India’s new Prime Minister, Narendra Modi, was heralded with widely covered pomp and circumstance during his twin visits to New York and Ottawa this winter. At the time, there was apprehension that the new leader might hold contentious views on market liberalisation, or regarding closer collaboration with Washington (especially in light of a previous visa ban by US administration). He was initially seen as a populist leader-to-be, more divisive than inspiring in his decision making. It was therefore with enthusiasm that economic analysts received Modi’s renewed commitment to further liberalization reforms, augmented by a set of announced targets aiming to unleash the full force of India’s still latent economic potential. Today, questions swirl anew as investors worldwide wonder if India’s current Prime Minister has what it takes to deliver on these promises. At a time when China is decelerating, and BRICS are doubted as a group, India’s fundamentals need to be urgently established if emerging markets as a group intend to remain in leading indicators of GDP growth.
Almost a year after PM Modi’s inauguration, international investors seriously doubt whether Narendra Modi has the heft required to deliver economic reform. This turn in investor sentiment is not baseless. The new Prime Minister has so far been slow to dismantle entrenched sectoral lobbies, in liberalizing the country’s financial sector, and in implementing regulation that would streamline government policy across State boundaries. This summer, he backed away from plans to push for land reform, a hallmark of the country’s nationalist-socialist years held by many as a key shackle on India’s mainstream consumption power. Modi’s reform ambitions and whether he is perceived to be succeeding in their implementation will determine whether India grows into an attractive replacement for fast-slowing China as the leading emerging market economy.
In 2013, the Nobel economist Jagdish Bhagwati published an in-depth review of the factors that prevented India from exerting its full economic potential between 1960 and 2005. He argued that the period between the 1970s to 1990s saw successive governments implement state-centric, license-monopolizing regulations meant at the time to empower India’s domestic producers and owners. These led to adverse conditions: higher minimum investment requirements, and prohibitive and distorted production costs for business owners. These made it prohibitively expensive to undertake large scale commercial projects similar to the ones that were flourishing in China at the same time in the early 1980s.
From the hiring and letting go of employees, to internal tariffs and restrictions on the sale of various products nationwide, to heavily State-reliant domestic banking sector rules, the legacy of cold war era economic policies still hinder India’s economic momentum. Likewise, onerous restrictions on foreign investment into India’s financial services, legal services, and consulting industries effectively prevented the Indian foreign direct investment -regulatory landscape from harmonizing with international standards, further stemming investment inflows. National empowerment policies aimed at protecting grassroot farmers still endure today. They amount to a problematic mixture of land laws, agricultural subsidies and other guarantee schemes that raise intractable property rights and competitiveness problems. The total sum of these limitations constitutes the basis for what economic observers refer to as the India’s normal “Hindu” rate of growth, roughly one or two percents more than its population growth rate (1-2% on average since 1960).
Still, at a time when China’s economy is decelerating in no uncertain terms, many see India’s large domestic population, its information technology competitive advantage, and its large untapped pool of domestic consumption that is yet to be unleashed from inter-provincial regulatory gridlock, as the leading opportunity among the BRICS economies today. Much of that hope hinges upon India’s complex and contrived legislative process, pitching the ruling BJP party against opposition factions in both houses, and in various regional power bases.
India’s banking sector is gridlocked. The thick range of regulatory guarantees and quotas is currently preventing much of the country’s banking sector from sorting its notoriously large pools of toxic non-performing loan(NPL) portfolios. The vast amount of banking-sector foreign direct investment available globally is at great pains to bring in much needed liquidity, private sector competition, and up to par financial services offerings given the stodgy pace of the Modi administration’s reform when it comes to banking sector regulation.
Notwithstanding the complexity of his regulatory ambitions, Prime Minister Modi has spent the past year actively courting trade regions that are strategic to the country’s economic chessboard. While much of this newfound activism is widely understood to be a reaction to China’s growing influence in Asia-Pacific and beyond, it still reflects Indian policymakers’ intention to expand their trade footprint. This ambition hasn’t shrunk despite the adverse macroeconomic environment spurred by the US Federal Reserve’s much anticipated interest rate rise. The Reserve Bank of India’s decision during the 3rd quarter of 2015 to cut interest rates to 6.25% in order to fight off rising inflation. The Indian Roupi is curiously being bolstered by global investors’ apprehensive expectations of US central baking policy’s impact on emerging markets currencies, contrary to mainstream expectations.
Altogether, India’s economic case relies on strong fundamentals (demography, domestic savings, and basic competitiveness) amidst manageable expectations so far. Narendra Modi inherited an onerous mandate to be sure. The past quarter’s chorus of misgivings regarding the pace of reform appears to have spurred series of major announcements by the country’s reserve bank and its ministry of finance calling for capital injections and consolidation of toxic balance sheets in order to improve domestic credit and liquidity conditions. These could serve as a useful signal to global markets, ahead of much anticipated legislative reform announcements.
Yves Guillaume is an analyst of international finance, strategy, and geopolitics. He is Associate Editor, Trade and Economy, at iAffairs Canada and Global Brief magazine; as well as a Research Fellow at the NATO Council of Canada. He frequently comments on foreign and public policy on CTV National News and the Huffington Post. Prior to being a Chartered Financial Analyst (CFA) Program Candidate, he studied political science at the University of Toronto.