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Q&A: While his opponents predict disaster if he becomes prime minister, investors overwhelmingly support him. Here’s why.
UPDATE: India's election results are mostly in, and Narendra Modi is set to become the next prime minister of India. His Bharatiya Janata Party won by a landslide, giving them enough seats for a parliamentary majority in India.
NEW DELHI, India — India’s firebrand opposition candidate for prime minister, Narendra Modi, has built his platform on a reputation for economic excellence.
As chief minister of Gujarat, Modi persuaded multinational corporations to set up in his state. In return, he pledged enticements that were radical for India: streamlined government regulations and reliable infrastructure.
Not everything went according to plan. Investors were scared off in 2002 by anti-Muslim riots in which more than 1,000 people were killed. Modi has struggled to shake off accusations that he was to blame for the violence. As the May 2014 elections approach, his opponents are comparing him to Hitler.
And as GlobalPost recently reported, some investors contend that his economic accomplishments relied less on strong administration than on debt, hype and the skills of his predecessors.
Still, Gujarat grew about 10 percent annually under Modi. And that’s what matters to voters.
With India’s growth slowing and the rupee losing 20 percent of its value since May, India’s middle classes seem prepared to overlook Modi’s reputation for divisiveness — if he can rescue the economy. Commentators sense that Modi’s campaign is gathering momentum while his rival, the Congress candidate Rahul Gandhi, remains in the doldrums.
The possibility of Modi becoming prime minister is even being credited with boosting the stock markets. And Congress leaders were very upset recently when investment bank Goldman Sachs suggested that a “business-friendly” BJP coalition might win the general election, calling Modi an “agent of change.”
So why exactly do investors like Narendra Modi? GlobalPost interviewed Ritika Mankar Mukherjee, an economist with Ambit Capital, one of India’s leading financial services companies.
(The interview has been condensed and edited by GlobalPost.)
GlobalPost: What would Prime Minister Modi mean for investors?
Ritika Mankar Mukherjee: Let’s divide it into two key parts. One of the key things for investors is that he will get the low-hanging reform out of the way. Something that doesn’t take serious amounts of time, like a GST [Goods and Services Tax] which requires consensus-building but doesn’t need serious amounts of engineering.
Given that he seems to be fairly headstrong and that he seems to stick to an issue and see it to its logical end, it seems likely he will get the wheels rolling.
If he gets a five-year term, he should definitely be able to do the work required to push through something like a Goods and Services Tax. Obviously it will be conditional upon him getting the right numbers in the Lok Sabha [India’s Parliament] but if he has that, he clearly has the ability and inclination to see through this sort of reform to its logical end.
However, the second bucket I would worry about — and I don’t think investors have thought this through — is the big ticket structural reforms, something like labor reform.
Given the number of vested interests [standing] in the way of pushing through labor reform — and that is what is required to take India through to the high growth path — I don’t quite know if he will be able take politically risky decisions which can have clear implications in terms of your popularity.
Can you be more specific about the labor reforms that are required?
The biggest problem is that the existing structure of labor laws is extremely tedious.
There are some 30 to 50 legislations governing the entire issue. There are also multiple state-level variations, and the states and [the Government of India in Delhi] don’t always see eye-to-eye.
The whole idea of a fairly strict labor regime was to protect laborers. What has actually happened is that to avoid the entire set of legislation, more and more employers are hiring contract workers who are exempt from this legalisation. It isn’t serving anybody’s purpose. If some sort of rationalization could come through allowing people to hire and fire more easily and at the same time ensure that there is a desire for compliance by respective employers then you’ll probably head to a middle ground.
There is also a massive skill mismatch problem. On one hand you have a record number of unemployed engineers, unemployed MBA graduates. On the other you have meaningful blue collar wage inflation. The labor market is generating the wrong sort of jobs and the education system is throwing up the wrong sort of qualifications. Something that corrects that will go a long way towards lifting the country.
You need to develop the manufacturing sector so the entry level workers can upgrade themselves. At the same time you need to develop the service sector at a faster pace so that the record number of white collar job aspirants that you’re getting have a reasonable job in the system.
If you can provide greater vocational training and greater skill development we’ll be in a better position.
