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India Inc. bets big on Modi, but can he deliver?
Publish Date: May 21, 2014
India Inc. bets big on Modi, but can he deliver?
Indian Prime Minister-Elect, Narendra Modi (L) shows a victory sign as he arrived to attend a public meeting in Ahmedabad on May 20, 2014. AFP PHOTO
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NEW DELHI - Daunting political and fiscal traps lie in wait that could ensnare new centre-right leader Narendra Modi as he embarks on the gargantuan task of fulfilling India's undoubted economic potential, observers say.

The landslide election win by Modi's Hindu nationalist Bharatiya Janata Party (BJP) could be a game-changer, they say, but any economic transformation will take time in the emerging-market giant of 1.25 billion people where competing interests abound.

"Expectations have built up very quickly, too quickly," Sidharth Birla, president of the Federation of Indian Chambers of Commerce and Industry (FICCI).

Mumbai's headline share index extended a heady rally on Tuesday to a new closing high and one of India's top investors, Rakesh Jhunjhunwala, forecasts the "mother of all bull runs".

The prime minister-elect has stoked the expectations by saying he could make the 21st century "India's century" within 10 years.

But Modi "will need to exercise reality management" to temper investor and voter hopes, Birla said, as the 63-year-old finalises his ministerial team before taking office on Monday.

The BJP ousted the left-leaning Congress, riding a tide of public anger over tepid growth, high inflation, rampant graft and a sclerotic political system.

Modi oversaw double-digit annual growth in a dozen years as chief minister of Gujarat state, and campaigned for national leader on his "Modinomics" mantra of "less government, more governance", pledging to spread his economic model nationwide.

Top of a 12-point business wish list issued by the FICCI is a call to sweep away the remainders of the so-called "Licence Raj".

That refers to bureaucratic controls dating from British colonial rule that have stalled multi-billion-dollar projects as well as small investors wishing to start up businesses.

Analysts say India is also in dire need of more roads, ports and other infrastructure to boost productivity if it hopes to emulate rival China's economic miracle, along with a simplified tax system and reform of a cumbersome land acquisition process for industrial projects.

- Exporting 'Modinomics' -

In Gujarat, Modi centralised control and gained a reputation for browbeating India's notoriously slow bureaucrats.

He was known as a tough taskmaster and reports say his office has already begun sounding out chief secretaries in various ministries asking them why stalled infrastructure or industrial projects have been held up.

But the challenge is greater on the national stage, where high consumer inflation has kept interest rates elevated, discouraging consumer spending and investment.

Meanwhile, a hefty fiscal deficit means the new BJP administration has no fiscal firepower to spur an economy growing at 4.9 percent -- half the level notched up as recently as 2011.

Serious structural economic problems complete Modi's difficult hand, as highlighted in a new World Bank "Ease of Doing Business" survey that ranked India at a lowly 134th among 185 nations -- below its BRICS peers Brazil, Russia, China and South Africa.

"We have got to change how India is perceived," said Birla, citing years of project clearance delays, graft and red tape which have tarnished India as an investment destination.

An average infrastructure project, for instance, needs approval from around 20 federal ministries. A convenience stores needs close to 30 licences to sell milk, bread and other goods, the Retailers Association of India says.

"The lowest-hanging fruits (to improve the investment environment) are fast-tracking of projects in the pipeline," said Roopa Kudva, managing director of rating agency CRISIL.

- Sacred cows -

But even with the BJP's lower house majority, "the government won't have everything its way since power is dispersed in India", said Capital Economics analyst Mark Williams.

Many reforms, such as introducing the wish-list proposal of a simplified national tax, require state approval under the nation's federal system, Williams noted.

The BJP and its allies control only eight of the 29 state governments. Congress remains in control of the upper house of parliament, which must sanction legislation.

Business leaders would also like India to relax strict hire-and-fire labour laws they say discourage industry from creating jobs for its youthful population, but this is not on the "to-do" list as easing job protection is seen as unpopular with voters.

Nervousness about jobs is also a reason the BJP says it will not allow foreign supermarkets into the lucrative retail market dominated by small convenience stores -- overturning a Congress government policy.

Meanwhile Modi showed no sign on Tuesday of departing from some of the populist policies of the previous Congress government, emphasising how his administration aimed to serve India's hundreds of millions of poor.

"To meet their aspirations and hopes, this is our responsibility because our weakest, poorest have sent us here," he said, breaking down briefly in a rare display of emotion, as he faces up to fulfilling the sky-high expectations of the world's biggest electorate.

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AFP

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