Global Economy 2015 – India Report (#73)

In a volatile and darkening economic World, India is a flickering light of positive economic potential, faint and weak yet, but definitely lit and glowing. That fabled India’s potential, a decades-old siren song that has dashed more hopes and destroyed more investment in time and money, and held captive more hundreds of millions in abject poverty than can be accurately estimated, once again has flickered to life with the election of Narendra Modi, his majority Government, and their latest growth oriented, investment encouraging ‘Budget 2015’. The election of a right-of-centre - development oriented - rebuild India type of government, with a majority mandate, which gives them the ability to carry out their social and economic agenda, is definitely a major step in the right direction. A deflating economic World needs a resurgent India. And India needs the World to help it develop with expertise, technology and long-term investment.

Will this government succeed where the previous ones failed? It’s too early to tell. However, we do like their basic and bold policies addressing India’s primary and chronic weaknesses such as: a half-hearted opening to the World; the protection of internal harmful vested interests; the selling out to corruption and cronyism; precious resources squandered and stolen by a corrupt, bloated and dysfunctional public sector; the lack of basic, economically rational, stable political policies to encourage infrastructure development; the lack of clarity and commitment in government intention; and accountability at all levels of government. Additionally, we were very encouraged to see the new Prime Minister tackle upfront the here-to-now taboo subject of the lack of basic sanitary facilities and the general filth that is accepted as the norm in Indian society. In our view, he set the right tone in announcing the goal to ‘clean India’.

India now has a Prime Minister, and hopefully a government, that not only has the nerve to bring taboo subjects, social and economic, to the political and policy forefront, but the indomitable will to see them through against India’s age old apathy towards change. Hopefully, once these “genies” are out of the bottle, it will be impossible to put them back in.

India’s potential is real, the fundamentals being so obvious, but the path and the means India chooses to realize on that potential has been usually and unnecessarily tortured, and usually sabotaged every step of the way by the very people charged with delivering the change, the political elite and the compliant but self serving and till now self perpetuating bureaucracy. It is hoped that this time it really may be different. Indians have voted overwhelmingly for change in the last year’s national election, and more recently in the Delhi State elections. The vote has gone overwhelmingly to anti-corruption and status-quo busting ‘outliers’, Narendra Modi as Prime Minister of India, and Arvind Kejriwal as Chief Minister of Delhi. Being ‘outliers’, both of them have promised to break with the status-quo and bring change, even though they are at different ends of the socio-economic spectrum (Modi being right-of-centre, and Kejriwal being definitely on the left). In the coming years, India will go in the direction of the one who succeeds the most.

The open and public acknowledgement of the problems that have plagued and held India back for decades gives hope, and Indians have voted overwhelmingly for dramatic change, to get away from those chronic problems, and that in itself is reason to expect change. The people of India have, in the recent elections, exercised their votes to throw out entrenched, nonperforming, self serving governments. The incoming governments and their leaders know the dangers of disappointing an increasingly demanding and judgmental public. Voter turnout for the national election was estimated at 66.8%, (540 million people) and for Delhi 67.1%. Such massive turnouts in a naturally chaotic democracy are very admirable.

We have greater faith that the centre can deliver enough to make a difference at the national level, because Narendra Modi has extensive experience in governing as Chief Minister of a major State, and his political party, the BJP, ruled as India’s government for a number of years. The Chief Minister of Delhi, Arvind Kejriwal, and his Aam Adami Party (AAP), on the other hand, are new, untested and inexperienced, and in spite of all good intentions, therefore suspect on deliverability. Nevertheless, any change towards less corruption will be beneficial at the National and State levels.

The last time there was such hope and optimistic anticipation, on the potential of India manifesting itself in reality, was in 1991, when the Congress led Government, tabled its first right-of-centre reform minded budget. The Samajwadi Janta Dal/Congress led Governments, due to a ‘Balance of Payment’ crisis, in 1991, were forced to pledge India’s gold reserves to secure a bailout of $2.2 Billion from the IMF, which in turn also demanded that the government undertake liberalizing economic reforms to unshackle India’s economy from decades of stifling socialist policies.

