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Narendra Modi: Nightmare or savior for India’s struggling economy?

Q&A: While his opponents predict disaster if he becomes prime minister, investors overwhelmingly support him. Here’s why.

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Chief Minister of Western India's Gujarat state, Narendra Modi during an event to launch the DVD's of a TV series of Lord Swaminarayan, on October 31, 2013. Many executives think Modi's election to prime minister would spur growth and investment. (Sam Panthaky/AFP/Getty Images)

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