Modi Is Ushering In A Bigger Change Than Most Imagine

This article was first published on Swarajya Mag (here)

Let’s face it – the on ground change in India in terms of new investment or new jobs created due to changes in governmental policy has been limited.

In fact, the GDP figures obtained from the new methodology reflect that during the last year of the UPA the GDP growth rate was substantially higher than previously thought (6.9% vs 4.7%). Additionally, the UPA had already started the ‘Make in India’ campaign, so to speak – as seen by the higher share of manufacturing in GDP at a respectable 17.3% (compared with 12.9% previously stated).

Further, while publicly cheerleading, many a business chief will privately concede that they see little change on the ground. Some are brave enough to do so in open. Deepak Parekh articulated this well by stating that while the environment did improve, the lack of real change will tire investors soon. Jim Rogers (who ran an investment firm with the legendary investor Benjamin Graham) thinks PM Modi has only talked till now. Marico’s Mariwala echoed these sentiments.

The private chatter is confirmed by the industry chamber Assocham’s first quarter Business Confidence Survey, which stated that 54.2% of the respondents saw little change at the operating level in the last six months. However, for future, the survey goes on to add that “more number of industry leaders expressed optimism about the shape of things to improve going forward”.

Some eminent personalities in the things-are-moving camp include HDFC Bank’s Aditya Puri, Ratan Tata and Sumit Mazumdar.

They recall how Modi appeared on the scene as a breath of fresh air. For the first time in recent history, a politician clearly laid out his vision that would define his early period in power: an economic revival after years of stagnation; transforming India into a Chinese-style manufacturing powerhouse; and a focus on the concerns of the poor, from building toilets to tidying up filthy streets.

All this and especially the Clean India campaign calls for a mindset change at the citizen level. After having successfully tackled industrialists, bureaucrats, politicians, Modi is now taking his appeal straight to the masses. At play here is something bigger than immediate GDP oriented gratification.

But why the chasm between present day realities and expectations?

Be as it may, the government of India is a perpetual entity and cannot wish away the ills of the past. This NDA 2.0 government was welcomed with a variety of baggage – including economic sluggishness, entrepreneurial lethargy, chalta-hai attitude, bureaucratic apathy, weakened and scam ridden institutions and an unmotivated populace.

The people having voted for a decisive change in the Lok Sabha elections, have precluded maintaining the status quo as a viable option. Therefore, the only option left is to set India on a sustainable high growth trajectory.

Modi has taken the challenge head on. I believe what this government has achieved in its first year has been far more than what any government did in its first year, and in some cases, in  it’s entire five-year term. Some of the major policy measures include financial inclusion, cleaning up the energy sector, petroleum sector reforms, opening up defense and railways to foreign investment, steps to remove outdated legislation, decisive moves towards implementing GST and fast-tracking environmental clearance for infrastructure projects counter balanced by an ambitious clean energy roadmap to mitigate environmental change.

As he approaches his first anniversary in office, Modi boasts a reasonable record. India’s economy is recovering. Next year it will surpass China, becoming the world’s fastest-growing emerging market. Moody has upgraded India’s rating outlook (though not the rating yet). Inflation is under control, in part due to fortuitous drop in oil prices, but also due to a mindful curb in minimum support price for farm produce.

Its international position has improved too, with Modi’s vigorous diplomacy earning him a place alongside China’s Xi Jinping and Shinzo Abe of Japan in a new troika of strongman Asian nationalists whose interplay will define the continent’s future.

Efforts to Re-energize Business Investment

Recoveries are investment and profit-led – not necessarily in any particular order per the laws of economics, but generally jumpstarted by investment activity during a new business cycle.

So even while sustainable recoveries are profit-led and investment leads to short term increased economic activity, the government’s focus today is firmly on courting manufacturing and infrastructure investment.

But while doing this the government can only facilitate improved profit outlooks and create avenues for investments through policy changes. However, they cannot realize them without the industry investing.

Encouraged by the policy changes, the domestic industrial houses are eager to invest but are still under considerable stress and many of them are yet to fully emerge from the corporate restructurings, thereby constraining their future investment plans. As per a dated Credit Suisse report, the top 10 industrial houses in India are sitting on about Rs 6.5 lakh crore debt (about 6% of the country’s GDP!). Project completion is not happening which has led to increased challenges.