After Independence in 1947, India had chosen the Russian-styled, centrally planned, heavy-handed political and bureaucratic socialist system, which had smothered innovation and efficiency in the public, and the protected (from foreign competition) India’s private sector for decades. As a result India’s citizens were held captive to a regressive economic system that condemned them to a prolonged second class status vis-a-vis the rapidly advancing West, and in lock-step with their equally beleaguered compatriots in communist Russia, China and the other socialist economic and political systems. Those decades of underdevelopment present an unprecedented opportunity now for above-average advancement, like China’s bold break from its economic past under Deng Chow Ping’s - ‘to be rich is glorious’ - mantra.

Even though induced by a real financial crisis in 1991, that almost had India default on its foreign obligations, and not by any real pre-meditated brilliant insights of the Indian Government, the ‘1991 Reforms’ nevertheless worked, as the opening of the Indian economy produced tangible positive changes. This shift towards a more liberal economy, imperfectly adhered to over the past two decades (more or less) by successive governments, was responsible for the rather dramatic lunge forward of India towards modernization, and the break from the traditionally accepted minimal rate of economic growth. The Chart below shows the dramatic upward swing in the economic growth rate from 1991. The Indian economy slowed in the recent years because of the 2008 global recession, and the ever larger and increasingly dysfunctional ruling government coalitions, the resulting policy paralysis, and the stunning increase in the scale of corruption, under the 17 party governing coalition led by the Congress Party.

With the recent change in government, with an overwhelming majority, in 30 years, and with a more determined attitude towards fixing India’s age old problems, India’s growth rate has once again jumped. The change in attitude in India, in the people, in government, and in governance, however early stage, bodes well for India. Its right-of-centre economic policies at the national level, position it to grow steadily even as the rest of the major economies struggle or stall in the coming years. The reason for India’s potential for above average growth is, on a per capita basis, it is one of the most underdeveloped major economies. India has a population of more than 1.2 Billion (growing by approximately 16 Million per year) crammed into a land mass of about a third the size of China. And yet, India is projected to overtake China by about 2030 and become the most populated country in the World. Such extreme density will exacerbate India’s existing problems. However, its internal consumption, which is estimated at about 60% of its economic output, will continue to rise with its otherwise scary population growth, and provide relatively strong consistent demand, when most other major economies start stalling, as now.

That extreme density of people is going to seriously challenge every type of resource in the Country, and the capacity of its people to deal with it. Already, India on a per capita basis ranks as one of the worst in the World in the following metrics: absolute poverty; the availability and use of energy, and clean water per person; general malnutrition; general healthcare; environmental degradation; deforestation and decimation of wildlife; air / water / food contamination; international standards of education, overall literacy, meaningful levels of skills and jobs; gender inequality; and, of course corruption.

India has been reluctant to tackle the issue of population control on a Central Government level after the disastrous episode during the infamous ‘Emergency Rule’, under the former Prime Minister Indira Gandhi. Nevertheless, it is an issue India will have to tackle before long, otherwise its so called demographic dividend is going to turn into an under-educated, under-employed, un-skilled, poverty-stricken, over-populated disaster. It is almost there now. Yet, as is proven in the rest of the World, with the rise in the standard of living and education, populations tend to automatically decline rapidly.

The above was the bad news. The good news…

For India to turn its formidable challenges into immense opportunities, above all, it needs good governance. An across the board altruistic, strong and fearless leadership that is not there solely for personal power and enrichment, at the cost of the general public, as has been the case so far, instead, is willing to take on the entrenched self-centred interest groups, in the public and the private sector, for the benefit of the country and its population.

Secondly, India needs its public to also reflect on self-governance and personal change, because no country can have the level of endemic corruption in daily life as India has, without the active and voluntary participation of the general population (no country can). In all countries where corruption is rampant, the public has blinders on when it comes to their own active, voluntary, daily role in the acceptance and fostering of corruption. The people of India are a living example of this, complaining daily about institutional corruption, while not changing their active and supportive role in the corrupt system that they helped build, and maintained for decades, and even now.

On both fronts, better governance and a changing public, there has been positive developments.

At the Central Government level, in Narendra Modi, the new Prime Minister, India now has an individual who certainly has the personal strength and ambition to push India’s governance towards the more altruistic stance that has long been required, so that he can bring about the measurable change that he promised during his election campaign, and for which the Indian people elected him in overwhelming numbers. Narendra Modi is keenly aware of the public’s expectations, and he will certainly try to meet them in a substantial way before the next election, in less than 5 years now. In his election campaign he raised the public’s expectations very high through his promise of change, and by showcasing his track record in the State of Gujarat where he was Chief Minister for three terms. There, he had become known for his organizing and governing abilities, his ambitious vision for development of the State of Gujarat, and had achieved enough results to have swept the Country by promising similar transformation for the rest of India.

