Man of the moment

IFR India Special Report 2013
16 min read

India’s new pro-reform prime minister has overseen a rebound in investor confidence, but is there substance behind the hype? Can Narendra Modi make his mark on India’s notoriously slow-moving bureaucracy?

The India of late-2014 is almost unrecognisable from the morose, abject country of a year ago, when high inflation and elevated twin deficits were sapping international confidence. Today, the national capital, Delhi, hums with political change, while the country’s economic fulcrum, Mumbai, is infused with confidence for the first time since the financial crisis. Investment bankers, lawyers, and accountants busy themselves for a new rush of blockbuster stock offerings. Domestic share prices regularly touch record highs.

Has India’s luck finally turned? Growth, once increasingly elusive in Asia’s third-largest economy, is firmly back on the agenda. In October, International Monetary Fund chief economist Olivier Blanchard revised up his forecast for GDP growth in the Indian fiscal year to end-March 2015 to 5.6% from 5.4%, and to 6.4% the following year.

“Modi has re-energised India. Wherever you look, from relations with neighbours to overall economic and financial sentiment, he has taken a stumbling country and given it fresh impetus and belief.”

The country’s once yawning current account deficit narrowed sharply to US$7.8bn in the three months to end-June 2014 from US$21.8bn in the same period a year ago, according to the Reserve Bank of India. Even inflation, long the bane of policymakers, is moving in the right direction. Consumer price growth weakened to 6.5% year on year in September, having topped 11% just 10 months earlier, with wholesale inflation hitting a five-year low of 2.4%.

In search of a single reason to explain the country’s remarkable turnaround, many point to the energy and actions of a single man, Narendra Modi. Since taking office following a landslide general election win in May, the country’s 15th prime minister has embarked on a bold reform drive that has penetrated virtually every crack and fissure of India’s creaking economy.

An anti-corruption campaign, no less vigorous and far-reaching than the one Chinese President Xi Jinping is waging in Beijing, is tackling endemic graft. In August, Indian stock regulator Sebi finally gave the go-ahead for the creation of real estate investment trusts (REITs) after six years of foot-dragging – a major boon for a recession-plagued property sector crying out for capital.

The nation’s dysfunctional energy sector, a huge strain on public finances, is also being transformed. In October, Modi’s left-field pick as finance minister, Arun Jaitley, announced that the price of natural gas would rise by a third, bringing it in line with market forces, with diesel prices also being deregulated.

Economic supporters, for now, are universal in their acclaim of the man vested with giving the country a new head of steam.

“Modi has re-energised India,” says Anjan Ghosh, head of corporate ratings at Gurgaon-based ratings agency Icra. “Wherever you look, from relations with neighbours to overall economic and financial sentiment, he has taken a stumbling country and given it fresh impetus and belief.”

IMF chief economist Blanchard implicitly praised Modi’s pioneering agenda to issue the Fund’s first genuinely sunny outlook on the country in years. Commending the decision to embark on “much-needed structural reforms”, he added that effective policies and a welcome injection of confidence had enabled India to “recover from its relative slump”.

It is easy, given the speed of Modi’s rise to national political prominence, and his record as the reform-minded governor of Gujarat, to make the mistake of viewing him as a free-market proponent in the guise of, say, Margaret Thatcher. The reality is rather more nuanced.

True, India’s new premier may have campaigned on a ticket of hope and change, much as US president Barack Obama did in 2008, but insiders say Modi’s worldview is also predicated on a belief that the public sector can be retained, so long as it is retrained to serve the people rather than – as has been the case in India’s long history – itself.

Gujarat model

His makeover of the civil service in Gujarat involved shifting hundreds of basic government services onto the Internet. In recent months, he has signalled his desire to implement a root-and-branch reform of the country’s vast and unwieldy bureaucracy. In October, Ram Sewak Sharma, Modi’s pick as head of e-government, unveiled a website monitoring the attendance record of 51,000 civil servants across 149 departments. The premier is also an advocate of a long-delayed national sales tax, as well as an identity scheme linked to the world’s largest biometric database, a vital measure in stamping out corruption.

However, India’s new leader is also, above all, a realist, with an economic modus operandi entrenched in 13 years’ worth of gubernatorial experience. From 2001, he converted a middling north-western province into the sort of thriving manufacturing hub more commonly found in East Asia, complete with IT parks, interdependent auto-sector plants, and world-class infrastructure.

Modi may have been “proud” of the thinned-down, publicly minded civil service he created in Gujarat, notes OP Bhatt, a former chairman of the State Bank of India, the country’s largest lender in terms of assets, “but he recognises that some businesses are best left in the hands of the private sector”.

Many, indeed, believe Modi’s perfectly logical goal is to transform India into a larger version of his home state. Prabhat Awasthi, head of Indian equities at Nomura, points to a thread running through his experience in Gujarat, and his reform agenda since rising to national power, noting: “His key aims are more manufacturing, more jobs, better governance, and more development and growth”.

Of that quartet of ambitions, the hardest to achieve, and the one likely either to burn or burnish Modi’s legacy, is the first. India has consistently proven unable or unwilling to build the sort of thriving manufacturing sector necessary to absorb millions of new jobseekers every year. National champions exist in take Larsen & Toubro in infrastructure and Bharat Forge in auto parts, but they are isolated dots of excellence in a country bereft, until now, of a joined-up, nationwide industrial strategy.

Modi wants to change that, recently unveiling a “Make in India” campaign aimed at convincing local and international investors that the country is serious about revamping regulations, slashing red tape, and making government decision-making transparent and accountable. A clutch of labour reforms have also been rolled out, with the aim of doing away with the endless arbitrary inspections that crimp efficiency and hand local officials the chance to line their pockets.

