WITH the rupee now breaching its crucial resistance level of 60 per dollar on the back of strong dollar inflows that has sparked a sharp uptick in the stock markets as well, the jury is still out on whether domestic factors have had a greater sway in the current pre-poll rally than the external factors.
Irrespective of how big a role the possibility of a BJP-led NDA victory has played in fuelling the broader pro-growth sentiment, a longer-term perspective points to growth actually being far less sensitive to poll results and instead proving to be more in tune with the global growth cycle. This is especially so since India began the process of greater integration with the global economy in 1991.
According to a Bank of America Merrill Lynch (BofA-ML) analysis, the markets have generally got it wrong when it reacted to the results of previous elections in relation to growth — in 2004, there was a 15.9 per cent sell off on the Sensex on result date just as growth was about to pick up, while in 2009, a 15 per cent surge on result day was followed by growth tapering off subsequently.
This has been attributed largely to the fact that markets ignored the impact of the global cycle, which has influenced India’s growth far more than the dispensation that comes to power at the Centre.
A global upcycle fuelled growth during UPA-I years, not just in India but also across BRICs and other emerging market economies, while a global downcycle pulled down growth in the UPA-II years. This is seen from the Indian growth chart, when juxtaposed with the global index.
Irrespective of who is in power at the Centre, the trend has, by and large, been the same during all of the years since 1991, though the intensity of the downslide in the UPA-II is seen to be comparatively sharper than that of the global downturn.
A look at the investment cycle too shows that the trend for India mirrors the global cycle, although much is made of how capex slowed down because “political paralysis” delayed project clearances. Investment picked up across BRICs in the upcycle UPA-I years and has fallen across BRICs in the downcycle UPA-II years.
It is for this reason that a turnaround in capex is not predicted till 2015 when the US is expected to show a recovery, BofA-ML said.
This counter view to an impending BJP-led government’s ability to turnaround the industrial sector is corroborated by equity research firm Credit Suisse, which in a March report said that the BJP would face an uphill task in kick-starting investments, as only a quarter of the stalled projects required clearance from the Centre.
“Only a fourth of projects are stuck with the Central government, and two-thirds of these are in power and steel, both wracked with massive overcapacity…. Only state governments can revive power demand. Even elsewhere, solutions will take years.” It is probably the first time a global firm has discounted Modi’s impact on the economy; earlier, brokerages such as Goldman Sachs and Nomura were upbeat on the BJP coming to power.
The rupee has also been driven by the US dollar rather than political regimes in New Delhi, while inflation too has mirrored the global commodity price inflation benchmark.
Although the two have diverged in recent years, this has been attributed to “temporary local factors” like delayed pass-through of global oil prices, rain shocks and sharp depreciation. As a result, the inflation curve looks sharply accentuated in the Indian context in the UPA-II years, as compared to the global benchmark.
In the latest rally, the role of external factors is conspicuous. On Friday, when the rupee had posted its biggest quarterly gain since the September quarter of 2012, heavy foreign buying of equities and debt played a big role, which prompted the RBI to put up some resistance to stem the sharp upsurge.
On a comparative basis, India currently finds itself sitting higher as compared to other emerging markets who have a slew of problems.