A fascinating article on PM Modi written by a truly knowledgeable person who understands the real qualities required of a LEADER & the complexities that an Indian PM has to deal with. Respect.
Don't Underestimate India's Cunning Narendra Modi
US President Donald Trump and Indian Prime Minister Narendra Modi embrace in the Rose Garden during a joint press conference at the White House in Washington, DC, June 26, 2017.
Harry G. Broadman Forbes | 2017-06-30 https://www.forbes.com/sites/harrybroadman/2017/06/30/dont-underestimate-indias-cunning-narendra-modi/amp/
With Prime Minister Narendra Modi’s state visit to Washington this week, many Americans were made aware for the first time of the gregariousness of the Indian leader who took the reins in Delhi in May 2014. But not in terms of the energy he has poured into, and the successes generated from, his initial programmatic reforms of the economy of the world’s second most populous country, indeed an economy whose growth rate has been exceeding that of China. Rather, the conventional press headlines and photos of the visit centered on what seemed to be a frivolous big bear hug Modi gave to U.S. President Donald Trump.
In fact, the bear hug shocked the U.S. President, ironically in the same way are people whose hands Trump initially shakes in conventional fashion but are then pulled into Trump’s clutches up close and personal. Modi gave Trump a taste of his own medicine.
And, then Modi caught Trump even more off guard in their substantive discussions by deliberately not tabling at all the issue of moves by the U.S. to clamp down on H1 visas, which control the flow of Indian (and other foreign) workers for jobs with firms on U.S. soil. Nor did Modi raise his displeasure with the U.S. administration’s backing out of the Paris global warming accord. Trump and his team—ready to pounce on Modi at his very mention of these issues—were left scratching their heads.
In my book, it was smart for Modi to keep this White House on its toes. The starkly different positions on the H1 visa and climate change issues were well-known on both sides and nothing would have been gained by Modi to mention them in this setting. There were only downside risks.
With Prime Minister Narendra Modi’s state visit to Washington this week, many Americans were made aware for the first time of the gregariousness of the Indian leader who took the reins in Delhi in May 2014. But not in terms of the energy he has poured into, and the successes generated from, his initial programmatic reforms of the economy of the world’s second most populous country, indeed an economy whose growth rate has been exceeding that of China. Rather, the conventional press headlines and photos of the visit centered on what seemed to be a frivolous big bear hug Modi gave to U.S. President Donald Trump.
In fact, the bear hug shocked the U.S. President, ironically in the same way are people whose hands Trump initially shakes in conventional fashion but are then pulled into Trump’s clutches up close and personal. Modi gave Trump a taste of his own medicine.
And, then Modi caught Trump even more off guard in their substantive discussions by deliberately not tabling at all the issue of moves by the U.S. to clamp down on H1 visas, which control the flow of Indian (and other foreign) workers for jobs with firms on U.S. soil. Nor did Modi raise his displeasure with the U.S. administration’s backing out of the Paris global warming accord. Trump and his team—ready to pounce on Modi at his very mention of these issues—were left scratching their heads.
In my book, it was smart for Modi to keep this White House on its toes. The starkly different positions on the H1 visa and climate change issues were well-known on both sides and nothing would have been gained by Modi to mention them in this setting. There were only downside risks.
Instead, it allowed Modi to create an environment for his non-governmental meetings with U.S. businesses and investors—usually the most important part of state visits anyhow—where the stellar performance of the Indian economy could speak for itself.
But don’t let Modi’s conduct at the White House fool you. They were not frivolous; nor is he. He knows full well that his work is cut out for him in trying to overhaul a supremely complex, multi-layered, and largely still ossified economy that has not been subjected to any serious systemic reform by an Indian leader during our lifetimes.
But don’t let Modi’s conduct at the White House fool you. They were not frivolous; nor is he. He knows full well that his work is cut out for him in trying to overhaul a supremely complex, multi-layered, and largely still ossified economy that has not been subjected to any serious systemic reform by an Indian leader during our lifetimes.
Like the bear hug in Washington, at home Modi has made some clever premeditated and sometimes deliberately unanticipated economic policy moves during his short time in office. He has also been developing a blueprint that if well-executed could arguably begin to fundamentally modernize the Indian economy.
But realistically this is a big “if”, especially in light of a slothy, shadowy and highly protectionist parliament that is decades out of date with today’s global economy, yet which with Modi will have to deal to get reform legislation passed.
