Saturday, November 29, 2014

Modi’s Mandate

WASHINGTON, DC – In an impressive exercise in democracy, 550 million eligible voters participated in India’s 16th general election. The new prime minister will be Narendra Modi of the conservative Bharatiya Janata Party (BJP), who presided over rapid economic growth in his 13 years as Chief Minister of the state of Gujarat, on India’s northwest coast. Modi won because most Indians believe that he can deliver more rapid growth in the country as a whole.

The election once again demonstrated how different in political terms India is from its giant neighbor, autocratic China. Now, however, the new government must try to match the superior economic progress that China has achieved over the last three decades. To do so, it will have to foster, in a different political context, two key ingredients of China’s economic success.

The first ingredient is a robust industrial sector composed of manufacturing industries that use unskilled labor, which would offer a route out of poverty for India’s hundreds of millions of rural laborers and their families. It is the route that China, and other countries before it, has taken. In India, by contrast, the underdevelopment of the industrial sector has kept the country from realizing its full economic potential.

The second ingredient is the infrastructure that all economic growth requires: roads, bridges, ports, and schools, as well as reliable supplies of electricity and clean water. Poor infrastructure constrains the industry that India does have. Factories need reliable supplies of power to operate effectively, good roads and railways to source inputs and distribute products, and, if they are to export those products, ports for cargo ships and airports for high-value items and business travel. China has these things in abundance. India does not.

Power outages are routine in India, nearly half the country’s households lack any electricity at all, and modern highways are scarce. While a trucker in the United States can haul a load a thousand miles in about 20 hours, in India the equivalent trip takes 4-5 days.

The underlying cause of these two shortcomings is one of the fundamental features of Indian democracy, and indeed of all democracies: the power of minorities. In democracies, people are free to organize themselves, and often do so on the basis of common economic interests. Such groups work politically to bring benefits to their members, but the benefits can come at the expense of the general welfare – and in India they have blocked the development of low-skilled industries and high-quality infrastructure.

While India abounds in workers with low (or no) skills, laws governing employment make it all but impossible for large firms to fire workers, discouraging them from hiring in the first place. The most efficient companies tend to avoid precisely the industries that could, if established on a large scale, lift millions of Indians out of poverty. Similarly, laws restricting the use of land make it difficult to build facilities such as factories and hotels, which could employ large numbers of people.

It is a particular kind of interest group – trade unions – that promotes and defends the laws that discourage large firms from entering industries that employ unskilled workers. While these laws benefit union members, who make up a very small fraction of the total workforce, they penalize India as a whole. Other interest groups obstruct the growth of employment-creating businesses. Local protesters, for example, sometimes prevent the use of land for industrial and other commercial purposes.

Political minorities also inhibit the construction of infrastructure and the development of the educational system that India needs by using the democratic process to divert resources to themselves, which then cannot be used to build roads or pay teachers. Subsidies of various kinds, all of them legislative achievements of interest groups, account for fully 2.4% of the country’s GDP.

The Indian bureaucracy itself is a large, powerful, and voracious interest group. Its salaries consume resources that would be better devoted to more productive uses. Special-interest spending leads to budget deficits, while the borrowing needed to finance these deficits drains yet more money from infrastructure and education.

Modi’s new government cannot – indeed, must not – abolish the democratic rules that permit minorities to flourish. With its various ethnic groups, religions, castes, and 30 languages used by more than a million native speakers each (and another 105 spoken by at least 10,000 people), India is more culturally diverse than the entire European Union – but with twice as many people. Without the emphasis on compromise, peaceful dispute resolution, and minority rights inherent to democracy, a united India could not exist.

So Modi’s challenge is to overcome the obstacles to growth-promoting polices using democratic methods. Here, the election has brought good news: the growing strength of India’s growing middle class, a potent ally in the cause of pursuing the needed economic reforms.

That middle class consists of propertied, salaried people, many of them young, who see government as an impersonal enforcer of the law and a neutral arbiter of disputes, rather than as a source of funds and favors. The votes of such people helped Modi win the election. His success in office will depend on how well he can harness the power of the middle class to overcome the political obstacles to the economic growth that its members demand.

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    1. CommentedRamesh Kumar Nanjundaiya

      As appeared in Forbes, NYT, Washington Post, Economist, US Reuters, US News, The Guardian

      Remember US will always go where they find a good business potential and a good market profile. India has been on their priority list particularly since the last 12 months. They also know that BJP is business oriented and this is a timely blessing. Here is an analysis of India for the next 10 years compiled after a thorough research. The last paragraph is about the BJP focus going forward.

      “Calling global investors/businessmen to come to India to do business now. BJP means business.

