The Modi election of 2014 was indeed groundbreaking for numerous reasons, regardless of one’s politics. The outcome indicated that one party, for the first time in a long time, won a majority on its own and discarded many of the “truths” in Indian elections with respect to the inevitability of coalition governments.
For those in the foreign investor community, the simple takeaway was that stable government plus strong leader who is center-right and wants to grow the economy, equals the likelihood an aggressive reform agenda. They accordingly concluded that Modi was Ronald Reagan and Margaret Thatcher reincarnated.
However, this analogy only served to set up potential disappointment. As I said then, and now, Modi is not Reagan and Thatcher. Modi is Modi and should be viewed in his own context per what was his economic ideology is vis a vis what is realistic in India. Yet, the inappropriate comparisons in 2014 to other historic leaders fueled subsequent editorials and articles in foreign periodicals highlighting how Modi disappointed the investor community. Were these fair articles? In my personal opinion, no.
It is Complicated
However, beyond the commenting community, foreign investors too have often complained that reforms have not materialised, namely land and labor. Yet simultaneously FDI and capital market investments soared during the Modi years, and will likely continue to do so. If investors vote with their money, does the record high investment levels not indicate happiness and accordingly are they not pleased with the Modi government?
As with everything in India, the answer is complicated.
One on hand, investors are indeed somewhat disappointed that the reforms, which over the years they convinced themselves were imperative for India to implement if it wanted to unlock growth, did not materialise. They say more needs to be done to liberalise the economy, and that India is a tough place to do business, approvals take time, bureaucracy is a problem, and politics can still deride the best of investment intentions,
But they will concurrently recognise that Modi is the best friend they’ve had in Delhi in years. They will shower him with praise, recognise that things have changed for the better, and will indicate that they intend to ramp up investments in the coming year, often because of his agenda. They equally fret about what will happen if Modi is not in office in the future.
This paradox exists because so much has changed in India, yet no one law or reform can be isolated as the cause. Accordingly, there is a perception issue. In many cases, investors cannot see specific reforms that have helped them, but they do see India has a more hospitable place to do business compared to a decade ago.
The concept of reforms, or at least those that investors wish would happen in India, conjure images of moving towards an accelerated sale of state owned enterprises, elimination of all FDI limits, implementation of western style land and labor policies, rapid development of infrastructure projects that are built in excess of current needs (rather than coming soon signs), along with a truly open capital account allowing for the free movement of capital across the border.
But with Modi, outside of GST, there has not been one mega reform or announcement of a bundle of smaller but very consequential reforms unveiled at once (a la Manmohan Singh in 1991) that captivated investors.
The Four Vital Developments
Yet, things have clearly changed from pre-Modi years, and it is because of four key developments that are opaque, yet important with respect to how foreign investors view India.
First, very technical and complicated reforms, which otherwise do not grab headlines, have in fact materialized. They lack the wow factor of “labor reform,” but are in many ways far more consequential. The passive India watcher may not recognise these, and accordingly does not factor them into their assessment of why things have changed, but they matter. These include the Bankruptcy and Insolvency Act, the RBI Amendment Act, Real Estate Regulator Act, Foreign Direct Investment (FDI) increases in nearly every sector, fiscal spending re-orientation which has boosted infrastructure spending to nearly $100 billion a year while keeping subsidies flat at $40 billion, banking for all program, and streamlining of subsidy disbursements.
Second, the mindset of government has changed based on Modi’s directive. The bureaucracy is held more accountable today than ever. Is it perfect? No. But has it improved? Yes. A cultural change has transpired of a civil service that is increasingly (not completely, but increasingly) focused on one goal – development. This has not yet resulted in quick decision making or approvals, but momentum has picked up and things have moved in the right direction in recent years.
Third, the political leadership’s mantra has changed. While hearing Modi constantly say “India is open for business” and “India is replacing red tape with red carpet” may sound cliché, it is said so often that investors they feel they have a prime minister who is unequivocally focused on courting business. This is in contrast to previous leaders who viewed foreign investors with suspicion. For investors, it’s a welcome sign that the prime minister courts foreign investments, rather than shuns it due to ideology. The re-positioning and re-branding of India is itself a reform.
Fourth, macroeconomic stability has prevailed (at least for now). While more could have been done, and luck has played a large part (i.e. lower oil), the first four years of the Modi administration have been marked by lower fiscal deficits, a narrower current account deficit, and benign inflation. These three have allowed the Reserve Bank of India (RBI) to build up its war chest of dollar holdings, while giving space for a reduction in subsidies and an increase in growth inducing public capital expenditure. The overall result has been healthy growth and a balance economic footing. For investors, this has been critical.
The common thread with the four examples above is that they are not obvious, legislative, or reforms in the traditional sense. Yet collectively they have played a part in enticing foreign investors. Thus while investors may say more needs to be done, collectively their activity in India proves that four years in, the foreign investor community very much favors Modi over any other leader. As further evidence, look at what happens to markets every time it seems Modi’s party may lose and election or is poised to win. The correlation between asset price changes, and the prospects of another Modi government in 2019 are profound. Clearly, investors are happy with the Modi administration because, again, they feel they have a friend in Delhi for the first time in a long time.
Shailesh Kumar is director, South Asia at Washington-based Eurasia Group and analyses political and economic risks and developments in India, Pakistan, Sri Lanka and Bangladesh.