Is India really the “New China”?

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.”

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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.

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India, Pakistan, and the Problem of the Sorcerer’s Apprentice

The National Interest website has posted my essay questioning whether the deterrent signals India is sending toward Pakistan these days are all that relevant to the gravest terrorist threats India faces from that direction.

India’s commando raid into Myanmar the other week has generated a great deal of debate about the propriety of New Delhi’s chest-beating and its utility to the specific challenge of jihadi attacks emanating from Pakistani soil.  Some criticize the Modi government for seeking domestic political gain while embarrassing the regime in Myanmar which clearly wants to keep its anti-militancy cooperation under wraps.  Others question the wisdom of highlighting operational details about an instrument of state power that should properly remain in the shadows.  And still others doubt whether a similar special-forces mission can even be undertaken against Pakistan-based targets.

Unexamined in the discussion, however, is the critical question of whether the deterrence signals India is transmitting are even applicable to the threats emanating from Pakistan.  The bombastic attitude in New Delhi these days fails to differentiate between jihadi groups over which Pakistan has some control and uses to its own strategic purposes as opposed to the large number of outfits that operate in defiance of the Pakistani state and see triggering unintended conflict between New Delhi and Islamabad as a way to advance their own interests.

Last fall Reuters quoted an Indian security official as acknowledging that “It has been clear for some time that there is no [jihadi] group that is fully within [Pakistan’s] control. They are all itching for independent action, some want to have a go at us immediately.”  Yet so far, Mr. Modi’s government shows no evidence of even recognizing the resulting deterrence conundrum.   But the failure to do so could well lead to military conflict neither country intends.

Indeed, the challenge of preventing mass-casualty attacks by Pakistan-based jihadi groups may not even be one well addressed by threats of punitive retaliation – either in the military realm or by suborning terrorism inside Pakistan as the Modi government has suggested (see here and here).  Rather, the priority might better be placed on bolstering India’s domestic counterterrorism apparatus, whose woeful state was laid bare by the November 2008 Mumbai attacks (see here, here, here and here) and whose repair remains unfinished (see here, here and here) more than six years later.

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The BJP Needs a History Lesson on Pakistan Policy

An earlier post on India’s new get-tough approach toward Pakistan quoted M.J. Akbar, the national spokesperson for the Bharatiya Janata Party, Prime Minister Narendra Modi’s political home, as saying that New Delhi has no interest in engaging Pakistan diplomatically until Islamabad proves its credibility as a negotiating partner by lifting the shadow of terrorism.  In a discussion at the prestigious International Institute for Strategic Studies in London last week, Mr. Akbar elaborated on this stance by saying, “There was 10 years of unrelenting goodwill” by Mr. Modi’s predecessor, Manmohan Singh, toward Pakistan “but it achieved nothing in return.” (An audio recording of the full discussion is available here.)

There is no doubt that Pakistan is a vexatious and duplicitous neighbor to all countries sharing borders with it.  In particular, as the new books by C. Christine Fair and Carlotta Gall remind us, it must surely hold the patent on the use of non-state proxies to inflict injury on adjoining nations.

But is the specific claim advanced by Akbar – that Indian diplomacy toward Pakistan over the last decade was futile – accurate?  Two huge pieces of contradictory evidence come to mind on this count.

The Wagah Bombing and the Sorcerer’s Apprentice in Pakistan

As a series of earlier posts note (here, here and here), the last few months have cast new light on the “Sorcerer’s Apprentice” problem in Pakistan.  Drawing on Goethe’s classic tale about the dangers of conjuring up proxies one cannot ultimately control, this refers to the predicament Pakistan finds itself in whereby some of the Sunni-based jihadi forces it has long directed to do mayhem against others have now turned against it.

Besides causing increasing levels of chaos inside Pakistan*, the “Sorcerer’s Apprentice” problem raises significant questions for Indian deterrence policy vis-à-vis its vexatious neighbor.  As then-U.S. Defense Secretary Robert Gates warned a while back, an ominous possibility exists that freebooting jihadi groups will mount operations aimed at catalyzing inadvertent war between New Delhi and Islamabad as a way to advance their own interests.  A timely illustration occurred in early September when jihadi forces assaulted a naval dockyard in Karachi, apparently with the aim of seizing a Pakistani frigate that would then be used to attack Indian warships with anti-ship missiles.

