Euclid Weighs in on India
This weekend’s Barron’s features a bullish cover story on India. While we take a back seat to no one when it comes to our admiration for the potential of the Indian economy and the possibilities of the Indian BSE Sensex stock market, (indeed, we are overweight the bourse), we do have some reservations for the basis of the bullish opinion presented.
The story rests primarily on the abilities of Raghuram Rajan, the current head of India’s central bank, the Reserve Bank of India (RBI), and Narendra Modi, head of the Bharatiya Janata Party (BJP) and the presumed winner of the upcoming national elections. The article cites a report likening them to Paul Volker, former Chairman of the U.S. Federal Reserve Board, and former U.S. President Ronald Reagan (1980-1988). The U.S. leaders vanquished inflation, cut taxes, reduced the influence of unions, accelerated economic growth, increased confidence in America overall, and served as catalysts for one of the great U.S. bull markets, with the S&P 500 rising approximately 329% from August 1982 to August 1987. The problem, however, is that the first 18 months of the Reagan administration were not pretty for the S&P 500, which dropped approximately 23% from the president’s inauguration day on January 20, 1981 to the bottom of the market decline on August 12, 1982. Mr. Volker had to take 30-year Treasury bond yields up to 15% to kill inflation, creating one of the worst U.S. recessions to that point since the Great Depression.
Messrs. Rajan and Modi have to deal with similar problems in India, including 8% inflation and a fiscal deficit of 4.6% of GDP. The point is not that we believe they won’t be successful. The point is that we believe they will need to administer some difficult medicine to get to the promised land. The Indian equity market is not discounting the pain before the gain.