Where has the Modi Magic gone?

Financial Mirror (Cyprus) - - FRONT PAGE - 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. 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.

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.

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