Don’t write off India, the untapped Asian Giant

I am just back from my latest trip to the sub-continent, having spent a week talking to the Indian political elite about their coming election for the Lok Sabha, India’s parliament, likely to be held in May 2014. While the Chinese Communist Party’s just concluded plenum has rightfully been overshadowing all else going on in Asian politics, it is vital the coming Indian election’s importance not be missed; in the end, the result may turn out to be just as fateful as Xi Jinping’s efforts to jumpstart economic reform.

For as is true of the narrative arc for many Emerging Markets, India has gone from being neglected, to being the future, to being quietly ignored again. This will prove to be an expensive mistake. My global political risk consulting firm highlights four counter-intuitive ‘buys’ at the macro-economic level every year. India heads our 2013 list, for the simple fact that of all the BRICS only it still has significant untapped reservoirs of catch-up growth available to it—largely due to its very favorable demography–that can be easily attained. Recently India has been badly run, and is still growing at a rate of around 3.8% this year. Think of the up side when it has moderately competent government again at the helm.

But there is no doubt that the present Congress premiership of Manmohan Singh has lacked the sparkle of his earlier stint as Finance Minister in the 1990s, when he dismantled the license Raj, the cumbersome Nehru-era socialist rules so constraining India’s potential. The cardinal mistake analysts made about the present government is in assuming that the reformist-minded Singh would be calling the shots; instead he has merely served as loyal family retainer to the still socialist-fixated Gandhi family that has run the Congress Party as a fiefdom since India’s independence. It is Sonia Gandhi and her lackluster son Rahul who have held sway, standing in the way of further reform.

The consensus view in Delhi is that change is on its way. The Hindu nationalist Bharatiya Janata Party (BJP), under the leadership of the charismatic and capable Narendra Modi, the Chief Minister of Gujurat, is commonly viewed as a cinch to win the most seats in the coming election. There is much about Modi that ought to make investors cheer. He has established a decade-long record of economic competence in Gujurat, and is the first mainline politician to generate genuine public enthusiasm in memory, a vital quality that if used shrewdly (and everyone agrees Modi is just that) could power the significant economic reforms India desperately needs.

So far, so good. But there are two storm clouds on the Modi horizon. The first is his opaque but certainly not creditable role in a pogrom that occurred in his state in 2002, where Hindu chauvinists chanting his name murdered over 1,000 Muslims. At worst, those around Modi were complicit in the atrocities; at best, they did little to stop them. It is an open question as to whether such a divisive figure with such a questionable reputation can stably govern so heterogeneous a place as India.

The second problem revolves around the underlying risk of Modi running a bull-in-a-china-shop foreign policy in India’s very rough neighborhood. With Afghanistan’s future a huge question mark, eternal rival Pakistan unstable as ever, coming rival China jostling for position along their unresolved border, a subtle Indian foreign policy is imperative. So far in the campaign, Modi has hammered Singh over how weak Congress’s foreign policy has been, with an alarmingly lack of specificity. The putative Prime Minister-in-waiting must fill in the blanks, and quickly, if investors are to have confidence in India’s regional stability.

Saying all that, Modi could certainly prove to be a step in the right direction. Assuming he can retain order both domestically and in terms of foreign policy, it is hard to think of investors coming across a better, more credible candidate to promote the labor market, infrastructure, and anti-corruption measures that will largely determine whether India makes it to the top table in global politics. More generally, I spent the week meeting an elite that spoke English, ordered whiskeys at a British oak-encrusted bar, talking about free markets, property rights, and rule of law as though they were not alien concepts. This common Anglosphere background is also part of the reason to be ultimately bullish about India’s prospects.

By Dr. John C. Hulsman, November 19, 2013, City AM London

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