What are the other big issues that investors would like Modi to deal with?
Single window clearance is something he should put in the first bucket of reforms. If I want to set up a manufacturing plant I shouldn’t have to pander to 20 different ministries, with each having a different view on how I should go about it. I should have one nodal body that tells me “Ritika — this is what you need to deliver on and if you hand me these papers by the end of the month you should be getting the clearances you require.”
So the lack of single window clearance is something that arguably is responsible for the slow-down you have seen in India. I think this guy seems to be somebody who will be able to deliver on that front.
The best proof you have seen on this is land acquisition in Gujarat, which is diametrically different from a state like West Bengal. [Editor’s note: In 2007, Indian mega-manufacturer Tata abandoned plans to make its new Nano car in West Bengal after Modi persuaded billionaire owner Ratan Tata to build his new factory in Gujarat]. In 48 hours flat [Modi] had handed Tata the land he needed with the right proximity to skilled labor, et cetera, et cetera.
This is a good example of how this guy can get you single window clearance.
There are big arguments on both sides about what Modi has delivered as chief minister of Gujarat. How do investors assess that?
We have seen in Gujarat that one thing this guy gets done effectively is administration. You don’t even need to get into any big ticket reform. He’ll make sure that the existing government machinery will work pretty efficiently with the bureaucrats given proper responsibility with executive powers and the ability to take decisions. This is completely different from what you see [in Delhi] where nobody knows who is responsible for what.
What Modi could accomplish would depend to a certain extent on the make-up of government — the level of his authority and his majority. Is that something we can assess at this stage?
That is one angle I worry about, to the extent that while things like administrative capabilities in Gujarat can be extrapolated to the national level, I don’t know if his authoritarianism will be a complete win-win for the country.
Remember, we are an extremely diverse country and we do need someone at the helm who has the ability to take people with him. And vice versa be open to other people’s views. That’s something I haven’t seen from him even in the Gujarat case where he had meaningful fall-outs with big politicians in Gujarat simply because of a difference of opinion.
Are there other elements that might make a Modi government risky?
The signs have already been there in the last six months, the fact that the BJP itself doesn’t seem to be an undivided party. There could be problems if all leaders don’t give Modi the sort of backing he requires. But the core risk is that he shouldn’t be too authoritarian so that he upsets too many other people that have differences of opinion.
What about potential opportunities that investors might have? If I were a foreign investor with several million dollars to invest in India, what potential opportunities might I have under Modi that don’t exist now?
Single window clearance is something that benefits the infrastructure sector to the greatest extent. That sector has been beaten down, in terms of relative values, to all-time lows, mainly because single window clearance has been missing.
At the moment, foreign investors don’t know if a project will get off the ground in this century.
Are there any elements of foreign policy which may change under Modi?
That’s another grey area. At the state level those policy stances don’t make much of a difference and so we don’t know what he thinks. The reason to worry is that we know he has got into diplomatic fracas because he has been denied visas to a lot of developed countries. [Editor’s note: The US cancelled his visa in 2005].
Hopefully he doesn’t hold any sort of grudge because of that.
The Indian middle classes do have quite high expectations of Modi. Are they too high for him to realistically achieve?
While that is a theory that is floating around especially with the rally in the markets in the last couple of days, I don’t think the market is factoring in a growth lift that you could potentially get if Modi came through. The degree of incompetence of the current government is so high that the smallest of measures will have a disproportionate impact and those are quite achievable. We’ve forgotten over the last 10 years that with a good administration, this country can have reasonable levels of growth.
How good do investors think it could get? What would be an overachievement for Modi?
If you get a combination of an improvement in the global business cycle and Modi getting the reins with a majority, in that case the 4.5 percent growth rate that we’re hovering over, you could easily drift towards 6 percent. But I’m still fairly confident that 8 percent or 9 percent isn’t really possible until you address the big structural issues such as labor reforms.
Two percentage points of improvement from where we are is par for the course. It should come through if the global business cycle improves which means that our exports get a boost, especially the services exports, and on top of that a Modi administration.
But beyond that if you want to get 8 or 9 percent on a sustainable basis without stoking inflation we need much more than what we’re confident of Modi achieving.