In vivid contrast to just a few years ago, when Jim O’Neill, who came up with the BRICs concept, wanted to drop the country from the acronym in favor of Indonesia, India has now emerged as the undisputed queen of the emerging markets. Along with this development comes a new mantra: “India is the New China.”
But how true is this assertion? Like everything else related to India, the answer is complicated and equivocal.
Given the stark economic problems in other major emerging markets, India is looking good in comparison. It has now displaced China to assume the mantle of the world’s fastest-growing major economy. The stock market is outperforming those in the other BRICS nations. India also received $7.1 billion in private equity funding for the first half of this year, 38 percent more than the same period in 2014. In volume terms, the number of deals jumped 62 percent vis-à-vis the corresponding period last year.
The CLSA brokerage and investment banking agency encouragingly reports that:
Our recent meetings with investors in Singapore and Hong Kong reveal that India continues to be a ‘favored’ market among regional investors. While some investors have reduced India weight, most investors believe in sharp 2HFY16 earnings recovery and focus on the long-term structural positives, retaining their overweight.
And a number of foreign companies have recently shown their faith in India’s prospects by announcing major expansion plans. I’ll have more to say about these in the next issue of Datapoints, but the logic driving all of them was pretty much summed up by a Mumbai-based entrepreneur and investor quoted in the Financial Times: “India is the last billion-person market left.”
But because the politics of economic reform are much more challenging in New Delhi than in Beijing, India will never be able to replicate China’s meteoric economic rise over the last 30 years. The past few weeks have offered ample illustration of this statement.
There is no denying that last summer’s hopes that Narendra Modi’s landslide election as prime minister would jump-start a quick economic renaissance have now faded. The hype overlooked two key points: 1.) The country does not do rapid transformational change; and 2.) the “I” in India stands for “incremental.”
Mr. Modi can claim that he brought about major changes in the northwestern state of Gujarat where he wielded unchallenged political authority during his long tenure as its chief minister. The experience earned him accolades from the global business community and engendered a good deal of hubris on his part, such as when he confidently declared following his May 2014 election triumph that “ten years is all that is needed” to modernize the country.
But the dynamics of economic reform play out very differently on the national stage, given the growing fragmentation of the Indian political system. And Modi has now run headlong into a truth that Montek Singh Alhuwalia, the distinguished economist and policy official, advanced many years ago: The norm in India is “a halting process of change in which political parties which opposed particular reforms when in opposition actually pushed them forward when in office. The process can be aptly described as creating a strong consensus for weak reforms!”
This is an insight into the reform process that every entrepreneur and investor, not to mention prime minister and Cabinet official, should never cease bearing in mind. Indeed, the just-concluded summer session of the Indian parliament demonstrated it in spades, as the Congress Party, the main opposition party, stalled progress on two key items on Modi’s economic reform agenda.
The first item is replacing the fragmented system of indirect taxes the central government and the states currently levy at different stages of the supply chain with a nationwide goods and services tax (GST), India’s version of the value-added tax. The measure would help create a more unified market in India, increase productivity and enable higher GDP growth. UBS bank recently estimated that “The introduction of the GST is a key reform measure that could have immense macro implications for India’s growth potential.”
But consideration of the measure was shut down in the parliament’s upper chamber, which is controlled by the Congress Party and its political allies, even though the party supported the measure when it controlled the central government just a short time ago. As ironically, Mr. Modi and his political party, the Bharatiya Janata Party (BJP), opposed the legislation when it was then out of power but now lines up foursquare behind it.
The BJP now decries the disruptive tactics employed by Congress though they are the same ones the BJP used when it was in the political wilderness. Indeed, the feisty Sushma Swaraj, who is currently Mr. Modi’s foreign minister, was a major thorn in the side of the Congress Party when she led the BJP caucus in parliament’s lower house.
Another causality of the partisan bickering was Modi’s effort to simplify the lengthy and legally-convoluted process of acquiring farmland for much-need infrastructure projects and industrial projects. The prime minister wants to amend the land acquisition act passed by the previous central government two years ago, which is widely judged to have substantially increased project development costs.
Political machinations surround this issue, too. The BJP cynically supported the 2013 land legislation since it wanted to court India’s vast reservoir of rural voters in the run-up to last year’s parliamentary elections. Once in office, however, Prime Minister Modi has expended much political capital on revising the legislation but so far to no avail.
I noted in a recent issue of Datapoints that Modi was close to abandoning the effort and this point appears now to have been validated. Anxious to avoid being tagged as “anti-farmer” in the run-up to important state-level elections in Bihar, Tamil Nadu, West Bengal and Kerala, the prime minister and his BJP colleagues have punted on the issue. Four months ago, Modi’s finance minister declared that the land reform bill would “determine a very large part of the progress India makes.” Now he’s taken to encouraging individual state governments to move forward in lieu of action by the central government.
This is a tacit but clear acknowledgement that Modi’s momentum is dissipating. The prime minister’s Independence Day address on August 15, delivered two days after the parliamentary session ended, said it all: Unlike last year’s speech, which brimmed with confidence and energy, his remarks last week were tepid and defensive. Reuters quoted an unidentified member of the prime minister’s inner circle as saying that Modi was “upset about failing to further his reforms agenda and decided to ‘keep his head down’ and focus on improving performance.”
The GST reform is not dead, though if enacted in the next year or so it will likely be in a much diluted form that erodes the economic jolt it delivers. The land reform effort, on the other hand, is in a deep coma. At a minimum, it will take several years for the politics to line up with meaningful movement on this issue.
The past weeks underscore two key, reinforcing lessons about the politics of economic reform in India: 1.) The election season, and thus the political pandering to certain voter blocs, never ends; and 2.) There is no national consensus on the imperative of economic modernization.
In a report last month Moody’s Analytics pegged India’s true annual growth potential at near 10 percent. It cautioned however that the “jury is still out on Prime Minister Modi, but the government’s failure to deliver on promised reforms is a major impediment to a broader economic growth momentum in the country.” This week Moody’s warned that it might need to lower its growth forecast for India:
One main risk to our forecast is that the pace of reforms slows significantly as consensus behind the need for reform weakens once the least controversial aspects of the government’s plan have been implemented.
This analysis is cross-posted on the website of Geoskope, a business intelligence firm focused on key emerging markets, where I serve as chief knowledge officer.