Will Modi Reset India’s Emerging Market Economy?

By Roy C. Smith and Ingo Walter[

The forthcoming visit to Washington by Narendra Modi, his first since becoming India’s Prime Minister last April, is likely to have little impact.

Yes, it will attract the usual ceremonies and displays of goodwill, but it comes at a time of disillusionment with the BRICS, and suspicion about Mr. Modi’s real political objectives. So it is not likely to change much of anything.

For the past 15 years, the BRICS have been seen as the world’s best hope for sustainable growth. These five countries, representing 40 per cent of the world’s population and 25 per cent of its GDP in 2013, recorded growth rates 4 to 5 times greater than those of the US, Europe and Japan, and threatened to displace them as the world’s most important economic powers in another 20 years or so.

Today, this seems much less likely – China is struggling to achieve a 7 per cent growth rate this year and avoid a banking crisis caused by excessively easy credit.

India’s growth has fallen to less than half the rate of its best years.

Russia, struggling with the crisis in Ukraine and President Vladimir Putin’s approach to foreign investment, will be lucky to report any growth at all.

And a humbled Brazil expects a growth rate of only 0.9 per cent at best, while South Africa’s is even worse.

Weathering economic shocks

True believers in “emerging markets” maintain that new growth has to come from internal economic reforms that permit market forces to set prices and allocate capital and labor.

It is the expectation of market-driven development in these countries that attracts the capital, which in turn underwrites higher rates of growth. The BRICS, the largest countries in the “developing” world, all set out to follow this template, even though some (Russia and China) were starting out on the journey well behind the others.

Even ardent supporters of the BRICS understand that there are obstacles to face along the way, primarily economic shocks (like the financial crisis of 2008) and domestic politics.

Over time, these obstacles slow growth performance, but the power of the internal reforms and the sheer size of the future markets for goods and services at “normal” per-capita consumption rates still made a good case for the BRICS.

India re-energized

Mr. Modi is thought by many in India to be just the sort of bold, charismatic leader needed to re-energize India’s effort to free up market forces.

The Rupee is up 3 per cent against the dollar, and the Indian stock market has gone up 14 per cent in value in the last year.

He may well be just such a person, but India’s recent political paralysis and economic slump that helped elect Mr. Modi, only confirms the skeptic’s view that the country’s burdensome political, bureaucratic and legal systems are just too much for any leader to shift long enough to transform the country into a market-driven economy to complement its democratic political structure.

These concerns now include Modi’s surprise decision in July to block an important WTO trade facilitation agreement because it lacked provisions to enhance government food subsidies.

While in the US, Mr. Modi will have many opportunities to discuss US-Indian trade, investment and bilateral cooperation. Mr. Obama will surely look for India's support for US policies in Asia, especially regarding relations with China and Pakistan; Mr. Modi - a newcomer to such issues - is likely to be cautious and non-committal.

Still, the meeting between the US and Indian heads of state is important. It helps clarify what each expects of the other, and what the costs and benefits of helping each other might be.

More importantly, however, is what Mr. Modi does back in India to advance the case for becoming a viable market economy. Progress in this direction can have an enormous payoff in terms on increasing India’s power and influence, including its influence in Washington.

Mr. Modi has political capital to spend in India, and he ought to use some of it to winnow government subsidies, reduce protection of certain economic sectors, and to do all he can to increase basic competition in goods and services.

Infrastructure and education are important too, but these take a long time to improve. The most immediate need is to get the growth rate back to a 9-10 per cent level.

Keeping doors open

The success of the BRICS has taught us that the prospect of change from low growth to high growth triggers all kinds of private sector energies seeking to engage in the opportunity the shift presents.

Vast amounts of inward foreign direct investment can be attracted, along with technology and managerial skills.

These resources are premised on the willingness of such countries to keep doors open and to treat investment capital fairly. Equally, however, they can be reversed if these conditions change.

Mr. Modi has to convince the world’s investors that he means to restart India’s efforts at becoming an emerged marketplace, despite inevitable setbacks.

If he achieves this, his next visit to Washington will be very different.