India — Growth Ahead: a Plan for Inclusiveness Under the New Prime Minister
A New Day: the Congress Party’s Ineffectual and Corrupt Leadership Is Out For At Least Five Years
The new Indian Prime Minister, Narendra Modi of the Bharatiya Janata Party (BJP), is known for the economic growth that he brought to the state of Gujarat as its Chief Minister from 2001 to the present. In those 13 years, Gujarat, which lies directly to the south of Pakistan, has far outperformed the rest of India — and especially its neighboring states in India’s north.
In Gujarat, he cut corruption, built infrastructure, actively encouraged investment (both Indian and foreign), and encouraged new business.
He was successful in raising the standard of living of his constituents substantially. This has led to his national popularity. During the same period India’s overall growth has slowed under its famously slow-moving, corrupt, ponderous, inefficient national bureaucracy — a bureaucracy which has been encouraged and expanded by the Indian National Congress Party (INC) during its decades of political dominance.
Young Indians were fed up, and it is they who voted for more free markets and less red tape when they handed victory to the BJP.
The national bureaucrats fear Modi. This famous quote delineates his
thinking:
“The country is facing trouble on all fronts because of maximum government. It is interfering with every aspect of life; it is not for changing the lives of people, but to benefit a few rent-seekers who think it is their God-ordained right to rule.”
He will work to cut back rentseeking, streamline government, and make it easier for business to come
to India and create prosperity for Indians — much as strong leadership in China has done for the Chinese. He will lower taxes and increase government accountability, and he will cut red tape. One of his first acts will be to go after tax evaders who hide money in nearby tax havens.
Guild Investment Management (GIM) officers first visited India in 1965, and in the past 49 years have returned over 40 times. GIM has invested there, and tried to do business there. In our opinion, everything Modi says above is absolutely true. Bureaucrats make their money by slowing down your project until you either pay to have it put back on track or abandon it. Corruption takes a huge bite out of GDP every year.
Religious Tensions
Modi has offered the hand of friendship to India’s neighbors. Mr. Modi has been accused by political opponents of being anti-Muslim. That is why it is significant that he invited the Prime Minister of Pakistan (an overwhelmingly Muslim nation) and Speaker of Parliament of Bangladesh (also Muslim) to his inauguration. They attended, as did top leaders of his near neighbors Afghanistan (Muslim), Sri Lanka, Nepal, Mauritius, and Bhutan.
Modi As the New Prime Minister
Mr. Modi has selected a cabinet of only 24 ministers, down from 34 under the previous government. He has expressed his preference for a smaller and less intrusive government, with continued support for the grassroots. The new finance minister, Arun Jaitley, should be much more business- and growth-oriented than his predecessors.
His list of ministers is inclusive; the 24 include seven women, religious minorities including Muslims, Sikhs, tribal peoples, and members of other political parties, including the INC.
Time For India to Take Off At Last?
The INC, and its policies of buying votes with handouts including cash, fuel, and food subsidies, was badly defeated at the polls after ruling for the great majority of the last 60 years. In spite of India’s remarkably able people and intelligent entrepreneurs, India has not enjoyed an economic growth rate anywhere near China’s. Over the past 30 years, the Chinese have seen their per capita GDP rise from $300 to $6,750, while India’s has been stagnant in comparison — rising from the same $300 starting-point to about $1,500 today.
The basic dynamic keeping India’s economy in a rut is the opposing forces in the form of corrupt bureaucrats and political leaders, who hold up many projects until they find a financial reason to implement them.
Modi ran on a platform of less handouts, cutting corruption and a much bigger focus on providing the infrastructure necessary attract foreign direct investment in India. Albeit decades later than China, India is planning to do the same kind of strategy which proved wise in China — build out the country’s infrastructure and open up to more foreign investment.
Tough Challenges Ahead
It is not likely to be as easy as it has been in China — which is top-down managed economy where the upper echelons dictate to the rest of the economy how to allocate resources. India is, to put it simply, a mess — a huge democracy with many poor, uneducated, and illiterate voters. But in spite of Modi’s stated plan to cut subsidies for fuel, food, and other necessities, and to spend the money on developing the country’s infrastructure, voters put him into office.
Obviously, many infrastructure spends will benefit the large numbers of poor farmers and rural workers: better roads, better crop storage facilities, better delivery of utilities (including telephone, rail service, water, and electricity). Better railroads will benefit all Indians.
However, there is also a necessity to massively improve the decrepit British-era infrastructure — improvements to which have been held up by corrupt and inefficient national state officials. Modi will work to sweep out corrupt officials, as well as take control of the defense ministry and its budget.
Indian Financial Markets
Indian stocks have performed very strongly so far in 2014, and rose rapidly once the election results became evident. Now we expect a small and short-term correction which will provide a buying opportunity for a trade over the next few months.
A great deal of work needs to be done; but if successful, India has the potential to become the great growth opportunity in Asia for the next decade. We will watch developments carefully. Today, we are short-term bullish, and would buy India on dips. Longer-term, we will wait to see how successful Modi is in attacking and dismantling India’s famously slow and corrupt bureaucracy.
