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India deciphering

Matthew Strauss's picture

There is no single India. I've come across this theme a number of times over the years, but never as notable as my recent visit to the land of the tiger. I didn't come across a tiger but did cross paths with motorists and cyclists that made crossing paths with a tiger look like an attractive alternative. States, or provinces if you wish, are the talk of town especially the differences between the 29 states. Per capita income in the top five states is around US$3500, while Bihar comes in at US$682. Said differently, some part of India is considered a solid "middle-income" country while another, large part of the population lives on income below the absolute poverty line. The theme of India as a mosaic of different "countries" within a "continent" is further reinforced by the changing nature of the relationships between states and the central government. Decentralization appears to be actively pursued by Prime Minister Narendra Modi who has not shied away from giving the states and departments more autonomy over decision making. State idiosyncrasies and competition amongst states will continue to gain traction and should increasingly drive investment decisions into this growing nation of 1.3 billion people. 

All good and well, but the big question remains unanswered: has the “Modi moment” worn off? A simple answer would not suffice and hence the reason for highlighting the “many Indias" concept. Within key departments – Finance, Roads, Railways and Economic Planning – the Modi momentum continues. The level of energy the Bharatiya Janata Party (BJP), the ruling party, has brought to a lethargic government is commendable but for the momentum to remain, the government has to deliver on its reform promises and not turn this government into yet another "failed reform" administration. An entrenched bureaucracy, non-reformist attitudes that had been cultivated over decades, cutting the private sector off from privileged access to the administration (a polite way of saying bribery and corruption) and overcoming vested interests complicate the task this government faces. The government already had to give up on one of its major reform drives, changing the Land Acquisition Act. Implementing GST is the other major reform and we should hopefully have an answer on this within the next few months. For most other things, look at the micro changes rather than headline grabbing reforms. Also, look at the state governments to provide direction where, theoretically, reforms are easier to pass as benefits or pain are largely limited to within the borders of the state.

With politicians realizing that economic growth and development is the path to career longevity, a new kind of healthy competition is emerging where states compete for investments and growth. Increasingly, voters are electing growth-orientated parties with relatively clean track records. State elections are turning out to be a real-time assessment of voters' attitude towards growth vs. social spending policies. This makes almost every major state election critical for the Modi/BJP as a significant thumping could cast doubt over whether the people are still supporting the BJP’s growth and reform-orientated platforms. The upcoming Bihar election (running from mid-October to early November) will be the next litmus test and is especially important after the media seriously questioned the BJP direction following its poor showing in the Delhi election earlier this year.

Although investors are disappointed that major reforms are taking longer than expected (the market has clearly erred on the positive side in terms of what policy reforms are achievable in the near term), one should not be blinded by the absence of big ticket reforms. State-level reforms, efficiency gains in the overall bureaucracy, clarity of regulations and performance measures are showing up at the micro level. Additionally, minor labour reforms and a central government that is increasingly changing decision making from discretionary to rule-based decision making (a major step to create a fair and transparent process) are showing up as well. Not enough to get the local private sector jumping with joy yet, but enough to keep the hope of reforms alive. Major projects have already been approved, and breaking ground is expected within months as the monsoon season comes to an end. Barring a global emerging markets collapse, the Modi train is moving ahead but with Indian characteristics, i.e. moving slowly. But even if one was to criticize the pace of implementation, the government is moving in the right direction and as long as they stay the course, India would stand tall among almost most of its emerging market peers.

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