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Marcuard's Market update by GaveKal Dragonomics
India has fallen out of favour with investors lately. Over the last four weeks, the Nifty stock index has dropped 4.6%, a fall that included eight consecutive sessions of declines, the market’s longest losing streak in more than 18 months. Investors blamed the collapse of lofty valuations following poor earnings results, with the fall exacerbated by rising tensions in the Middle East. But critics of India’s government say the problems go deeper. Ten months after his landslide election victory, Prime Minister Narendra Modi is struggling to deliver his bold promises of economic reform. Has the much-touted “Modi magic” vanished?
Not quite. Criticism of Modi comes mainly from the metropolitan elite, never natural allies of Modi’s Hindu nationalist Bharatiya Janata Party. But hundreds of millions of ordinary voters still believe in the prime minister, who has kept his promise to cut inflation and tackle corruption. His government has certainly benefited from falling oil prices, but it has also kept itself admirably scandal free. Modi’s supporters in the business community admit that his larger promises to reform the economy remain unfulfilled—but they are willing to give him time to deliver.
Until recently, even liberal Delhi-wallahs willed Modi to succeed. After nearly a decade of political paralysis, they were desperate for a capable leader who promised to cut red tape, invest in infrastructure, encourage foreign investment, and pave the way for India to become a manufacturing powerhouse. They looked at Modi’s impressive record in his home state of Gujarat and saw a man who could unleash India’s vast, unfulfilled potential. With half of the nation’s 1.25 bln population aged under 25, India’s dreams of double digit growth are surely not unrealistic.
With these promises still unmet nearly a year after his election, scrutiny of the Indian prime minister is intensifying. After keeping quiet for months, Modi’s critics are finding their voices. They criticise the new government for tinkering at the edges rather than attempting bold reforms. But their carping is premature: Modi’s government was never going to galvanise India’s sclerotic bureaucracy, ignite a factory revolution, and push the economy towards 10% growth within such a short period. And although Modi’s reforms last year were underwhelming, progress is picking up.
Notably, the government has begun to target India’s sprawling and deeply inefficient state monopolies. Take Indian Railways, the grand daddy of the state sector. A government report is set to recommend the biggest reform of the network for 100 years. The government intends to separate ownership of the track from those who run the trains. Foreign investors will be allowed to own and operate services. The government also proposes to funnel savings from lower oil prices—which could amount to as much as INR 1 trln over the two fiscal years ending in March 2016—into a special fund for railway and highway construction. Its commitment to improving infrastructure seems genuine.
In the resource sector, new laws promise to open up mining to private business. In February, domestic metal and cement companies were allowed to bid for coal blocks in the country’s first auctions to sell mines, reducing their dependence on the national resource behemoth Coal India. This month the passage of the Coal Bill effectively created the legal conditions to privatise India’s second largest state enterprise—a substantive market reform that has largely gone unnoticed.
Fiscal reforms are also gaining momentum. Critics complained with some justification that February’s budget was not sufficiently bold. But in one respect it was truly radical, granting individual states real spending autonomy, for the first time. The majority of public funds will now be disbursed directly to state governments to be spent as local areas need (in return for strict deficit caps and a centralisation of revenue-raising). “State governments no longer need to come to us with a begging bowl,” Arun Jaitley, India’s finance minister, told a forum in the capital last week.
Modi’s critics doubt how deep these reforms will really go. They question the capacity of his cabinet and complain that power is over-concentrated in the prime minister’s office, which employs fully 355 staff.
“Modi’s bureaucrats are regressive morons—they’ll never beat the system,” one seasoned observer told us in Delhi last week. Other critics argue that Modi’s reformist credentials have been overplayed. For all his success in creating a business-friendly environment in Gujarat, the public sector continues to reign supreme in India’s most entrepreneurial state.
Such carping is par for the course in India's rambunctious democracy. And time may prove these critics right. But for the next year or so, Modi deserves to be given the benefit of the doubt. This is the first Indian government in living memory to put business, growth and jobs at the top of the agenda. The Modi magic may have faded a little, but cautious optimism remains the order of the day.
