India is at a tipping point. Five months after a landslide general election that carried him to power on a wave of optimism, Narendra Modi, the country’s 15th elected prime minister, is striving to inject confidence, momentum and belief into a chronically underperforming economy.
Before the poll, many Indian voters viewed Modi, leader of the Bharatiya Janata Party, as a transformational figure capable of shattering and rebuilding a sclerotic economy hobbled by bureaucracy and undercut by corruption. Modi himself did little to pare back expectations, campaigning on a ticket of change similar to one that catapulted Barack Obama to the US presidency in 2008.
Unsurprisingly, Modi has struggled to meet the manifold expectations of 1.2bn Indians, most of whom had despaired at former premier Manmohan Singh’s increasingly aimless administration.
The new era’s first test was its inaugural budget, delivered on July 10 by Modi’s pick as finance minister, Arun Jaitley.
It proved to be a deflating event. Jaitley eschewed the chance to tackle head-on a $43bn state subsidy programme that cleaves to the economic thinking of the mid-20th century, pledging merely to make the system “more targeted”. He focused minds on the importance of cutting the budget deficit from 4.5% of gross domestic product (GDP) in the fiscal year to end-March 2014 to 4.1% this year and 3% by 2017, without outlining a clear plan of action. Plans to reform moribund sectors such as construction and power production were touched on only lightly. India, the new finance minister declared, was a country at the “beginning of a journey” that would see GDP rise from 4.5% last year, to 7%-8% in 2017.
But it was all rather vague. India’s army of social commentators huffed and puffed about the dearth of clarity or direction. Ratings agency Moody’s warned that the budget “lacked details on revenue and expenditure measures to lower the deficit”, thus making it hard to assess the “likelihood that future deficit targets will be met”.
Respected analysts fretted that ennui was setting in two months after the largest electoral landslide in modern history. Pratap Bhanu Mehta, head of the independent New Delhi-based Centre for Policy Research, accuses Modi of becoming wedged in his own “echo chamber”.
The most common word used to describe Modi’s first 100 days in charge is “underwhelming”. Deepak Lalwani, director of London-based, India-focused brokerage Lalcap, warns that the lack of direction could yet convince leading ratings agencies to “downgrade India’s sovereign rating to junk status”. In a July 10 research note, Standard & Poor’s cautioned that a high fiscal deficit and a national debt stock running at 70% of GDP were “two of the main constraints on the sovereign rating”.
PATIENCE, PLEASE
Yet others counsel patience, urging critics to take the long view. India’s problems are too deep-rooted to weed out overnight. The past eight years under Singh were largely wasted. State firms and banks still predominate. A ruthless tax department imposes seemingly arbitrary fines on local and foreign firms. Corruption, once merely entrenched, has become endemic, due in part to a lack of political leadership. In direct contrast with, say, China, India remains a weak state perched atop a robust society.
The new premier’s supporters — and there are still many — remain convinced he is the right man for the job. “People were too impatient, expecting miracles from the get-go,” says Frederic Neumann, co-head of Asia economics for HSBC. OP Bhatt, former chairman of State Bank of India, and a grizzled veteran of India’s business community, agrees. “There are huge hopes riding on him,” he says. “Maybe the response by his team hasn’t been as fast or as focused as some had hoped. But he has impeccable credentials. He is totally dedicated to the job in hand and he has huge amounts of energy. He’s all work-work-work.”
Then there is Modi’s background: poor, provincial and unprivileged. The combination worked in his favour as a candidate. He was the right man in the right place at the right time: a teaboy who rose to become governor of Gujarat, a northwestern Indian province which, with its manufacturing hubs and free trade zones, resembles an East Asian economic superpower. That is what compelled so many Indians to vote for him. Sick of politics-as-normal, they plumped for a clean-and-clever common-man candidate who pledged to create jobs, slash bureaucracy and court the business community.
INTO THE CAULDRON
But Gujarat is not the political cauldron of New Delhi. India’s capital is a “fragile structure”, says Bhatt. “It takes time to learn how to operate there.”
HSBC’s Neumann says Modi has spent his first months in charge “working out carefully what works and what can be done, similar to how he operated in Gujarat. Given the complexity of Indian politics, that’s the right way to get ahead.”
Those who know Modi best say that, far from dragging his feet over reforms, he has been quietly putting his ducks in a row. Rather than stating wild ambitions that cannot be met, the pragmatic new premier has, says S. Subramanian, managing director of investment banking at Mumbai-based Axis Capital, avoided making tall claims. “He is trying to fix what can be fixed. You won’t see any grandiose statements from him; rather, you will see on-the-ground action.” His focus is to “ensure that projects get completed, that capital is spent wisely, and that the government is seen to be business friendly.”
