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Moodys not overstepping; India will do well if its heeds to constructive criticism

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Mr.Dhananjay Sinha

Head of Research and strategist.

19 Dec 2015

The commentary of Moody’s expressing concerns on India’s outlook from rising intolerance is definitely not an over-reaction; ahead of them, there are several from within who have aired similar sentiments. It includes the President of India, Governor of RBI and a whole host of eminent writers and artists.

Government on the other hand seem to be dismissive of such protest and alerts, labelling them as rabid opponents of the BJP and limited to the Lutyens Delhi. Several defendant have also contended that since there is little evidence of large scale social disorder, media has exaggerated isolated incidents.

The problem with the views justifying the government stance or ignoring the writing on the wall is that it is more often the case that dissent of eminent people that get highlighted. It does not preclude the dissent from the masses that does not get highlighted, but surface after elections. The outcome of the Bihar elections will be a testimony to whether the infestation of communal intolerance delivered the intended electoral gains or ended up harming the economy on the balance.

The problem comes after 1.5 years of the new government which Indian voted to power in a presidential style election, with BJP projecting Mr Modi has a transformational leader who is the sole purveyor of “Achhe Din”, good governance and “minimum government, maximum governance”. In the context of intensifying pressure on delivering on poll promises, attempts of elements within the government to polarise can create an impression of evasiveness.

Even if we take the point that these remarks are exaggerated, the damage negative publicity of rising intolerance can make in the international arena can be far reaching on both economic and political levels. This is especially so because the Mr Modi has invested a lot of time and energy drawing attention of global leaders on him and on the Indian nation. Clearly the adverse commentary of Moody’s and adversarial coverage on India, even if on isolated incidents, will impact the global sentiment and denouement of bigger goals of the Indian government like “Make in India”, "Start-up India, Stand up India", inclusive growth “Sab ka saath, sab ka vikas” etc.

The bigger story, however, is that these developments are coming in the wake of increasing stridency of political the opposition to the Mr Modi and the NDA led government. The pull back on the land acquisition amendment bill, obfuscation on passage of the GST bill, worsening conditions of the agrarian economy and lack of job creation are probably providing fodder for the opposition parties to consolidate. Hence, evolving situation could pose challenges to the government in arriving at a consensus on critical reforms, thereby narrowing the window of opportunity for the government to deliver on its promises.

Why should this be concerning?

In my view, erosion of the robust image of the Modi government as the purveyor of development and growth, having the potential to transform India in the pattern of Gujarat model can induce a severe dent to the financial markets. It is on the back of this tall image that global and domestic investors pulled up the Indian benchmark stock indices by over 40% since the formation of the Modi government in 2014. Ahead of that, the markets gained nearly 10% in the second half of 2013 in response to BJP led government elected in states of Madhya Pradesh, Rajasthan, Chattisgarh and supported in Punjab.

Quite clearly, the premium the markets have been crediting the Modi government with has started to mellow with a correction of over 10% from the peak as in contrast to consensus expectations, business and earnings cycle failed to pick up meaningfully. Further erosion in perception at the time when people are looking for deliverance from the government can expose markets to risk of retrenchment of global portfolio flows. India’s perceived unassailability in the backdrop of weak global growth, especially with respect to slowdown in China can take a beating.

In a constructive outcome, BJP may choose to start focusing on execution of promises made in the General elections 2014. Instead of labelling the critical evaluations, reign in trends of elements festering intolerance. Lack of numbers in the Rajya Sabha (Upper House) may push BJP to bridge the trust deficit with other political parties to enable better floor management in the Parliament. This will be crucial to enhance BJP’s ability to push through some critical reforms. Conversely, an obdurate disposition can make the opposition parties more strident.