Geoff Hiscock. Economic time is right in India for Modi and his mandate22/05/2014
Narendra Modi comes to office in India with two big advantages: the economic cycle is starting to turn up at last, and his Bharatiya Janata Party (BJP) has a clear majority in parliament that frees him from the coalition-style shackles that plagued his predecessor, Manmohan Singh.
The timing is right for Modi. After two years of sub-5 per cent growth, it looks like India’s economy will grow 5.2 per this year and 6.0 per cent in 2015, according to the latest outlook from regional analysis firm IMA Asia.
While that is still a long way from the 8 to 9 per cent boom days of 2010 and 2005-07, it offers hope of better times ahead for India’s 1.25 billion people, particularly for lower income earners who are eager to join the spending class.
One caveat is that the livelihoods of many of India’s 800 million rural dwellers will depend on how much rain this year’s southwest monsoon brings. The first monsoon rain is expected in Kerala in the south around June 5, but there is also a 60 per cent chance of a strong El Nino this year, according to the Indian Meteorological Department. That could bring drought conditions, which would have a big impact on rural incomes.
Whatever the weather, the new government’s policy settings will play a big role in how the economy performs. Indian ratings and research agency CRISIL says the election result has created “the best environment in a long time to bite the bullet on government finances.” It says an agenda that improves India’s competitive stance by tackling inflation, introducing the long-awaited GST, reducing subsidies, recapitalising banks, fostering corporate debt markets and giving a “booster shot” to manufacturing will pave the way for a shot at 6.5 to 7 per cent annual GDP growth.
More broadly, Modi’s decisive win and pro-business outlook should encourage multinationals and domestic companies alike to dust off their investment expansion plans. The one area where this won’t happen is in the modern retail sector, where Modi and the BJP remain opposed to foreign direct investment in multi-brand retailing.
That is a pity, because retailing is a job-intensive business of the type India desperately needs. The services sector, along with manufacturing and construction, is where growth must occur if Modi is to make any headway against one of India’s biggest challenges: providing jobs for the 13 to 15 million young people who seek to enter the labour market every year. International retailers such as Tesco want to expand their operations in India and would bring new skills, technology and job opportunities to the table if allowed. But for now, Modi and the BJP are more concerned about protecting the livelihoods of the 13 million “kirana,” or family-owned corner stores, that are the backbone of India’s retail scene.
Consulting firm McKinsey estimates that India needs to add 115 million new non-farm jobs over the next decade to cater for a growing population and to reduce agriculture’s overall share in employment. Labor market flexibility and more vocational training for the poor and uneducated are among the steps it says are required.
One of India’s biggest handicaps remains its poor performance in infrastructure development. It has hundreds of road, rail, port and power projects on its books, but they seem forever mired in red tape, corruption and disputes about land zoning, jurisdiction, relocation and environmental factors. Modi brings to the table the model of his home state Gujarat, where the electricity always runs – courtesy of profitable private power stations — and where businesses such as automotive plants have been encouraged to set up. The central government’s role in state-based infrastructure development is limited, but Modi’s mantra of “minimum government, maximum governance,” should at least encourage some movement on the national infrastructure front.
Internationally, Modi will find the existing policy settings do not require too much fiddling. Pakistan, as always, is the key security challenge, but at least Modi is amenable to a dialogue with his counterpart Nawaz Sharif, who has already invited him to visit Islamabad. Modi talks tough on China over territorial issues, yet is pragmatic enough to want expanded business ties. Likewise, China says it wants to take relations with India to a “new height.” Modi likes Vladimir Putin and got a congratulatory call from Barack Obama, so he may be able to improve India’s energy security outlook in the way he deals with Russia and the United States over oil and gas supplies and nuclear technology, though the nuclear civil liability issue is not fully resolved. He also likes Japan’s assertive leader Shinzo Abe – the pair follow each other on Twitter – with Abe tweeting this week: “Great talking to you, Mr Modi. I look forward to welcoming you in Tokyo and deepening our friendly ties.”
And what of the man Modi is replacing, the long-serving Manmohan Singh? Widely regarded as a good and decent man, Singh was brought low by the dynastic politics of the Congress Party, and the sheer complication of heading a fractious agglomeration of self-interested parties. His best legacy goes back to the early 1990s; as finance minister he brought in a series of reforms that allowed India to slough off the Raj-era mindset and embark on a more vigorous growth path. Sadly, too many of his colleagues at the state and federal level still believe in the “pay to play” approach to governing the world’s biggest democracy. Let’s hope Modi’s mandate cuts corruption and gives India the boost it so desperately needs.
Geoff Hiscock writes on international business and is the author of several books, including “Earth Wars: The Battle for Global Resources,” and “India’s Global Wealth Club,” both published by Wiley.