In sharp contrast to his predecessor, Dr. Manmohan Singh (who was considered competent, sometime brilliant, but consensus-seeking and generally too weak to control those in his government and political party who hijacked, and then sabotaged his reformist agenda), Modi is considered strong-willed, controlling, micro-managing and the lead-from-the-front type. The closest thing to a ‘benevolent dictator’ that the educated upper middle class Indians have wished for (for decades - over evening scotches) as the real need of India, for it to be governed effectively. And now through the democratic process, they have such a ‘dictatorial’ strong leader. India, at this stage of its development, and after the chaotic decade and more of multiparty, dysfunctional and increasingly corrupt governments, needed a strong anti-corruption and pro-reform development leader, with a strong mandate from the people to govern. And that is exactly what the people of India gave Narendra Modi; a strong mandate to quell corruption, reform the bureaucracy, formulate and implement pro-development policies, and govern.

There was a lot of trepidation in secular India, post election, about Narendra Modi’s past involvement and roots in the Hindu National organizations such as the Rashtriya Swayamsevak Sangh (RSS), his role as a Chief Minister in the Gujarat riots (he was acquitted by the Courts) where Muslims were targeted and killed by rampaging Hindus, and his perceived Hindu Nationalism and its threat to other religious minorities. And post election those fears seemed to be validated with some of these organizations holding ‘reconversion’ events called “ghar vapsi” (“home-coming”), from Christianity and Islam back into Hinduism. In February 2015, when addressing a meeting of concerned Christians in Delhi, the Prime Minister finally spoke against such activities saying, “We cannot accept violence against any religion on any pretext, and I strongly condemn such violence. My Government will act strongly in this regard”. Also, in addressing the Indian Parliament, PM Modi is reported as saying “Nobody has the right to discriminate on the basis of Religion...” and “No one has the right to take law into his hands”.

In our view, after decades of building on his RSS support, PM Modi is constrained in the manner he can contain the destructive side of that organization, but to rebuild India he cannot afford serious internal discord, and risk external isolation and condemnation, because that would push India backwards.

We believe the Government of India will not allow the attempted mass reconversion of Christians and Muslims because of the chaos it would cause within India, and the significant negative repercussions and backlash from “Christian and Muslim” countries abroad. The United States, Canada, England, Australia and Europe (Christian countries) are the favoured destinations of Indians for immigration, business and tourism. India’s hugely successful and important Information Technology (“IT”) sector benefits almost extensively from business emanating primarily from these countries. Plus they are the favoured economies to do business with and get investment capital from, and the Prime Minister has been wooing them actively since his election. His development and reform agenda, and his desire to rebuild India, will derail significantly if he is not able to control the collective Hindu Nationalist organizations effectively.

Plus, there are millions of Hindus living and prospering in the so called Christian countries, for decades, where they live, prosper, practice their religion, and build their temples, with no harassment.

The oil rich Middle Eastern Islamic Countries are the primary suppliers of India’s imported energy needs - oil, natural gas etc. And thousands of Indians work and live and prosper in the Middle East. We cannot see serious persecution of Indian Muslims being ignored by the energy and wealth providing Islamic countries. In today’s interconnected global economy even India cannot act outside of international considerations, without suffering serious economic and political repercussions. We believe the Prime Minister is acutely aware of such key reciprocating relationships, and will act to suppress the more extreme elements in the ‘Sangh Parivar’ - the sum total of all the Hindu Nationalist Organizations. Regardless of his personal beliefs or ideologies, Narendra Modi has to act as the ‘International Statesman’ that being the Prime Minister of India requires. His trips abroad and his early actions to promote India internationally indicate his view of himself as a worthy international statesman. Therefore he will act to contain the overly zealous in the Hindu Nationalist organizations, for he needs to keep India secular and stable for him to deliver on his promise of positive, inclusive change for all, and to achieve his dream to see India ascend to real power in the international community.

More to come in the next report - Global Economy 2015 – India Report (#74)