicious policy-making?
I am very doubtful whether any judicious policy making will ever by delivered by existing major parties or the new socialist AAP. I have been in touch with senior people from all these parties and they have neither the knowledge of good policy principles, nor any interest in learning about them. India tends to runs on the random wishful thinking of its socialist ‘leaders’ and will therefore continue to lurch from one crisis to another.
If, however, the National Liberal Front gains traction, the country can expect dramatically improved public policies and policy frameworks in 2014.
Q.10: Do you agree with Chidambaram's view that the market is overly reacting to international events and issues and not acting prudent enough by looking beyond domestic economic concerns?
Chidambram’s government bonds are rated Baa3 by Moody’s – just one step higher than junk bonds. The world has no confidence in India’s ability to repay its longer term loans, which then drives up its borrowing costs. Chidambram can’t fix India’s economy without reforming its underlying governance system, but I’m not aware of one word that he might have ever articulated about this basic issue.
Overall, I remain pessimistic for India. Indians outside India will tend to remain away, and more meritorious Indians will continue to leave. The socialists have totally destroyed India, but India is unwilling to overthrow them.