India’s Harvard Yard Weeding Waft

Indian shares up 10 percent through March were further buoyed by 7 percent last quarter growth defying demonetization gloom and Prime Minister Modi’s strong party showings in state elections cast as a referendum on his personal popularity and economic reform policies. He savaged the downbeat forecasts “from Harvard and Oxford” experts with banknote confiscation targeting illegal funds, and described the continued expansion as vindication for hard work, even though statistics do not capture the estimated 40 percent informal sector hardest hit by the physical cash squeeze. A good monsoon and civil servant salary hike contributed, but real estate and financial services slowed and government spending was the main manufacturing driver with capacity utilization still under 75 percent. However the reading is not final and may undergo downward revisions following the pattern of previous quarters recalculated with changing methodologies challenged by international statisticians. The Prime Minister’s runaway victory in Uttar Pradesh in particular was interpreted as satisfaction with his business-friendly agenda, although average voters focused more on pro-poor rhetoric and the coalition’s financial inclusion platform. Officials continue to sweep bank accounts for evidence of “black money” despite caution by top economic advisers that the crackdown risks overkill. On the tax question, companies and wealthy individuals are already unnerved by Finance Minister Jaitley’s admission that the national goods and services levy rollout due this summer has encountered “teething problems” and may be delayed as states reconsider their own revenue mix. He also panned the “bad bank” proposal to handle the 15 percent NPL load at state-owned lenders as a non-starter since it could jeopardize the 3 percent of GDP budget deficit goal. The central bank is considering faster write-off rules, but corporate credit is flat and many big property borrowers are in trouble after the demonetization fallout. Consumer lines were increasing 20 percent annually and are likely to suffer under tighter classification standards and more lenient bankruptcy treatment for individuals than companies in a new code. The process currently takes 4-5 years, and many politically connected debtors are protected from harsh action. Despite the administration’s anti-corruption vow, the former head of defunct airline Kingfisher, a well-known Delhi insider, fled to luxury exile in London after accusations of defrauding banks and shareholders.

Pakistan national elections will also be held for the first time in two decades in the coming months, with the stock market slated to reenter the core MSCI group on a 50 percent in local terms the past year. GDP growth is 5 percent and daily power cuts have halved after completing an IMF program. On infrastructure a $1 billion road between Islamabad and Lahore has opened and Prime Minister Sharif has negotiated $40 billion in Chinese investment under the One Belt One Road scheme. Consumer goods listings have enjoyed a run, with multinationals like Nestle doubling sales and banks are in the process of more privatization. In the business capital Karachi kidnapping and terrorism incidents may have abated, and the army has claimed rebel suppression in the Federal Autonomous Areas unable to be independently verified. The Prime Minister and US President Trump reportedly have exchanged cordial phone calls, despite the latter’s fulminations against the political and commercial elite with the Sharif family a charter member.