‘The Vision Thing’ proves a challenge for Modi aides
In its attempts to be both pro-business and pro-poor, the administration of Prime Minister Narendra Modi is experiencing communication struggles that are starting to alienate both groups.
The most costly misstep occurred in April, when Finance Minister Arun Jaitley overstated — by nearly 70 times — the amount of tax that was overdue from foreign funds to make a point about helping the poor. The comments triggered a stock selloff, wiping about US$10 billion off investor wealth over the next four days.
Modi has since trumpeted policies for the poor to counter opposition claims that he’s running a “suit-boot government”, a phrase that was coined by opposition figure Rajiv Gandhi and is gaining traction among farmers. Modi has offered to make a proposed land bill more farmer-friendly and slowed down a push to overhaul labour rules and food handouts.
“Here is a government that’s pro-business and pro-jobs, but is so much on the back foot and having to embellish its pro-poor credentials,” said Rajeev Malik, senior economist at CLSA Singapore Ltd. “Apart from a course redirection, I think they also just need to make sure the right message is going out.”
A clear vision is crucial for Modi to capitalise on renewed optimism over India since his election win. While growth in the year through March reached 7.3%, just shy of a slowing China, other indicators such as private investment, exports and corporate earnings suggest weakness in the economy.
The lacklustre data prompted Goldman Sachs to predict that the Reserve Bank of India will cut its key interest rate by 25 basis points when it meets tomorrow.
India’s benchmark stock index has gained just 1.5% so far this year after gaining 30% in 2014 on optimism that Modi would jumpstart growth.
Investor sentiment soured after Jaitley told NDTV in April that foreign funds owed the government 400 billion rupees (US$6.3 billion) in unpaid taxes. “I can change the face of India’s irrigation with that,” Jaitley said. “If I wave it off, we are like a tax haven.”
Finance ministry officials rushed to find out the real number, which turned out to be only about 6 billion rupees. Junior Finance Minister Jayant Sinha held a teleconference to assure foreign investors they would be treated fairly, and the ministry set up a committee to recommend solutions.
The damage, however, was done. Foreign investors sold a net $1.8 billion of Indian stocks and bonds in May, the most in any month this year.
“Confusion is a regulatory risk for foreign portfolio investors, and you saw the mania,” said Ajay Marwaha, director for investments at Sun Global Investments Ltd in London. “All other risks can be mitigated; regulatory risk has only one solution: Exit.”
India’s political dynamics make it hard for any administration to quickly reduce the role of government in the economy. About half of India’s 1.2 billion people are employed in agriculture, and Modi needs to win upcoming elections in mostly agrarian states to gain control of both houses of parliament.
“I have repeatedly said this government will expand businesses,” Jaitley told ET Now television on May 25. “It will use the enriched resources of the government for the poor. Therefore the economy growing is going to help the poor, but this government does not believe in crony capitalism.”
Asked about criticism that the government was too pro-business, Sinha told Bloomberg TV India that ensuring the poor have adequate healthcare, education and other government services is “our most important priority”.
“If industries don’t flourish, then we don’t have the resources to fulfill our most important responsibility,” Sinha said. “So there’s no question here of any trade-off. Both fit together really, really well.”
On several issues, Modi is putting on the brakes. Amit Shah, the head of Modi’s Bharatiya Janata Party, said last month that he would form a committee to discuss labour reforms with unions, according to Mint newspaper.
Modi also said he was open to changing a bill that makes it easier to buy land — a key impediment to investment — to be more favourable to farmers. And his food minister rejected a proposal from a government committee to reduce food grain coverage to 40% of the population from two-thirds now.
While the pace of change has been more incremental than anticipated, analysts are still generally positive. Economists at Standard Chartered say Modi has taken small but significant steps in his first year and he’s poised to make progress on the land bill and national sales tax.
“Modi is a charismatic and forceful figure,” said Jonathan Schiessl, head of equities at Channel Islands-based Ashburton Investments Ltd. “He has to have a cabinet working with him.”