Modi's mission: Start with financial markets

6 min read
Asia
Jonathan Rogers

THIS MAY SOUND funny, but when Narendra Modi was elected by the biggest landslide in a generation to become India’s prime minister, I immediately thought of Deutsche Bank. You may wonder why. Well, it’s a commonplace, in Asia at least, that Deutsche is often referred to by the sobriquet of “the Indian bank”, thanks to the rather obvious reason that numerous Indian nationals work at the German lender.

And an impressive bunch they are. Immaculately turned out, supremely confident and possessed of an often terrifying command of their brief, they represent everything that India aspires to be. The bank’s co-CEO, Anshu Jain, is an Indian passport holder, and there were jibes thrown soon after Jain’s ascendency to the top job in 2011 that the bank was run by an Indian clique. I won’t debate that here. But it’s not just in Deutsche that Indian nationals thrive: they are well represented in investment banking across all the world’s major financial centres.

Deutsche’s Indian bankers are part of the diaspora that has brought all that is impressive about India to every corner of the world, be it in the form of doctors, lawyers, accountants, entrepreneurs, you name it. That, of course, is to make a case for the country based on its exported elite, many of whom are from well-off families who can fund the finest education to meet the fervent ambitions they have for their offspring, invariably overseas.

But back at home it’s a different story. The country simply disappoints on many measures, never quite living up to the potential that provided the crucial vowel for Jim O’Neill’s BRIC acronym.

INDIA IS MIRED in what is best described as the slough of stagnation. Policy gridlock, competing regional interests, mountains of red tape, bloated banks sitting on a pile of questionable loans, venal relationships between government and big family businesses and the failure to deliver urgently needed infrastructure have contributed to India’s sorry economic performance over the past few years.

To all of this, Modi promises to be the antidote. He is the man who would be India’s answer to Singapore’s Lee Kuan Yew: a nation-builder ruling with an iron fist, the supreme getter-of-things-done with an eye to greatness, for his country and for himself in the annals of posterity.

Pundits have set Modi’s benchmark as Jawaharlal Nehru, arguably India’s greatest prime minister. But the contrast could not be greater between the patrician Nehru, who worked within the clubbable confines of the license Raj, and the former tea seller facing the challenge of reinvigorating a country that is staring at an identity crisis as it confronts its global superpower status and stop-start industrialisation.

The pristine edifice that Indian nationals present at the world’s investment banks – a combination of charm, guile and technocracy – is sorely needed when it comes to running the country. It may be argued that every diaspora necessarily represents a brain drain, and it’s probably true that many of India’s finest end up seeking a living outside the country. Something needs to happen in India that will bring them back.

Whatever the misgivings about Modi – and there are plenty – what India delivered at its elections was a profound display of democracy in action. The world’s largest election delivered a prime minister with widespread popular support, even among the Muslim minority who are supposed to have loathed Modi since 2002, when his opponents claim he did little to suppress anti-Muslim riots in the state of Gujurat.

Contrast this with Thailand, where last week martial law was imposed following a political impasse that has seen a democratically elected prime minister ousted by a combination of mob rule and judicial interference. A 10pm curfew was imposed last Thursday in Bangkok, television stations were blacked out and there was talk among the city’s residents that the internet was about to be cut off. What started out as the apparently quiet intervention of the army to prevent opposing sides in the debate from clashing is now a full-blown military coup. Democracy is failing.

To stamp his seal on the first one hundred days in office, Modi should issue a Republic of India bond

IN INDIA, ONE can only hope that democracy will deliver, and that a man who appears to be something of a nationalist extremist – he is allied to the Rashtriya Swayamsevak Sangh (RSS) Hindu nationalist movement – can exercise restraint in the carrying out of his mandate. He needs to be more of the technocrat than a messianic leader.

In some quarters it’s estimated that India’s creaking banking system requires a bailout which would equate to 4% of the country’s GDP, or roughly equivalent to the US’s bailout of its banking system after the financial crisis. Modi needs to work with the Reserve Bank of India to sort that mess out. And he needs to get moving on infrastructure.

A measure of the market’s confidence that Modi can deliver was starkly illustrated by the rally in State Bank of India CDS – seen as a proxy for theoretical sovereign India debt – from 237bp at five years to around 200bp last week.

I’m not sure it will tighten much from there, but the initial move was encouraging. Here’s a suggestion for Modi to stamp his seal on the first one hundred days in office: issue a Republic of India bond. The market has been gagging for such a deal for years and I’m sure Mr Modi will understand how potent the symbolism of bringing such an issue would be, particularly given the market’s recent re-rating of India credit thanks to his victory.

Earmark the proceeds for some key infrastructure projects, price as tight as possible to all the sovereign comps out there and you will have started your job as well as you possibly could.