Electoral bonds verdict, RBI action on Paytm bank sign of robust institutions

On the regulatory front, the Reserve Bank of India stood firm on the Paytm Payments Bank issue.

On Monday, Indian stocks reached record levels, spurred largely by domestic buying, while other Asian markets were largely range-bound.
Yet another bullish day in an exuberant market certainly does not lend itself to definitive conclusions, but it is reasonable to argue that several seemingly disparate events in the previous week, considered together, have reinforced the growing consensus that India is a country with considerable institutional strength, enhancing its attractiveness as an investment destination, both for portfolio and foreign direct investors.

When it comes to markets, the widely reported move to include India in the Bloomberg Bond Index and the increasing weight of Indian stocks in the MSCI index—mostly at China's expense— testify to the growing tailwinds propelling India.

On the regulatory front, the Reserve Bank of India stood firm on the Paytm Payments Bank issue. While offering an extension till March 15, it stuck to its guns, essentially rendering Paytm Payments Bank dormant after that date. Notably, it did not seem perturbed by an organized social media campaign by some startup founders in favour of One97 Communications, which operates the Paytm app and is a 49% shareholder in the payments bank. The suggestion that One97 Communication represented a nationalist constituent of Digital India appears to have been repudiated.

Another notable instance of institutional strength, I would argue, is the Supreme Court's verdict on electoral bonds.

The last example might seem surprising, so let's delve into the subject in a little more detail.

The Supreme Court, on February 15, ruled that a flagship albeit controversial initiative of the first Narendra Modi government was unconstitutional on the ground that donor anonymity violated the citizen's right to information, which the court has held to be a fundamental right.
Corporate donors can exert influence by way of large and anonymous contributions, while the voters are none the wiser, according to the ruling.
It takes on board the Union of India's stance that the scheme, a brainchild of the late Arun Jaitley, is intended to eliminate political donations using black money as the contributions are being made through banking channels. Yet, the ruling contends that the scheme's defects outweigh its positives.

One possibly controversial aspect of the ruling is that it has ordered the names of donors to be made public. This might be the subject of a review petition.

Donors had made contributions believing in the government's promise that their names would not be known. The verdict would mean that the government's word has little meaning. Tomorrow, a tax amnesty could be retrospectively invalidated, and the names of those who had availed the amnesty could be made public.

Of course, policy decisions are subject to judicial review if they are arbitrary or unconstitutional. But the government would be justified in challenging this aspect of the verdict. It's also far from clear if those who have donated to opposition parties would want their names to be made public.
Election funding now reverts back to the pre-electoral bond days, and unaccounted cash could return in a big way, supporters of the government argue.

The court's response, spelt out in the judgement, is that the government is free to devise any other scheme to deal with the black money problem—just not this one.

The court accepts that corporate donors have a right to anonymity but that such a right has to be weighed in the balance against the right of voters to know. It also appears to be drawing a distinction between donations made out of genuine political conviction and contributions aimed at eliciting a quid pro quo.

It's a complex verdict befitting the top court of the world's largest democracy. It's also possible to argue that it could have gone the other way if the test of proportionality had been adjudicated differently.

Be that as it may, a ruling against a powerful government on a core issue has enhanced not just the court but the country's credibility.

In the long term, independence of the judiciary and other institutions matters for markets and businesses. One reason Hong Kong is losing its lustre as an investment destination is that the former colony's institutions, including its judiciary, are increasingly under the sway of the Chinese Communist Party (CCP). The market capitalization of companies listed on the NSE crossed that of Hong Kong on January 23. While Hong Kong has again exceeded NSE, the declining institutional integrity remains a concern for global investors.

Mainland China, of course, never had an independent judiciary. Previously, regulators such as China's central bank have come under the direct control of the CCP along with a widespread and arbitrary crackdown on the private sector. These actions, coupled with geopolitical tensions, have soured the China story. China saw its lowest net foreign direct investment in the fourth quarter of 2023.

India's inclusion in the JPMorgan bond index could attract annual inflows of $20 billion, while the move by Bloomberg could attract passive inflows of $5 billion, according to an Economic Times report. India's weight in the MSCI Global Standard Index (Emerging markets) will rise to a historic high of 18.2% on February 29 after the latest review by the index provider, nearly double the level of November 2020. While China has the highest weightage, the latest review saw the deletion of 66 Chinese stocks, while five were added, according to Nuvama Quantitative and Alternative research. India saw the addition of five stocks and no exits.

Robust institutions aren't the only reason why India is flying high, but surely, it's a major one. We should not endanger them in my way.