Although some details remain unclear, the suicide bombing earlier this month at Wagah, the main road border crossing with India, could well be another example.  The deadliest terrorist strike in Pakistan in over a year, it killed nearly 60 people, including three Pakistani paramilitary troops, and injured well over 100.  It occurred just inside Pakistani territory as the famous border-closing ceremony involving Indian and Pakistani guards was concluding at the end of the day.

A variety of jihadi outfits have claimed responsibility.  One of these, the Jundallah, a Pakistani Taliban offshoot, states that the bombing was in retaliation for the major military assault the Pakistani army launched this past summer to clear anti-government militants from the North Waziristan tribal area, a notoriously lawless zone along the border with Afghanistan that has become infested with all sorts of jihadi groups.  The operation commenced shortly after the terrorist attack on Karachi’s international airport in early June, and a senior commander of U.S. and NATO troops in Afghanistan acknowledged earlier this month that it has weakened the Haqqani network, one of the main Pakistan-based jihadi groups fighting in that country.

But Wagah remains a curious choice if the real objective was payback for the North Waziristan operation.  Even with a heightened police profile due to the Shia holy day of Ashura, the public spaces in near-by Lahore, Pakistan’s second largest city, would have offered a much more inviting target.  The security presence at Wagah, which had been beefed up due to an intelligence report about a possible attack, should have served as a deterrent.  Indeed, the suicide bomber detonated his explosive vest at a security checkpoint half a kilometer away from the border.

This detail points to the possibility that the attack’s true objective was the infliction of mass casualties on the Indian side of the border.  If such an event had occurred, already strained ties between New Delhi and Islamabad could have been pushed to the breaking point.  As the eminent Pakistani journalist, Ahmed Rashid, notes:

Militant groups such as the [Pakistani] Taliban – which wants to topple the government in Islamabad – would like nothing better than a conflict between India and Pakistan to distract the army from north Waziristan. The easiest way to achieve this would be by planting bombs on the border, leading both governments to levy accusations of terrorism against each other.

Indian security officials have reportedly reached a similar conclusion.  The Economic Times quotes one as saying that “It appears the target of the bomber was India with collateral damages across the border, but he exploded due to some miscalculation.”

Further underscoring this possibility are the statements issued by Jamaat-ul-Ahrar, a newly-formed Pakistani Taliban splinter group also claiming to behind the bombing.  Its spokesman tweeted that “This attack was a message to the governments on both sides of the border. If we can carry out an attack on this side, then we can attack the other side too.”  He also warned that the group had set its sights on India and would avenge the deaths of Muslims in the disputed Kashmir region and in Gujarat, the home state of new Indian Prime Minister Narendra Modi.  Following this threat, the Indian security services issued an unusual alert about a strike by Pakistan-based terrorists in the port city of Kolkata (Calcutta), causing the Indian navy in turn to hurriedly send two of its visiting warships to sea.

Reuters quotes an Indian security official as acknowledging that “It has been clear for some time that there is no [jihadi] group that is fully within [Pakistan’s] control. They are all itching for independent action, some want to have a go at us immediately.”  Yet it is unclear whether Mr. Modi’s government understands this as well.  The “zero-tolerance policy” it has adopted toward Islamabad suggests not.  But the failure to differentiate between jihadi forces over which Pakistan has some control and those that operate entirely in defiance of the Pakistani state could well lead to military conflict neither country intends.

*UPDATE, November 20: The newly-released Global Terrorism Index reports that, with the exception of Iraq and Afghanistan, Pakistan was the country most affected by terrorist activity in 2013.  The anti-state Pakistan Taliban was responsible for almost a quarter of all terrorist-related deaths that year, as well as half of all claimed attacks.  The report also notes that India ranked sixth, behind Syria but in front of Somalia and Yemen, in terms of the impact of terrorist action.

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The Problems with Modi’s Hard Line toward Pakistan

The new Indian government has pursued a noticeably harder line toward Pakistan-based terrorism than its predecessor.  During the recent electoral campaign, Prime Minister Narendra Modi and promised to “Talk to Pakistan in Pakistan’s language because it won’t learn lessons until then.”  He has responded to the ongoing firefights along the Kashmir divide with aggressive shelling.  Consonant with his tough-guy image, that “The enemy has realised that times have changed and their old habits will not be tolerated,” and displaying his skill in wordplay that “This is not the time for empty talk [‘boli’] … but for bullet [‘goli’] for our soldiers.”The new Indian government has pursued a noticeably harder line toward Pakistan-based terrorism than its predecessor.  During the recent electoral campaign, Prime Minister Narendra Modi called for a “zero-tolerance policy” and promised to “Talk to Pakistan in Pakistan’s language because it won’t learn lessons until then.”  He has responded to the ongoing firefights along the Kashmir divide with aggressive shelling.  Consonant with his tough-guy image, he boasts that “The enemy has realised that times have changed and their old habits will not be tolerated,” and displaying his skill in wordplay he proclaims that “This is not the time for empty talk [‘boli’] … but for bullet [‘goli’] for our soldiers.”

