By Matein Khalid: Chief Investment Officer and Partner at Asas Capital
If BJP Prime Minister Narendra Modi is really pro-business, someone forgot to inform the Indian economy. GDP growth has plummeted from 8% in end 2017 to 4.8% now, with economic growth prospects for 2020 slashed by Moodys, the IMF/World Bank, SBI and the Asian Development Bank. India has grossly underperformed the MSCI global emerging market index, up 12% in 2019.
There is zero chance that India will achieve the BJP’s $5 trillion GDP target even if the Prime Minister – a lifelong member of the same Hindutva supremacist RSS gang whose gunmen assassinated Mahatma Gandhi – appoints himself “Maharajah For Life” of Bharat Mata (Mother India). Auto sales have fallen a ghastly 30% in 2019. Indian property markets are an unmitigated disaster for investors and prospective homeowners. Gullible Western and GCC investors have found out the hard way that most Indian stock promoters (Crooks R Us!) are such maestros of financial black magic that they put their rivals in Indonesia, Russia and China to shame. True, I concede I am from the other side of the Radcliffe Line and corruption in the land of the Pure includes not just deals under the table but the table itself!
India’s shadow banking system has just imploded the country’s “Lehman moment” after IF & LS, Dewan Housing, Yes Bank, Indiabulls and their ilk vaporized a $100 billion in investor wealth now gone to money heaven. This is hardly chump change even for a megalomanic, self-styled visionary genius like Narendra Modi, known as Supernamo to millions of his Hindi Cow Belt acolytes. In a country where two thirds of the population is below 30, youth unemployment has spiked, a social time bomb just waiting to explode since one million kids enter the labour force – each month.
Modi has delivered a succession of shocks to the Indian economy: rupee demonetization in 2016, the GST and draconian penalties for tax evasion in 2017, the collapse of the shadow banking daisy chains in 2018 and a mercifully short air war with Pakistan and unconstitutional coup on the special status of Jammu and Kashmir in 2019.
From personal experience, I can attest that the wealthiest clans in Bombay and New Delhi are opening offshore trusts/family offices to save their assets from the arbitrary demands of Modi’s taxmen brigades. If Modi is pro-business, I wonder why the Indian business elite is voting with its feet to hide their capital in the Swiss Alps, Malta, Singapore and the Arabian desert where their black money rupees/dollars are aspiring to attain gorgeous suntans. Somethings seems to have gone awfully wrong in India – a nation whose Constitution I once admired because its first five words were “the state is a secular socialist republic.” There is nothing secular or socialist about Modi’s India, now redefined as a homeland for Hindus akin to Israel’s “ingathering of the exiles” – though not even Modi can rebrand India as “a land without people for a people without land” as Theodore Hertzel’s Zionists once described Ottoman-era Palestine to the World Zionist Congress.
India has been the consensus darling overweight of emerging markets fund managers as a hedge against a US – China trade war and a slump in manufacturing exports because its growth was derived from domestic drivers. India deserves a growth premium but the Sensex’s current valuation multiple is absurd at 29 times earnings since EPS growth in India has been beyond mediocre in 2019. The Sensex today reminds me of the S&P 500 Index’s 30 times earnings valuation just before the tech bubble burst in late 1999. The 10-12% melt up in the Sensex/Nifty indices this autumn is due to the $12 billion in financial flows that have gone into a handful of megacap Indian index corporate colossi from dumb money, also known as Foreign Institutional Investors (FIIs). Indian midcaps are in a savage bear markets as the Indian Warren Buffet of Oman knows all too well, with 50-70% drawdowns on “promoter” allocations.
There is no reason to expect an immediate snapback in Indian economic growth as the shadow banking sector has gutted consumer credit, corporate loan growth, rural demand and property prices. Outside 15 odd index supermajors, the jewels in the crown for the Sensex and Nifty, the broader BSE-100 stocks have done squat. Now that Trump and Xi Jinping have signed a “phase one” trade ceasefire and the Powell Fed has priced out US recession risk with three successive FOMC rate cuts, my EM fund manager friends tell me that they plan to rotate into high beta, cyclical deep value markets like Brazil, Russia, Thailand, Indonesia and South Korea. So it is entirely possible that the exodus of global money means 30% downside risk in the Nifty at 12,000 and Sensex at 41,000 – these are stratospheric levels for both indices given that the macro storm clouds in Indian finance will only darken in 2020. A vicious, crazy bear market (Pagal Bhaloo?) will gut India’s inflated, comically narrow breath stock market indices. If anything, I feel my 30% correction call is overly optimistic.
However, a 30% fall in the Sensex/Nifty can create some compelling risk-reward calculus ideas for me. Ironically, there is a silver lining in Modi’s first term Big Bang reforms. Rupee demonetization, while a nightmare of flawed execution, vastly boosted India’s banking deposits/GDP ratio. The Bankruptcy Code will hopefully help reduce the systemic looting of Indian public (and private) banks by generations of Indian oligarchs since Nehru’s License Raj era. The GST, while falling short of its tax revenue collection targets, has created national scale economies for Indian consumer businesses.
Modi has also gone after the corporate assets of zombie borrowers and cracked down on the untold billions of “black money” capital flight that exited India every year to hide from the taxman in offshore money laundromats, the new digital hubs of global peekaboo finance. India now faces its greatest financial crisis since the post-Lehman global recession of 2009. The collapse of prominent shadow banks has frozen access to funding markets for thousands of Mom and Pop non-bank lenders and Netaji rotten borough pocket banks.
Millions of Indian citizens have been cheated by overleveraged and now bankrupt property developers (what does déjà vu mean in English, habibi?). Property prices are in free fall, as are retail sales and industrial production. I can easily envision GDP growth falling to 2% as the deflation big chill sends tens of thousands of Indian corporates belly up. India must now pay the price for the go-go loot (the first Hindi word to enter the English language, thanks to the brazen, kleptocratic exploits in Bengal of a certain Robert Clive Esquire after the battle of Plasey!) and pillage culture that has so devastated its public sector banks and shadow banking system since Prime Minister Vajpayee’s Indian Rising era two decades ago. It is symbolic that Tamil ex-Finance Minister P. Chidambaram, a Harvard alum once hailed as a Congress finance maestro, is now in Tihar jail. India faces a financial reckoning moment in 2020, akin to Mexico ’94, Russia ’98, Indonesia ’98 and Argentina 2001 and 2019. After all, credit bubble busts are like Trotsky’s definition of revolution – unthinkable until they become inevitable. This time the wolf is here and not all of Modi’s henchmen and all of Modi’s horses can put the Indian financial Humpty Dumpty together again. Get real. Get out.