Modi’s reforms are starting to pay off
After Moody’s upgrade, the bureaucracy must unequivocally back the PM’s push for reforms
International commentators have asked the government of India to make major economic reforms for years. We said it would be like The Field of Dreams: If you make major reforms, international money will pour in. But the problem for politicians is that reform in the short term can be political suicide — and that’s precisely why very little gets done in any country absent a crisis. You implement a controversial regulation or take a difficult vote, but you lose the next election because of it.
This political truth hamstrings politicians from all factions around the globe. Prime Minister Narendra Modi appears to be the exception. He has had the courage to take major risks — such as demonetisation to reduce corruption and digitise payments, along with the Good and Services Tax (GST), which will streamline India’s patchwork tax system and make it easier to do business between states.
And he’s now being rewarded: Moody’s has upgraded India’s government bond rating for the first time in 14 years, citing demonetization and the Good and Services Tax as significant contributors to the ratings change.
At first glance, the benefits of an improved rating are obvious. The upgrade will reduce borrowing costs for the government and Indian corporations, freeing up additional capital for investment. The Indian stock market is already experiencing an increase in anticipation of higher earnings.
More important, the Moody’s upgrade raises the confidence level of US business leaders who are looking to invest globally and shows that Modi possesses a genuine intention to enact additional reforms.
The other gem in the Moody’s upgrade is its forecast of a bounce in India’s GDP growth from 6.7% in FY 2017 to 7.5% in FY 2018 “… with similarly robust levels of growth from FY 2019 onward,” noting that in the longerterm India’s “growth potential is significantly higher than most other [similarly rated] sovereigns.” This is what gets the attention of international investors: A big market that is growing faster than its competitors with a reform-minded prime minister in control.
Moody’s spells out the key to additional upgrades. You guessed it, more reform: “The rating could face upward pressure if there were to be a material strengthening in fiscal metrics, combined with a strong and durable recovery of the investment cycle, probably supported by significant economic and institutional reforms.”
Modi has proved that he can think big and act on it. His headline-grabbing initiatives point to India’s future: Make in India is a nod to the need to employ India’s burgeoning youth; Skill India recognises that its youth will do much better if they have the education and training to fill manufacturing jobs; and Digital India recognises that connectivity is paramount in a country that has already taken the Internet by storm with its $150 billion IT services industry.
The next step is to get the bureaucracy on board with the prime minister’s push for reforms. In March, the US trade representative published its 2017 National Trade Estimate Report on Foreign Trade Barriers for US exports. The report spends roughly as much ink on India as it does on Russia and China, outlining over 30 issues that US companies face in India. Some of these issues arise out of the desire to protect local stakeholders.
The report finds that “India maintains very high tariff peaks on a number of other goods … India has also raised tariffs on specified telecommunication equipment (from nil to 7.5 or 10%) and on electronic-readers (from nil to 7.5%). … India also increased its duties on medical equipment and devices to a 7.5% basic customs duty, 12.5% additional duty, and a 4% special additional duty.” Increasing tariffs might protect local manufacturers, but Indian consumers pay the price. Of course, the revenue-generating barriers are harder to eliminate than non-revenue ones. But plenty of tweaks can be made. One example is duplicative in-country safety testing requirements for electronic and ICT products that have already been certified by internationally accredited labs.
This is the type of low hanging fruit that can be solved overnight by the NDA government. If the prime minister can tackle enormous obstacles like the GST, he can certainly solve minor policy roadblocks.
And when he does, he’ll be rewarded once again with higher ratings, more investment, and additional economic growth. After all, the Moody’s report drives home a point that our chairman John Chambers has made for years: If you’re not investing in India right now, you may “miss the bus.” The prime minister is in the driver’s seat, safety-belt fastened, with the keys in the ignition. We look forward to the ride.