However, saying will prove far easier than doing for two reasons.

First, an accelerating global technological revolution is flattening production prices around the world, making it tougher for developing countries to attract or create manufacturing jobs. Arvind Subramanian, a noted academic recently appointed to the role of Modi’s chief economic adviser, describes this worrying loss of industry before economies reach middle-income status as “premature non-industrialisation”.

Second, transforming India into an industrial giant will be predicated upon the premier’s ability to shatter and reform almost every aspect of the country’s vast bureaucracy. This will not be easy because India operates as a vast network of vested interests, just as it has for thousands of years, enduring through the rule of Mughal emperors and British governors. Building a thriving manufacturing sector – the sort found in, say, China or Germany – will require Modi to push through painful energy and labour reforms, as well as a long-delayed land acquisition bill, “none of which,” says ICRA’s Ghosh, “can be done overnight”.

The latter piece of legislation will be particularly fraught. No one is in any doubt that India needs to compensate smallholders for the loss of their land, but the country needs interconnected power grids, bridges, tunnels, roads, rail lines and airports more than it needs farmers.

“To turn India into a manufacturing hub, he (Modi) will have to move multiple layers of reform,” says Nomura’s Awasthi. “It will be painful and protracted and, if they can get manufacturing right, it will be amazing. However, these reforms will take at least five years” to push through. “This won’t be a short-term process.”

Power politics

Modi’s progress, to be sure, remains littered with any number of obstacles. The overwhelming majority his Bharatiya Janata Party holds in India’s lower house of parliament, the Lok Sabha, received a further boost in October with crushing election wins in the states of Maharashtra and Haryana. These are victories that Rohini Malkani, an economist at Citi India, believes will further “embolden reform momentum”.

Yet, the BJP remains a minority player in the Rajya House, India’s version of the US Senate, which remains under the control of a coalition led by the once all-powerful Congress party, which has already proven willing to strike down reform-minded bills for political reasons. With elections due in the upper house only in 2016, Modi will have to pick his fights carefully for the time being. Only a majority in both houses, analysts warn, will be enough to ensure that the BJP can push through the sort of tough reforms that the premier so clearly craves.

Political chicanery is not the only impediment to Modi’s grand plan. As US President Obama has found, governing is an entirely different business to campaigning. Also, while India’s premier still has the business community, the media, and the people firmly on his side, these positive may change as and when the seriously painful reforms kick in.

Fracturing the state’s grip on industries like banking and transport should lead to a long-term inflow of private-sector investments from around the world, but will also likely lead to the sort of mass short-term redundancies suffered in China in the late 1990s under then-premier Zhu Rongji. Assuming Modi can weather that storm – and that his BJP party can successfully gain control of both houses of parliament – he has a chance of pushing through his entire reform agenda, and going down in history as the man who transformed India.

The premier can also consider himself more than a mite lucky. His rise to high political office coincided with another remarkable turnaround in the country’s fortunes, albeit one emanating far from India’s shores. A gloomy global growth forecast has played into the hands of an economy that remains largely isolated from international trade flows.

Tumbling commodity and oil prices, stemming from slowing demand in the eurozone and China, benefit India, which imports half of its energy needs. Given that its current account deficit declines around US$1bn a year for every US$1 fall in the per-barrel price of oil, a recent slide in global energy prices should also further ease the upward pressure on India’s budget.

“Factors, such as falling crude prices, also play in India’s favour, allowing the state to push forward with more, much-needed reforms,” notes S Subramanian, managing director of investment banking at Mumbai-based Axis Capital.

Lower inflation should also lead to a welcome cut in interest rates, boosting domestic investment and creating, Deutsche Bank noted in a September 15 research report, an “unambiguous positive” for the world’s 10th largest economy. IMF chief economist Blanchard in October singled out India as “uniquely well-placed” to benefit from an international slowdown.

It’s quite a turnaround for a country that, just 12 months ago, was leaking confidence as global capital fled a slowing economy hobbled by soaring debt and a feeble currency. And at the heart of everything stands a single man: Narendra Modi, a former teaboy, who defied all expectations by rising to run the world’s largest democracy by promising 1.2 billion Indians that his reform-oriented reign as premier would be anything, but “business as usual”.

So far, it is working out nicely. India’s luck, it seems, may have finally turned.

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Top bookrunners of Indian rupee bonds
Top bookrunners of Indian rupee bonds
1/1/14 – 30/10/14
NameDealsAmount Rs (m)%
2Trust Group104167,850.408.8
6Standard Chartered2897,332.705.1
7Yes Bank3593,421.904.9
9AK Capital Services4070,601.403.7
Source: Thomson Reuters
Top bookrunners of Indian loans
Top bookrunners of Indian loans
1/1/14 – 30/10/14
NameDealsAmount US$ (m)%
1State Bank of India7533,092.3063.6
7Mitsubishi UFJ Financial71,020.402
8Standard Chartered10936.71.8
Source: Thomson Reuters
Top bookrunners of India offshore bonds in G3 Currencies
Top bookrunners of India offshore bonds in G3 Currencies
1/1/14 – 30/10/14
NameDealsAmount US$ (m)%
1Standard Chartered162,521.1016.6
6JP Morgan81,181.807.8
Source: Thomson Reuters
Top bookrunners of Global Equity and Equity-related India
Top bookrunners of Global Equity and Equity-related India
1/1/14 – 30/10/14
NameDealsAmount US$ (m)%
2JP Morgan8934.410.9
3Goldman Sachs6615.57.2
4JM Financial7553.86.5
8Standard Chartered6382.14.5
Source: Thomson Reuters
Man of the moment