This constraint in short is the primary reason why the bombastic public commitments at major business fora consistently fail to translate into firm investments, and not the ‘scape-goated’ tight monetary policy. Anyone familiar with investment decisions on major projects would know a 0.5-1.0% change in interest rates will not make or break a major project, unless it is in a rate sensitive sector such as banks or real estate or solar these days. As further evidence against this assertion, the RBI governor’s 15th January announcement to pare rates by 0.25%, which formally signaled the turn of the rate cycle, followed by another rate cut, hasn’t seen businesses rushing in to draw advantage.

So where will the money to finance the much needed (and promised) infrastructure come from, if the domestic industry doesn’t invest?

Two options remain – government capital expenditure and foreign direct investment.

On the former, while there has been some noise, notably from the Chief Economic Advisor Arvind Subramanium, to easen-up on fisc such as to provide room to increase government capital expenditure, the government has resolutely reaffirmed its commitment to the fisc consolidation glide path – as confirmed by the recent 4% fisc reading.

So What Has Modi Done For Revival of Foreign Investment?

The stretched balance sheets of the Indian industrial houses make foreign investment to jumpstart growth a sine qua non.

Mindful of these constraints, Modi has rightly courted all major industrial economies including the US, China, Japan, Germany, France and Canada, with the ‘Make-in-India’ campaign. The political commentators who view this vigorous international dalliance and punishing travel schedule, as holidaying cannot be further removed from reality. The Prime Minister’s energetic marketing of India’s 3D’s – Democracy, Demographics and Demand- have not just reinvigorated the international investors’ interest towards India but have also been touted as rebirth of India’s dormant foreign policy. Indeed astute observations by senior former diplomat, Kanwal Sibal, offer measured comfort on the outcome of these trips.

Further, the ministers of Team India have established contact with their foreign counterparts and global industrial houses, and have been trying to make it easier for the multinationals to invest in India. Barring the recent MAT gaffe by the Finance Minister, the foreign investors have largely seen India as welcoming and have redrawn their plans for India. No major investor with a 3-10 year investment horizon can afford to ignore India today.

All said and done, one cannot blame Modi for not trying.

The Long and Short of Reforms

Modi’s has made a decent start on reforms. There has been a clever mix of big bang and bottom-up reforms. Much of the things that Modi is trying to change are not purely economic in nature. They involve changing social patterns as well. All this has led to a good start. No major scams have emerged. Almost no senior BJP politician is suspected of corruption. There is a new sense of administrative energy, embodied by possibly apocryphal stories of civil servants at their desks early and leaving late, forbidden from easing out for afternoon entertainments at the Gymkhana Club.

There have been more substantial changes too. A move to online applications for environmental and industrial permits should remove bureaucratic and ministerial discretion. The nationwide GST, to be introduced next year, ought to cut corruption as goods move around the country. Financial inclusion schemes to move financial benefits directly into the beneficiary accounts and provide the masses with affordable insurance and pension, and integrate the use of unique identification numbers and mobile phones, will cut subsidy fraud dramatically. Most significant of all, India now plans to auction off all mineral rights, beginning with this year’s lucrative coal licence sale—a radical move that should preclude major new natural resources scandals.

However, critics tend to focus on his modest progress at bringing about “bold” structural economic reforms, pointing out that his majority in India’s lower house of parliament ought to permit more than gradualism. But I am yet to come across one good suggestion on what this “boldness” could mean. Bulk of our input industries are now auction led. 15 crore Jan Dhan Yojana accounts were opened towards inclusive banking. A move has been initiated towards Clean India by Gandhi’s centenary. Ambitious clean energy targets have been set. A move has been made to take on the civil service and make the central government employees public service delivery-oriented. Digital India project is aiming to connect the country digitally. Most importantly the playing field is being leveled.

If these initiatives are not “bold” enough then what is?

In a nutshell, from where we were a year ago, a lot of things have moved. While there are many more to go and still others which are work in progress, we should take this opportunity to remind ourselves where we were and celebrate the progress made which has moved India back on the global investor’s map. For India’s sake, May the Force be with Mr Modi.