As Nahendra Modi reaches the end of his first year as India’s Prime Minister, everybody is asking if he is on track to unleash his country’s huge potential.
It was perhaps Nahendra Modi’s clarity of message about India being on the brink of superpower status that gave his Bharatiya Janata Party the biggest electoral mandate the country has seen in over a generation. It is therefore no surprise that the anniversary of his first year in office has been met by a long line of commentators eager to pass judgment on whether he is the right man to unleash India’s potential economic might.
The first point to make is that Modi has certainly been blessed with some good macro-economic luck. The economy has significantly strengthened and is very well positioned for any global macro-economic instability (for example, Grexit and US rate rises).
Moreover, inflation has declined (wholesale price inflation has fallen from 5.6% to -2.7%) and foreign exchange reserves have increased dramatically from $310 billion to $345 billion. This macro-economic stability, which has been significantly aided by the collapse in the oil price, has enabled the Reserve Bank of India to cut interest rates from 8% to 7.5%, with further cuts widely expected.
But there are also important signs to suggest Modi’s tenure thus far has more substance than mere serendipity. Indeed, there are some important signals to suggest Modi is planning (and readying himself) for the economic and political long game this vast country needs.
In terms of infrastructure, which is inherently long-term, there has been an increase in new investment projects and a major jump in the amount of revived projects that had previously been delayed (see charts below), although it is clearly way too early to see the impact of these changes on the ground. In addition, road expenditure in the budget increased from INR 280bn to 826bn, and railway expenditure will rise 3.5x to USD 140bn in next five years.
In terms of foreign policy, much attention has been given to Modi’s choice of attire in which to greet US President Obama. Although having one’s name embroidered in gold thread as a pinstripe may not be to everyone’s liking, this has diverted attention away from what is a concerted effort to build relations with both the USA and China (see recent selfie with Premier Li). This can only be a positive for future investment flows, which have not been even close to their true potential for far too long.
Progress has also been made to rid India of its reputation for being intrinsically isolationist. In a move that was inconceivable under the previous Congress administration – even when the political will was there — Modi has succeeded in opening up state-centric industries, such as railways, defence and insurance, to foreign investment.
If these achievements are signals of laying the ground for long-term economic growth, there are also positive signs regarding Modi’s political intent. While the passage of game changing legislation in the areas of land acquisition and tax simplification (the Goods and Services Tax) may not be fast enough for some, recent Parliamentary sessions have still been some of the most productive for several years. Indeed, the largest number of bills have been passed since 2009, including long delayed laws, such as the infamous Insurance Bill that had been pending since 2008.
This is despite the BJP only having a minority in the Upper House of Parliament, a position that many commentators will no doubt watch closely in coming years. In addition, the Apprenticeship Bill and the Factories Bill (both increasing flexibility in the work force) were passed, as were the Coal Mines Bill (efficient auction and allocation of coal blocks) and Mines and Minerals Bill (competitive bidding for mining rights, increasing transparency).
Also, we should not forget that the deregulation of fuel prices and the increase in gas prices in line with market trends was a notable structural reform early in in Modi’s tenure. And the 2014 Budget was notable for reducing corporate tax in future years, expanding the visa on arrival scheme and cutting red tape.
There are many who believe Modi could and should have done more to exploit his party’s bewildering electoral advantage. It is certainly possible to see why so many commentators’ focus has shifted onto what has not been achieved, rather than the successes, with the stock market retracing most of its 2015 gains. But with Congress likely to remain in the political wilderness for some time yet, it may well be that we’re seeing the foundations necessary to allow this vast country to build up a head of steam.
Mike Sell is an Asia fund manager at Alquity Investment Management
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