Page 58 - Nuvama | IC Report 2023

• DE-GLOBALISATION • DEREGULATION • DEBT • DEMOGRAPHY • DEMOCRACY

Democracy: What investors see

Form of governance has a bearing on investment returns. All types – varying from democracy to
authoritarian – may offer lucrative investing opportunities, but each entails risks pertaining to political
and macroeconomic stability. Given less than half of the world’s population is living in democracies
and more than one–third under authoritarian rule, investors cannot ignore opportunities barely on the
basis of the nature of polity. It is, therefore, imperative that investors weigh the pros and cons of each.
Democracies, for instance, are synonymous with the rule of law, civil liberties and institutional
Democracy, mechanisms for recourse to justice. In a true democracy, institutions are independent of the executive
through and draw power from constitutional statutes. Creditable independent institutions such as regulators,
institutional checks a central bank, judiciary and an election commission inspire investor confidence and foster
and balances, large-scale investments.
political competition
and freedom of Authoritarian regimes meanwhile have a unique ability to push investments into sectors of choice
press allows for a far more efficaciously. Decision-making is concentrated, but swift—and investors love it. China, for
continuous process instance largely regarded as an authoritarian regime, has a history of stimulating certain sectors of its
of evaluation and economy, which have yielded handsome returns for investors.
adjustment, a safety
valve of sorts Regardless of polity, investors cannot give a short shift to concomitant risks. Democracies might be
home to weak institutions with cumbersome processes or loopholes that undermine constitutional
rights. Such feeble guardrails of democratic values and ideals can deter investors. Similarly,
authoritarian regimes are notorious for arbitrary interventions that make policy path unpredictable
and macroeconomic environment instable. Investors abhor policy flip-flops.

India: Underpinnings of a veritable democracy

In a world rife with mega threats – pandemic, geopolitical, energy, logistical bottlenecks, EM upheavals
and volatile currencies, to name a few – India stands out as a doughty democracy underpinned by its
creditable institutions. This is all the more appreciable in light of one of India’s democratic neighbours
– Sri Lanka – withering into a meltdown. We shine light on India’s democratic credentials.

India’s democratic strength stems from its robust independent institutions. We outline a few.
• The Reserve Bank of India: India’s central bank is respected by investors worldwide. Buffeted
by macroeconomic headwinds nearly a decade ago that culminated in a balance of payments
crisis in 2013, Indian policymakers understood the hard way that price stability is the bedrock of
sustainable economic growth. They embraced the idea of more independence and accountability
for the RBI, and a more transparency in the policymaking process.
In 2015, India formally adopted the flexible inflation-targeting regime. Under this regime, the
inflation indicator and the inflation target were explicitly defined—a stark departure from the
earlier regime that relied on multiple indicators. A six-member Monetary Policy Committee (MPC)
was constituted to run the monetary policy. All this helped restore the RBI’s credibility, and price
stability at large.

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