“Forward ever, backward never: onwards with Breaking Through”

Why politics has nothing to do with economics in India.

India's economy now seems to move like a vast oil slick on the global sea, far too broad, far too hard to grasp, to be contained or even shaped by any one leader sitting in Delhi

For two decades now, I have been leading a band of journalists on annual trips to follow state and national elections across India. Of all my global travels, I relish these journeys the most, as a way to explore the country I love, an added pleasure at election time when India truly comes alive. But what has become increasingly clear to me over time is that, at least from an economic standpoint, the outcome of the elections is irrelevant. Seventy years after Independence, India has changed in many ways, but is more or less the same in one: there is no connection between politics and economics.

In the last decade, it seemed for a while that a link was building between politics and economics, as the few high-profile state chief ministers who delivered strong growth were re-elected. The rate at which voters rejected the incumbent candidate dropped to a low of 50% last decade, compared to the average of 65% that had prevailed since multi-party democracy took root in the 1970s. In this decade, however, voters have switched back to their default mode of throwing out the incumbents, almost regardless of their economic performance.
There have been around 30 major state elections since 2010, and during this period the state chief minister once again faced a two-thirds probability of losing his or her re-election bid even if a state economy had grown faster than the national average. In fact, going back to 1981, when state GDP numbers first became available, records show that even if chief ministers delivered an annual economic growth rate faster than 8%, they faced a 58% chance of getting tossed out of office.


When Prime Minister Narendra Modi came to power over three years ago, expectations were high that he would have a dramatic effect on the country's economic prospects. Yet, for all his power, Modi is having much less impact on the economy than either his detractors or supporters imagine. Just as surprising, this disconnect is hardly hurting him politically. He remains very popular with the masses, who increasingly favour a strong, nationalist leader.

Exhaustion after 60 nearly unbroken years of Congress rule, combined with disdain for the ineffectual last prime minister in the Congress line, created a yearning for strongman rule, the scale of which is still widely unrecognised. The World Values Survey polled voters in the largest democracies in the late 1990s and again in this decade, and found a sharp increase in popular support for authoritarian leadership in most of the 30 countries that were part of the poll. The results were particularly striking in India, where support for "a strong leader who doesn't have to answer to parliament" rose 25 percentage points to 70%. This was the third largest increase for any nation, after only Ukraine and Romania, countries with little to no tradition of democracy. Modi continues to ride this surge in support for strongman rule, and that popular emotion is likely to shape his political future in 2019 more than any economic variable.

Of course, many supporters of the current government argue that Modi has done more for economic reform in three years than Congress did in nearly 60. Maybe over time that will prove to be the case, but for now both the nature of economic growth and the stock market's performance suggest that the impact of this government has been rather limited on the country's economic prospects.

Governments exert their greatest impact on economic growth by encouraging investment. In India, as in many countries, investment growth has been weak since the global financial crisis of 2008. The main reason India is still growing at a decent clip is strong consumption, which is playing an increasingly large role in driving the economy. The share of private consumption in the Indian economy has grown from 55% in 2008 to 60% now.

This trend is also reflected in the stock market, where the consumer staples sector has risen by 50% and delivered the highest relative returns since Modi was elected. This again reflects the growing irrelevance of politics: because in developing countries the state usually plays a large role in investment projects but has little direct sway over consumer choices.

India's stock market continues to move in line with other stock markets around the world, and anyone who made investment decisions based on Modi's political agenda currently looks like a loser, whether they bet on him or against him. Liberals who pulled out of the market expecting Modi's autocratic tendencies to lead to economic disaster would have missed out on a market that has risen by 20% during his tenure.
On the other hand, right-wing supporters who bet on the "Modi basket" (of state, infrastructure, real estate and manufacturing companies that were supposed to benefit from his reform agenda) would have missed out, too, by choosing all the wrong stocks. The average stock price of state companies rose more than 30% in the months immediately before and after Modi's election, but has since given back almost all of those gains. And despite the much hyped 'Make in India' campaign, industrial stocks have risen less than half as much as the Indian market as a whole during his tenure.

In short, the market in its collective wisdom has chosen to ignore politics. Though Indian market analysts still love to talk about the impact of Modi and his policies, the latest Indian bull market has nothing to do with politics.


This may also be the cleanest and least politically influenced bull market in Indian history. In the past, run-ups in the market always kicked up a tide that lifted all boats, including the flotsam and jetsam of shady characters whose political ties appeared to boost their performance. This time, however, dubious companies are hard to find among the stocks with the best performance—a trend that predates the arrival of the relatively corruption-free Modi administration.