Mr. Modi’s national security advisor, Ajit Doval, stated last week that while New Delhi is willing to talk with Islamabad, “effective deterrence” is key to dealing with Pakistan.  Referring to the cross-border skirmishes in Kashmir, Indian Defense Minister Arun Jaitley similarly warns that “Our conventional strength is far more than theirs and therefore if they persist with this, the cost to them would be unaffordable. They will also feel the pain of this kind of adventurism.” And a senior government official reports that “The prime minister’s office has instructed us to ensure that Pakistan suffers deep and heavy losses.”

The merits of this tougher posture have sparked a lively debate within India.  Some observers caution that “machismo has never worked as a plan against Pakistan” and that an approach based solely on coercion is “a dangerous game” that could easily spin out of control.  A former Indian envoy to Pakistan contends that a policy of escalatory response is “what the Pakistani army wants and we are falling into this trap.”  Others, however, argue (here, here and here) that Mr. Modi has no choice but to reply robustly to what are deliberate Pakistani tests of his resolve.

But beyond this debate, there are other problems associated with Modi’s new line toward Pakistan that have so far escaped much notice.

Read the entire essay in The Diplomat.

[UPDATE, October 31: In an opinion piece in The Hindu today, Sharat Sabharwal, a former Indian ambassador to Pakistan, echoes some of my points.  He writes:

“Faced with Pakistan’s firing across the LoC, we have no option but to respond. However, in general, more subtle strategies to contain and counter threats from Pakistan would be in our interest.

Finally, the jingoistic and threatening rhetoric in a section of our media in response to each provocation from Pakistan does us no good. Our growing power ought to be felt by our adversaries and not flaunted. Threatening language tends to drive a significant number in Pakistan, who think constructively of relations with India, into the arms of the security state proponents.”]

[UPDATE, November 2: A suicide bombing today killed over 50 people, including three members of Pakistani Rangers, a paramilitary organization, and injured well over 100 others, at Wagah, the main border crossing between India and Pakistan.  The attack occurred on the Pakistani side of the border and just as the famous border-closing ceremony involving Indian and Pakistani guards was concluding at the end of the day.  Several jihadi groups, including Pakistani Taliban splinter groups and an Al Qaeda offshoot, have claimed responsibility.  The attack’s objective is unknown at present but had it caused Indian casualties, it would have further strained already fraught relations between the countries, conceivably prompting Indian military retaliation.]

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Pakistan: The Sorcerer’s Apprentice Strikes Again

My last post examined the significant anti-state violence in Pakistan caused by a myriad of non-state actors residing within its borders, and highlighted the danger of freebooting jihadis mounting terrorist operations aimed at catalyzing unwanted tensions between Islamabad and its neighbors.  The problem is rooted in what can be called the Sorcerer’s Apprentice syndrome, from Goethe’s classic tale about the dangers of conjuring up proxies one cannot ultimately control.  Among other things, it raises difficult questions for how New Delhi and, to a lesser extent, Tehran structure credible deterrence equations with a country that is being challenged internally by capable militant elements it once supported.

Two developments in the last month or so underscore these points.  The first is an audacious seaborne jihadi assault upon a naval dockyard in Karachi, which Pakistani security forces were only able to beat back following a six-hour gunfight.  According to a detailed statement by the newly-formed Al Qaeda in the Indian Subcontinent, the strike had a two-fold objective.  One was to take control of a Pakistani frigate and “steer it toward the Indian waters in order to attack Indian warships with anti-ship missiles.”  The other aim was to seize another frigate and use it to attack U.S. Navy vessels operating in the region.

If successful, the operation would have vastly exacerbated Pakistan’s fraught relations with New Delhi and Washington.  During the recent electoral campaign, Prime Minister Narendra Modi called for a “zero-tolerance policy” against Pakistan-sourced terrorist attacks, and he has pursued a noticeably tougher line in the on-going skirmishes along the Kashmir divide than his predecessor.  As a senior official in the Indian home ministry puts it, “The message we have been given from the prime minister’s office is very clear and precise. The prime minister’s office has instructed us to ensure that Pakistan suffers deep and heavy losses.”