      India: The next decade – challenges, opportunities and solutions [2014-2024] Today India is in the most enviable situation to consolidate its position in the world market place. Thanks to India’s rich talent pool of researchers, scientists and engineers as well as its large, well-educated English-speaking workforce and the democratic way of life make it an attractive destination for manufacturers. In addition, the Indian “Middle Class” comprising almost 250 million people is the catalyst driving consumerism and the economic growth in the country. Let’s consider the software sector as an example: Today India’s software sector is seen differently wherein it has risen from a low-cost, “back office” operations set-up to a country that is well-positioned to be an active participant in the entire value chain. Thus today global Corporations and MNC view India as an integral part of their global manufacturing enterprise and location strategy and this traction will go on building. The economy, inter-alia is also buzzing by an increased activity i n the capital markets as has been seen in the numbers of IPOs in the last 18 months. There have been over 100 public offers in this period and interestingly close to 50% have been from the small and medium enterprises. This suggests that there is a clear shift in thinking in the mid sized segment about on approaching the capital markets. Added to this, Private equity funding has been steadily growing in 2012-13 and the same trend is expected to continue. From a sectoral standpoint, Energy, Healthcare, Industrials and Materials has emerged as the top four sectors for pursuing inorganic growth, together accounting for a large chunk the total deal value. From various local press and economic analysis, it is evident that while there has been a decline in inbound M&A deals, in the period 2012-13, the outbound deals have increased substantially all over the globe. Our research indicates that, essentially today not only are the larger Indian corporates seeing opportunities for growth beyond India, particularly in the emerging markets of Asia, Africa and South America and to a lesser extent in the developed economies including W. Europe, but even among the medium sized organizations, there is a large appetite to look overseas to set up business for strategic profiling and franchise building. Depressed valuations due to the recent recession in the developed world have increased the attractiveness of an outbound acquisition strategy.

      Thus the next 10 years is expected to see substantial investment flowing into energy (generation, distribution and transmission), mining, water, waste treatment and ports infrastructure. Our analysis, as strategic business consultants indicates that the Middle East (GCC) and Africa are the two promising regions where Indian and overseas companies can certainly see a rise in their activities, clearly shifting focus from the ailing EU region. From the technology sector, this period of 2014-24 will see advancement and refinement in technology coming out in the area of advanced communication, visuals, automobile, biotechnology and healthcare. Small to medium sized technology company can expect business traction from North America, North Africa and the Middle East region with business/deal size of between US$ 1- US$ 10 million. Majority of other companies are directly/indirectly tied up with large MNC’s or Indian companies for business. Notwithstanding all the above positives, the ongoing global financial crisis of 2008-09 has had a major impact on investments. While funding is generally getting restricted, the beauty is that there are still very very deep pockets of funds awaiting new sustainable venture/product, franchise. The potentially big challenge therefore will be to researching, sourcing, costing and securing funds globally or what is termed as seeking borderless venture capital infusion.

      BJP Focus: The just elected BJP government will need to focus on increased industrial production, foreign exchange for the country, will be highly investor friendly and will need to undertake environmentally friendly, gender balance and sustainable “Development Economics” by way of impact investment initiatives.

      The writer: Does not have any political affiliation nor is connected to any political group or idealogy.

      Ramesh Kumar Nanjundaiya

    2. CommentedArvind Gupta

      This write-up regurgitates India's growth issues and challenges that have been known for more than two decades. The write-up would have been complete and useful if the author had offered --- backed by analysis and logic, some specific implementable proposals, suggestions on the process, and the expected impact of these on growth.

    3. CommentedProcyon Mukherjee

      1000 miles in India, as the author notes, could take a truck 4-5 days ! Actually 4-5 days is just the lowest end of the data point, the variability is such that it could be as high as 25 days, depending on the material being hauled as is the case with bulky materials like a transformer or a large housing of a motor. The variability stems not from the fact that documentation is improper, but because the highway is owned by private operators who collect rent and negotiations are so difficult at times that it could take a week just to move a few miles. Delay also happens because the road is not unencumbered like a freeway, it has electric poles and trees which sometimes have to be cut to make way, such are the travails when we talk of 1000 miles; only a few highways can boast of a hassle-free travel for a distance of 1000 miles.

    4. CommentedK Chandra

      An interesting way of looking at this conundrum. On the one hand, India needs huge investments in infrastructure for development and job creation. On the other hand it is held up by the two minority interests that the author has eloquently summarised - trade unions and the bureaucracy.
      To this we can add a third minority - the local influential business lobbies that resist FDI behind the scenes. Nor do they support pro competition policies, understandably. But they do support various parties with election funding! It is for this reason that historically, 'passive but volatile FII' was more welcome than the 'active and stable FDI'. This is largely the opposite of what happened in China. Democracy therefore is not an unmixed blessing for developing countries.
      Unfortunately the jobless in India do not have a voice except through the elections and the new Government should not let them down. If not, the unemployed young will become a demographic dynamite. They need education and jobs.