In early 2009, amid the corruption that flourished under the Congress government, Ambit (a brokerage firm) started to keep an index of "connected companies", with known ties to politicians. Through late 2010 the index rose 180%, 60 percentage points more than the overall market. Then, as the anti-corruption investigations triggered by the scandalous 2010 Commonwealth Games gained momentum, the connected companies began to falter. Their stock prices suffered big losses from late 2010 through March 2012 and have gone flat ever since, while the overall Indian market has gone on to double in value.

In short, the Indian market now questions not only whether politicians and the state can deliver, but also whether political cronies can deliver. The connected tycoons that flourished under the previous regime have been decimated, and since taking office in 2014 Modi has kept a new generation from rising up—by bringing much more transparency to public bidding and licensing. But he is following a trend that was pressed on the government by the judiciary even before he took office.

The clean quality of this bull market — and its disconnect from politics — is also reflected in my analysis of good and bad billionaires. Bad billionaires come from corruption-prone industries like oil and real estate, good ones come from industries like tech and healthcare that tend to be relatively free of political influence and make the most impact on productivity. In the first half of this decade, the good billionaires increased their share of total billionaire wealth in India by 22 percentage points to 53%. Of the 13 new names on India's latest billionaire list, almost all of them can be classified as good billionaires.

The key to understanding where the economy and markets are headed in India is to ignore Indian politicians and follow the top 30 to 40 business leaders. Since opening to the world economy India has continued to grow at an above-average pace in part because of the advantage of growing from a very low income base, and in part based on the extraordinary strength, diversity and quality of its entrepreneurial culture.

India has the second most listed companies after China among emerging markets, and a surprising number are very high quality. If you screen the major emerging markets for large, high quality companies—meaning companies with a market cap of more than $1 billion that consistently deliver both earnings growth and a return on equity in excess of 15% every year — India consistently tops the league tables. Over the past five years, just over 30 companies have cleared this high bar.

India's selection of large, quality companies is absolutely unique and the results are apparent. Over the past five years, 75 Indian companies with a market value of a more than a billion dollars have doubled in value, which is the most in any emerging stock market. Shanghai is second with 64, but in third place South Korea is far behind with just 22. South Africa has only 9, Brazil scores 5, Russia boasts only one.
India's private companies are incredibly strong, deep and varied by comparison with all these major rivals, which also helps explain why it tends to rise and fall with global trends. Every time a global tailwind picks up, no matter what the sector, India catches the breeze, because it has so many sails up in every sector. Both the Indian stock market and the economy have steadily outperformed other emerging markets over the past three decades and that basic trend should roll on for the foreseeable future.

India's economy now seems to move like a vast oil slick on the global sea, far too broad, far too hard to grasp, to be contained or even shaped by any one leader sitting in Delhi. In recent years, the 3-Ds of slower demographics, debt and deglobalisation have slowed growth across the world. There is not a single region that is currently growing faster than its average growth rate in the last decade. Every country needs to lower its expectations, and the least developed countries need to lower their definition of fast growth from above 7% to above 5%. The number of countries growing that fast is shrinking rapidly. As of 2010 there were 78 countries growing faster than 5%, now there are just 28 and India is one of them—whether you believe the official growth statistics or not.

This performance is, however, not necessarily cause for political celebration. The least developed economies tend to grow fastest — because it is easier to grow from a low base — and India has reflected this basic development dynamic for decades. Particularly since India began opening to global trade and capital flows in the 1980s and '90s, its economy has tended to grow about 2 percentage points faster than the emerging world average. In this decade too, India has retained this tendency, growing around 2 percentage points faster than the emerging world average is true that over the last couple of years, India has continued to grow at a strong pace while growth has slowed more sharply in emerging economies as a whole. But this likely has more to do with the fall in commodity prices, which has undercut commodity exporters and benefited importers like India, than anything the government has done.


Of course, the government has carried out some economic reforms, such as the passage of the GST with its complex, multiple tax rates. But these measures are in keeping with India's long tradition of incremental reform, which do just enough to keep the economic momentum going. These are not the kind of disruptive reforms that were carried out by miracle economies like China and South Korea, which fundamentally changed the growth profile of their nations.

Right-wingers who celebrate and liberals who dismiss this government's accomplishments may both be guilty of exaggeration. In this country politics has been a poor guide to the economy's prospects for decades, and this characteristic has reasserted itself strongly in recent years, so don't hold your breath for that to change anytime soon. All the evidence suggests that one of the most important attributes for succeeding in the economic sphere in India is to go into a form of internal exile, which means simply tuning out politics.

Sharma is the author of The Rise and Fall of Nations: Ten Rules of Change in the Post-Crisis World