Only as July turned to August, and then September, did the new premier’s strategy start to gain form and substance. During his inaugural Independence Day speech at New Delhi’s Red Fort on August 15, he thundered about the country’s lack of financial inclusion, and pledged to open 75m new bank accounts for impoverished Indians by 2018, guaranteeing each a debit card and insurance coverage worth Rs100,000 ($1,640). To the surprise of many, even this ambition was trumped by his decision to scrap an inefficient and antiquated Soviet-style Planning Commission riddled with “competing fiefdoms”.
That announcement came just three days after the Securities and Exchange Board of India approved the creation and listing of domestic real estate investment trusts (Reits), a move that heartened the country’s cash-strapped property firms. The new rules, finally passed after six years of foot dragging by India’s securities regulator, provide much needed safeguards to investors while handing upwardly mobile Indians a new and reputable way to invest their money. As much as $12bn worth of Reits will be listed in Mumbai in the years ahead, reckons real estate consultancy Jones Lang LaSalle India.
Modi has also made clear his desire to boost the foreign investment cap on insurance joint ventures to 49%, from 26%, and to raise the ceiling on foreign investments in the railways and defence sectors to 49%.
In early September, officials in the capital hinted that foreign defence firms could own a 100% stake in domestic operations so long as their local chief executive officer were Indian.
Slowly, notes Kapil Gupta, economist at Edelweiss Financial Services in Mumbai, the new premier has been seeking “to show the world that the new government is business-friendly”. A bigger challenge will be proving that his new administration can start to winnow out the corrupting influences that hindered the previous government.
The mis-selling of telecoms licences under former premier Singh cost the state $40bn, and many are looking to Modi, a modest man who lives simply and abhors graft, to root out the worst cases of institutional fraud. “Those large corruption cases rattled the [last] government,” says Deepak Parekh, chairman of Housing Development Finance Corp, a leading financial services conglomerate. “We lost our way, we lost our stature. The government was just unable to work as a team.”
HELLO WORLD — AGAIN
Insiders say Modi is equally keen to re-establish India’s position in the world. Post-independence, the country adopted a semi-isolationist stance, remaining one of a tiny handful of non-aligned states during the Cold War. That lack of engagement has come to harm the economy, and Modi has sought, post-election, to boost India’s trade ties with peers near and far. Nawaz Sharif in May became the first Pakistani premier to attend the swearing-in of an Indian leader, an event also attended by Afghan president Hamid Karzai.
In late August, Modi embarked on a five-day visit to Japan to meet an old friend, Japanese prime minister Shinzo Abe, returning home with a ¥50bn ($480m) loan for domestic infrastructure projects, and a pledge to boost annual Japanese investment in the country to ¥3.5tr within five years. That trip offered more than simply the chance to push for greater bilateral trade; it also offered a peek into a Modi-moulded future, in which India marries manufacturing with engineering and IT, emulating the great economies of East Asia.
INVESTOR QUESTION
A final question mark hangs over Modi, one that will perhaps define how global investors come to view the Indian premier: how receptive he is to privatisation. So far, the jury is out. Modi clearly trusts the public sector. As governor of Gujarat, “he was proud of how the state worked,” says former SBI chairman Bhatt. “He believes that public institutions can be taught to operate as well as private institutions.”
But India’s new leader is also a realist. He recognises the need to let private capital permeate, and maybe even dominate, state-controlled industries. In July, he ventured along the path of privatisation, pledging to raise $2.9bn by selling a 5% stake in state-run energy explorer Oil and Natural Gas Corp, with another $7.6bn set to be generated by stake sales in public firms, including the dominant coal producer Coal India, by mid-2015.
The state is also believed to be looking at beginning the long, slow break-up of Life Insurance Corp, one of the country’s largest companies. Government institutions clearly see which way the wind is blowing. In June, Sebi (Securities and Exchange Board of India) ordered all listed firms to cut their state ownership to 75% by mid-2017; a month later, the regulator agreed to raise the investment limit on the ownership of government bonds by foreign institutional investors by $5bn, to $25bn.
Analysts say the best is yet to come. HSBC’s Neumann sees real Big Bang-style policies emerging from early 2015. “The big kick from reforms, which will be put in place over the coming one or two years, will produce significant growth results two to three years down the line,” he says. Ultimately, he sees India under its new premier pursuing a “very substantial privatisation agenda”. Modi started slowly, but he is building up a head of speed — and could yet go down in history as the great reformer of a country eager for a reason to believe in its future.