India’s recently elected Prime Minister Narendra Modi recently wrapped up a trip to the United States, where he was greeted as a rock-star by the Indian-American community. It wasn’t a trip for substantial announcements of new cooperative ventures, but more of an opportunity to meet the Obama administration and smooth over any lingering bad feelings from the denial of a visa for a visit to the U.S. in 2005.
Modi has had easy diplomatic success since his election in May, having cordial and productive meetings with the leaders of Australia, Japan, China, Brazil, and even Russia (on the sideline of a BRICs gathering in June). He is eager to publicize his intention to make India a manufacturing powerhouse for the world, open to do business — by revitalizing Indian infrastructure and sweeping away obstructive and corrupt bureaucracy.
At home, his progress has been more measured. As the Economist observed in dry British style, “Shocking tales of civil servants working late have become common.” Modi has cracked down hard on central government workers, getting dozens of projects approved that had languished in bureaucratic no-man’s land. The central bank under Raghuram Rajan has steadied financial markets and restrained inflation. In short, in the areas under his direct control, Modi has pushed his agenda hard.
Why Not Faster?
Modi hasn’t moved fast enough for some in the implementation of sweeping structural reforms. The intention is clearly there, but his first budget disappointed many observers.
The basic reason can be found in India’s celebrated “fractious democracy.” India’s states wield enormous power, and without the politicking that can get them on board with Modi’s agenda, they can slow much of what he wants to accomplish. As one example, local airlines are hampered in India by sky-high state taxes on jet fuel. Some states are friendly, run by regional parties allied with his own national Bharatiya Janata Party (BJP). Others are hostile. Local elections in September showed a slight backlash against the BJP — not surprising as the euphoria from the national elections in May dissipates. On a positive note, more state elections will take place in November, with Modi’s allies expected to gain control of two or three more formerly unfriendly states.
In short, May’s victory was not the end of the political component of Modi’s struggle to renew India. He’ll be pursuing his vision now within the frame of local and regional Indian politics — and this is why it will take time.
We believe that Modi’s vision can put India on a growth path like that of the developing-world peers who have left it behind over the last generation. As states that embrace his goals prosper, we think that voters in other states will follow suit in demanding change — the same dynamic that brought him to national office after he invigorated the economy of Gujarat.
However, it won’t happen overnight. India remains a secular bet.
Investment implications: India’s long-suppressed economic potential, and Modi’s strong mandate for reform, continue to make India compelling on a secular basis, in spite of the pressure on emerging-market economies that may come from a strong U.S. Dollar. Investors should continue to monitor internal political developments in India to track the progress of Modi’s reform efforts.