[T.S.R:18005] Ambit-India GDP Growth To Sink Sub 6% In FY12-13, Inflation Unlikely To Drop

 

Political in-fighting in Delhi….

On 28

th October we described why we found the EU's $1.4 trillion rescue package non-credible given the lack of

details around who would finance such a package and why. In this email we turn our focus back on India and try to

give more detail and colour on: (a) the political gridlock in Delhi, and (b) the extent to which it is hurting the

economy.

Given that the policymaking mechanism in Delhi has now remained jammed for more than a year, a

range of seasoned political observers in Delhi have told us that:



There is political infighting within both the main political parties in New Delhi. Hence trust is in short supply and

even senior political figures don't know quite what is going on.



The Congress leader's illness has created a vacuum and thereby raised the political stakes for everyone else.



The plethora of big-ticket corruption investigations has resulted in the unwritten "contract" between the political

and business classes being suspended. As a result neither side now knows how to get things done.



Ministers and civil servants are reluctant to take any decisions for fear of restrospective investigations.

…is resulting in the "India story" unravelling

The trillion dollar question is "How profound is the impact of this on the Indian economy?" As the months go by

without any meaningful thaw in the political situation, some of the wiser sages in Delhi are beginning to draw some

early conclusions:



It seems unlikely that the situation in Delhi will improve until the next General Election following which big ticket

political changes are likely regardless of which party wins.



A leadership vacuum of the scale that we see currently is unprecedented in India. Even the late-1980s and the

late-1990s (periods which saw a series of Prime Ministers take charge) were more productive periods by way of

decision making at the centre. Paralysis of the sort that we see today in unknown territory for India.



Given that India's institutions of public governance (leaving aside the hyperactive CAG and the Supreme Court)

are not particularly robust, the leadership deficit in Delhi has left the country rudderless. This is all too apparent

to investors who can see the contrast between India and: (a) an increasingly prosperous Brazil (under Lula's

stewardship); and (b) an increasingly aggressive China (even as the leadership at the helm of the Communist

Party goes through a generational change).



Indian companies don't seem to have any one to turn to Delhi with regards to their requests for reform. So

whether it is power companies seeking coal, retailers seeking FDI, gas companies seeking price deregulation,

etc – no one in Delhi can really help at present.



India's drift has broader implications for its national security and defense - areas which are outside our remit

but ones which have important implications for investors.

Investment implications

Unless the political situation in Delhi changes dramatically in the next 6 months (and that's something we can't rule

out given what we know about some of the critical variables in play), India seems headed for a double whammy:



The problems in Europe are likely to hit investment growth in FY12 and push growth towards 6%. See our

economist, Ritika Mankar's 17

th October note on this subject (attached). Note that investment accounts for 32%

of Indian GDP.

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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