Q & A session with a Global Hedge Fund Manager on BJP’s Economic Policy

Dear Harsh:

One of the local newspapers is reporting some early indications of what BJP’s economic policy might look like if they are elected. The BJP is engaging with top-notch economists like Arvind Panagariya of Columbia University to finalize its economic manifesto. The ideas floated below could find their place in the manifesto but it is yet to form a unified macro structure. Some of these could be highly contentious. a) Opposes the RBI’s view of raising interest rates to control inflation – it has not been successful in the past, so there is no guarantee that it will be successful now.

Reply: In the short run I am going to position myself to believe that the BJP will allow the RBI to continue with its hawkish stance. Using monitory policy to stabilize the currency has in the past provided for mixed results in the short run, however over the medium term it has resulted in a more confident/ stable environment.

The RBI for what it’s worth has in the past fairly successfully distanced itself from the Government. Specific to BJP’s motives, by nature they are aggressive/pro-business and in the mid run would like to have a monitory policy that complements its economic reforms agenda. There are a number of themes out on the street. One view is that the RBI has been pushed to a corner, more so by domestic policy issues which have created structural imbalances across the economy, than the EM/ tapering angle, and hence the unrelenting interest rate hikes. The EM / tapering issue is a mere catalyst to get the house back in shape.

What is the key takeaway here is that the Congress with its socialist schemes has created for inflation a feedback loop that has left the RBI with little or no room to maneuver. Once these schemes are moderated inflation should ease. It is evident from the data that core inflation or inflation resulting from the creation of positive economic value is subdued.

So the scenario the BJP is gunning for is a growth oriented policy environment which would bring in the stability / interest into the Indian economy from sticky, long term FDI’s rather than hot money from FII’s, thereby stabilizing the currency. All the while in a measured way orienting monitory policy to complement the above environment.

Come to think of it, having to raise interest rates to tackle short term capital outflows is like having to sell a long term investment because of the MTM. To that extent the BJP is right in its views.

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DownloadedT:+918067590789 from www.hvst.com F:+918067590400 by IP address | E: 192.168.160.10 [email protected] on 09/29/2021 Q & A session with Global Hedge Fund Manager on BJP’s Economic Policy b) Believes that the RBI’s roadmap of giving new bank licenses is subjective. BJP (if they come to power) is likely to scrutinize the issuance of these licenses if the RBI issues them before the elections.

Reply: This is very political in nature. Scrutinize issuance to what degree? Scrutinize the policy/ need for new banking licences or scrutinize the process by which these licenses are given out? Having the BJP to launch a witch-hunt would be less likely. They are a mature political party who have enough and more experience in working the system to stability. c) Strong focus on investment and job creation with stress on manufacturing and infrastructure development. This is very much needed but specifics not yet disclosed. No mention of labor reforms as yet.

Reply: One can draw the conclusion that the BJP by nature are a pro-reform/ pro- industrialisation, business oriented party. The Congress on the other hand has left of centre capitalistic approach. As you have specified there are no specifics, but taking a cue from Modi’s governance style we do expect a reduction in the bureaucratic bottlenecks, more on ground growth that is created by actual implementation of projects.

The thing with the Congress is that while we say high growth during its stint between 2004- 2009, a lot of that growth can be accommodated to mere opening of markets/ technology advancements and of course the infrastructure boom created by the massive road projects (Golden quadrilateral / Triangle ), which incidentally was a baby of the BJP under the leadership of Atal Bihari Vajpayee. d) Simplifying the process of land acquisition – BJP seems to be fine with higher compensation for land acquisition but will stress on removing the clutter of bureaucracy around it

Reply: This is a Modi move. Bureaucracy increases the time lines across every project which has a large bearing of the cost of finance. The BJP understands that while paying a lot more for land acquisition, faster completion of projects will allow for an uptick in IRR, provided there is seamless execution. Providing for that environment is something the BJP has been able to showcase with the example of Gujarat. e) Environment clearances would be made simpler with focus on companies being encouraged to plant new forests

Reply: No comments.

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DownloadedT:+918067590789 from www.hvst.com F:+918067590400 by IP address | E: 192.168.160.10 [email protected] on 09/29/2021

Q & A session with Global Hedge Fund Manager on BJP’s Economic Policy f) Claims that the royalty payment by Indian companies to their parent companies is exceptionally high in technology-light sectors – BJP would look to bring it down in sectors like FMCG, food, cars etc.

Reply: This will have a positive bearing on FMCG companies such as HUL etc., in the short run. However this will be perceived negatively by the parent companies. Moreover I have not heard of this theme being discussed much. I am more curious to understand how they would implement such a restriction. g) The Jet-Etihad deal where the Indian government has granted additional flying rights to Abu Dhabi will be under scrutiny if BJP is elected.

Reply: Political in nature. We do not invest in the aviation sector; hence will not be able to comment. h) Operational and financial freedom to public sector companies and banks. This could be critical if BJP stops the practice of funding fiscal deficit through higher special dividends from the public sector companies. The banks would be allowed to raise more capital independently. This can raise the hope that the government’s share in PSU banks will come down substantially.

Reply: This will be viewed as a very positive step. This point also helps in describing the economic ideology of the BJP vs. the Congress. Funding the fiscal deficit via special dividends is like dressing up the accounts. The BJP has in the past postured itself towards providing measured socialist schemes. I am going to believe that they will tone down the fiscal imbalances by actually creating positive economic value rather than window dressing. i) We have already heard that BJP will oppose some parts of FDI in multi-brand retail but the pace of GST Implementation is still unclear.

Reply: GST should be out by 2016. FDI in retail is a very touch topic and we need to see how this pans out. While it is not very clear if the BJP is outright against FDI in multi-brand retail or is it against the current policy relating to FDI in multi-brand retail. I will position myself towards the latter.

Note: Exposure into India preceding and post elections is a game of sentiment coupled typically by a heightened participation by the domestic / retail participants. There is almost no bearing to fundamentals or the lack off, until the government settles down. History is your best friend.

Level 15, Concorde Towers, UB City,#1 Vittal Mallya Road, Bangalore 560001, India.

DownloadedT:+918067590789 from www.hvst.com F:+918067590400 by IP address | E: 192.168.160.10 [email protected] on 09/29/2021