Speaking a few days ago, Modi reiterated this stance, proclaiming:

Today, when bullets are being fired on the border, it is the enemy that is screaming. Our jawans [soldiers] have responded to the aggression with courage. The enemy has realised that times have changed and their old habits will not be tolerated… People know my intentions and I need not express those in words. When the jawans have to speak, they speak with their fingers on the trigger… and they will continue to speak that way.

Given the new political atmosphere in India, a naval engagement initiated by Pakistan-based jihadis could quickly escalate into a perilous military confrontation between New Delhi and Islamabad.  And an attack upon U.S. Navy ships by these groups carries its own dangers.

Following the May 2010 car bombing attempt in New York’s Times Square by a naturalized U.S. citizen of Pakistani origin, the Obama administration put Islamabad on notice that future terrorist attacks on American soil emanating from Pakistan would result in retaliatory military action.  Indeed, President Obama used an October 2010 White House meeting with Pakistani senior officials, including then-army chief General Ashfaq Parvez Kayani, to repeat this message, which according to Pakistan’s ambassador in Washington at the time “sounded more ominous coming directly from the president of the United States.”

The second development is an increasing series of attacks by Pakistan-based Sunni insurgents upon border posts in the Sistan and Baluchestan province of Iran, which is roiled by a disgruntled Sunni minority in the predominately Shiite country. The assaults have caused Tehran to warn that it will launch hot-pursuit operations into Pakistan if Islamabad fails to control its borders.

[UPDATE, October 17: The deputy commander of Iran’s Islamic Revolutionary Guard Corps yesterday reiterated that Tehran reserves the option of launching military strikes into Pakistan if Islamabad fails to take action against Baluchi rebels staging cross-border attacks.]

[UPDATE, October 18: A Pakistani paramilitary officer was killed and four other personnel were injured yesterday when their vehicle came under fire by Iranian border guards.  Dozens of Iranian troops also raided a village along the Iran-Pakistan border.  More on these developments here, here and here.]

So much of the regional security environment in South Asia turns on a Pakistan that is unable to keep its raging domestic turmoil from spilling over into the neighborhood. Expect to see more of the Sorcerer’s Apprentice as the country’s internal travails mount.

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Pakistan and the Curse of the Sorcerer’s Apprentice

More evidence is emerging that Pakistan’s security establishment is not an omnipotent presence, but rather the victim of what might be called the “Sorcerer’s Apprentice Syndrome,” from Goethe’s classic tale about the dangers of conjuring up proxies one cannot ultimately control. That some of the jihadi forces Pakistan has long directed to do mayhem against others have now turned against it is a predicament, which has important ramifications for the approach India’s new government adopts toward its most vexatious neighbor.

Read the rest of the essay at Fair Observer.

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Repentant “Tax Terrorists” and Other Signs of Change in New Delhi

From senior government officials working longer hours and cutting back on their golf game, to the emphasis on Hindi in official documents, there are plenty of signs that a new order is descending on Delhi.  But perhaps the most poignant so far is the way Pranab K. Mukherjee, currently the president of India, has been forced into a public renunciation of the very tax policies he pursued just two years ago when he was finance minister.

The most significant consequence of the horrific November 2008 terrorist assault in Mumbai was actually self-inflicted.  The talented Palaniappan Chidambaram was shifted out of the finance ministry in order to whip the feckless home ministry into shape.  Mukherjee was appointed to fill the resulting vacancy, reprising an entirely unmemorable stint as finance minister in the early 1980s.  Significantly, while Chidambaram was an enthusiastic champion of the key economic reforms of the early 1990s when he was serving as commerce minister, Mukherjee was virtually invisible despite then heading up the Planning Commission, a key economic planning agency.

His second stint at the finance ministry, from early 2009 to mid-2012, was nothing short of disastrous.  He remained complacent as the global economic meltdown started to weigh in on India, preferring to emphasize expensive social welfare projects instead of productivity-enhancing structural reforms.  The budget he formulated in early 2011 was bereft of any serious commitment to rein in profligate spending and was laced with roseate assumptions that were quickly proved unfounded.  And the following year’s budget was so out of touch that a distinguished observer noted it was “shocking that a finance minister can ignore all the problems that he faces.”

