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India Looks to Asia for Economy Fix

  • Catherine Maddux

Indian Prime Minister-designate and Hindu nationalist Bharatiya Janata Party leader Narendra Modi pays his respects at Rajghat, the memorial of Mahatma Gandhi, in New Delhi, May 26, 2014.

Indian Prime Minister-designate and Hindu nationalist Bharatiya Janata Party leader Narendra Modi pays his respects at Rajghat, the memorial of Mahatma Gandhi, in New Delhi, May 26, 2014.

The “Modi era” has arrived in India.

Just under a month ago, voters sent a clear message: out with the old and in with the new.

A record 66.4 percent of eligible voters threw out the Congress Party, plagued by charges of severe corruption and a sputtering economy, instead choosing the Hindu nationalist Bharatiya Janata Party and its star politician from Gujarat state, Narendra Modi.

And the message from voters has been crystal clear, says Pramit Pal Chaudhuri, foreign editor at the Hindustan Times. Fix the economy.

“The Indian economy has seen its growth rate halve in the past three or four years. It’s suffering from chronic inflationary problems; core inflation has been stuck at eight to nine percent, even though the economic growth rate has fallen,” Chaudhuri said.

Known for turning Gujarat state into an economic powerhouse, Modi has already begun to execute his plan, hosting top Chinese officials this past week in what appears to be a warming trend aimed at pulling in investment from Beijing. And Modi is intent on rolling back the bureaucracy in order to attract lots of foreign investment.

But in a country of 1.2 billion people living across 29 states, that won’t be easy, says Milan Vaishnav, an associate with the South Asia program at the Carnegie Endowment for International Peace in Washington, D.C.

That’s because India is undoubtedly trending towards decentralization.

“So what that means in practical terms is that Narendra Modi has limited levers of power when it comes to pushing through, say, economic reforms because more and more it is the state capitals [that] have to take decisions on things related to labor, land, things having to do with health and education,” Vaishnav said.

“Many of those fundamental issues that affect citizen’s [daily] lives really rest with primarily with the states, rather than the central government in Delhi,” he said. “So that poses an impediment and set of challenges for Modi as he tries to clean up India’s economy.”

And certain sectors on India’s economy will demand a lot more time to turn around, says Alyssa Ayres, Senior Fellow for India, Pakistan and South Asia at the Council on Foreign Relations.

“Certain areas are the provenance of states, rather than the center [of government]... areas like agriculture and retail, electricity, land, labor, those are going to take more time,” she said.

The 'Gujarat model'

That may also play to one of Modi’s core strengths as a politician, Chaudhuri said, because of his record of growth in Gujarat state, which has experienced a dramatic economic boom during Modi’s three terms as chief minister.

“His argument has been that the model that he has developed in Gujarat, which largely depended on a technocratic, allowing technocrats and bureaucrats to run large sectors of the government, and maintaining a very tight, centralized control of the implementation of these policies, as well as a keen political sense about how to sell these policies to the public,” he said.

But critics say touting his so-called “Gujarat model” for all of India dismisses the realities of governing a state of some 60 million people and the whole of India.

Ayers said his background of successful implementation is critical.

“He'll have a shared sensibility with other chief ministers,” she said. “He'll be able to compare notes with them and say, ‘look this worked for us, let's try this here’....certainly he's bringing with him a background of very successful administration. But obviously it is different to look at major national change from the center."

Most observers predict it will take Modi around two years to repair the Indian economy – that is, raising annual growth rate to seven or eight percent without further triggering already chronic inflation.

And there are a few realities that are playing in his favor: India’s opposition Congress party suffered a stunning defeat having won only 44 seats in parliament – the worst showing the party has ever had.

The other plus is that Modi has an absolute majority in the lower house of parliament, a political dynamic that has been in play since 1984.

Looking eastward

With his first major foreign trip since becoming prime minister being Japan, in addition to last week’s talks with top Chinese officials, it is clear that Modi is looking to woo Asia countries who want a place to park excess capital.

“Japan is putting out a plan for India that would effectively transform huge chunks of the Indian economy," Chaudhuri pointed out. “Japan is having serious problems with China on the foreign policy side, so the Japanese are now signaling that they want to move out of China they have invested heavily in China, they’ve got about 18 thousand factories there and plants and they’re now looking for places to move them out because of the tensions,’ he said.

India has also set its eyes on investment possibilities from Singapore and Thailand.

So where does that leave the United States?

“The United States, for at least the last decade, has encouraged India to become more integrated with Southeast Asia and Asia, has encouraged trading relations to develop, has talked in very encouraging terms about India really developing what it calls its 'Look East' policy,” Vaishnav said.

“And so I actually think this is a place where it's a win-win situation. To the extent that the Indian economy is going to grow faster…. that’s going to rebound to the benefit of U.S. investors and U.S. economy.”

In July, Modi will announce his very first budget – expected to be a roadmap of exactly how he will pull in new foreign investment and tackle structural problems like taxes to make India more attractive.

In the meantime, the latest economic report card from India showed a rebound in industrial growth along with a drop in retail inflation.

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