Mukherjee’s tenure ended when he was kicked upstairs to the Indian presidency, the largely ceremonial head-of-state post.  By then India, hailed as the next China just a few years earlier, was being called the “first BRIC fallen angel,” the “Greece of Asia” and a “gasping elephant.”  The global ratings agency Standard & Poors was threatening to downgrade the country’s sovereign debt credit rating.  The announcement that economic growth in the first quarter of 2012 had declined to 5.3 percent, from over 8 percent just over a year earlier was so shocking that headlines in the Economic Times screamed “Goodbye 2020, Hello 1991!”  A Congress Party leader was even quoted as saying that “We have to rescue the economy from the ravages of Pranab Mukherjee.”

Most damagingly was the wrecking ball Mukherjee took to India’s reputation among global investors.  Searching for ways to pay for costly social spending, he devised exasperating tax policies directed at foreign companies doing business in India – this at the very moment when India should have been pulling out the stops to attract more overseas investment.  The most egregious case in point concerns Vodafone, the London-based telecommunications company, which in 2007 spent $11 billion to buy from a Hong Kong conglomerate majority ownership of what is now the second-largest telecommunications company in India.

Vodafone was subsequently hit with a $2.2 billion tax bill on its purchase.  The company resisted, arguing that the transaction was executed by offshore vehicles of the two principals and that in any case Vodafone was not the seller of the assets and so could not possibly be liable for a capital-gains tax.   After an extensive legal battle, the Indian supreme court in early 2012 agreed and reproached the government for overreaching its authority.

Having thus failed to prevail in the courts, Mukherjee attempted to re-write the law by proposing a retroactive tax on capital gains arising from cross-border purchases of Indian assets dating back 50 years, a piece of legislation that only furthered India’s reputation as an inhospitable investment destination.  According to Sanjaya Baru’s new book, Mukherjee gave Prime Minister Singh just one day’s notice that he was going to introduce the legislation.  The proposal provoked seven business associations from the US, the UK, Canada, Japan and Hong Kong to write a joint letter to Singh, warning that it “has called into question the very rule of law.”

The concept of retroactive taxation also drew criticism from the BJP, which labeled it “tax terrorism” in its recent election manifesto.   In its first official policy statement, Prime Minister Narendra Modi’s new government pledged to re-work the current tax regime so that it’s “non-adversarial and conducive to investment, enterprise and growth.”  It also promised to “create a policy environment which is predictable, transparent and fair.”

The irony is that this repudiation of the way Mukherjee approached things while at the finance ministry was issued not by Modi but by Mukherjee, who was discharging the traditional duty of the Indian president in outlining a new government’s agenda to a joint session of Parliament.  It’s an irony that many commentators overlooked, though it has much more import for the country’s prospects than the numerous stories in the press these days about miffed ministers and inconvenienced babus.

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Memo to Modi: Focus on India’s Near Abroad

The invitation by Narendra Modi, India’s new prime minister, bringing other South Asian leaders to his elaborate swearing-in ceremony was a brilliant piece of regional diplomacy.  Breaking with tradition, the event was akin to an American-style inauguration held in the forecourt of the Presidential Palace, a majestic red sandstone edifice that formerly housed the viceroy of the British Raj.  At once, the ceremony showcased the vigor of India’s democratic institutions – the centerpiece of the country’s soft power – as well as its natural primary in subcontinental affairs.  It also dampened concerns that the incoming government would be driven by hyperbolic nationalism.

But Mr. Modi will require creative initiatives and sustained endeavors in order to capitalize on this initial gesture.

Modi’s Economic Agenda: Encumbrances Ahead but an Opportunity Looms

As the hoopla about Prime Minister Modi’s blow-out electoral ​triumph dies down, the constraints on his policy agenda are becoming clearer.  One of these is that the need to combat chronic inflation means ​the continuation of ​tight monetary policies at least for the foreseeable future.  Another is that rival political parties still ​control the upper house of parliament, which ​for now ​will have the power to disrupt important parts of Modi’s legislative agenda.  A third is that these parties also control most of India’s ​state governments, which have immense discretion over the major infrastructure projects he wants to accelerate.

​A key development in Modi’s favor, however, is the emergence of a large bloc of states in the northern and western parts of the country governed by administrations now looking to emulate the very​ economic model he crafted in Gujarat.  These states would do well to copy the reforms he enacted in the electricity sector, labor market regulation, and land clearances for industrial projects.

(UPDATE, June 10: The BJP government in Rajasthan is preparing legislation to enact critical labor market reforms.)

The emergence of a “Saffron economic bloc” of state governments would be a powerful force offsetting the other elements of the Indian system that will act to stymie the impatient Mr. Modi.  Its success also would have a potent demonstration effect for the rest of the country.​

Read the entire article at Fair Observer here.

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