There is little question that India has experienced a high annual growth rate in real GDP during the time Modi has been in office: the country’s growth rate rose from 6.5% in 2013 to 7.9% in 2015, although growth slowed to 6.8% in 2016.
There is little question that India has experienced a high annual growth rate in real GDP during the time Modi has been in office: the country’s growth rate rose from 6.5% in 2013 to 7.9% in 2015, although growth slowed to 6.8% in 2016.
However, the IMF projects India’s GDP growth to rebound to 7.2% in 2017 and increase further to 7.7% in 2018. In contrast, China’s GDP growth in real terms fell from 7.8% in 2013 to 6.9% in 2015, further decreased to 6.7% in 2016, and is projected by the IMF to register an additional decline to 6.6% in 2017, and fall even further to 6.2% in 2018. These data show why India is regularly referred to as a faster grower than China.
To be sure, part of India’s economic performance reflects the country benefitting from low world oil prices. After all, India imports about 80% of its crude oil needs. (China, which imports about 65% of its crude oil needs, also has had its growth buoyed by cheap oil.)
But there is a higher likelihood that Modi’s reform program, and even more importantly the confidence he inspires, have been the fundamental drivers of India’s growth. And unlike growth generated by changes in commodity prices, the types of reforms being undertaken by the Modi team are destined to make lasting, rather than transitory, changes in the structure of the Indian economy.
To be sure, part of India’s economic performance reflects the country benefitting from low world oil prices. After all, India imports about 80% of its crude oil needs. (China, which imports about 65% of its crude oil needs, also has had its growth buoyed by cheap oil.)
But there is a higher likelihood that Modi’s reform program, and even more importantly the confidence he inspires, have been the fundamental drivers of India’s growth. And unlike growth generated by changes in commodity prices, the types of reforms being undertaken by the Modi team are destined to make lasting, rather than transitory, changes in the structure of the Indian economy.
For years, this is exactly what the doctor has been ordering for India. Yet few Prime Ministers before Modi were ever as cunning and effective in achieving some modicum of success at reform.
In this context, it’s curious that The Economist has been critical of Modi, calling him more of an ‘administrator’ than a ‘reformer’. For those of us who have slogged on the ground investing in and driving improvements in business governance, growth and innovation in emerging markets for decades, the British newspaper comes off as naïve, at best deliberately posing a strawman argument for effect. Like Modi seems to be, one needs both, a reformer and an administrator at the very top.
From first-hand experience, several examples make the case. Xi Jinping is one heck of an administrator, but I do not know of anyone of authority in China who would call him a reformer, except perhaps for his role as ‘the enforcer’ on corruption (but even there, ulterior motives are at play). If there is one country today that has the toughest reform nut to crack with the greatest downside to the world economy if it does not succeed it is China. An administrator alone will not cut it.
Boris Yeltsin was the opposite. It would be foolhardy to not label him in his heyday as a true reformer. His truly public display of courage and then taking on the task of charting a transition of Russia towards reliance on market forces and away from central planning form an enviable example of a reformer by any historic standard. But it was equally the case that Yeltsin certainly was no administrator, and copious amounts of alcohol assured that to be so; they also did him in.
Regrettably, his successor, Mr. Putin is cut out of the same cloth as Xi Jinping. Over the decade and a half that he has ruled Russia not only have no palpable reforms moved forward, but in several cases, there has actually been regression towards central-planning like rules.
Not only has the ascendency of Modi’s governing prowess (what The Economist would call his ‘administrator role’) and his reforms boosted India’s GDP growth, but they’ve also produced sizeable increases of inflows of foreign direct investment (FDI) to India—often seen as the ‘put-your-money-where-your-mouth-is” vote of confidence in both an economy and its policy leadership. Here the change for India has been startling, even when compared to China.
While in absolute terms, India’s FDI inflows in 2015 were US$44 billion and China received US$250 billion, these data are not economically meaningful unless the relative size of each economy is taken into account. To this end, India’s FDI inflows as a share of GDP were 2.1% in 2015 and China’s were 2.3%. As a practical matter, this is not a significant difference. (For reference, the comparable statistic for the U.S. is 2.1%).
It is even more instructive to examine the trend in FDI inflows over time. Over the course of the still-short Modi regime, India’s FDI inflows as a share of GDP rose 24% over 2014 and 2015, whereas for China, FDI inflows as a share of GDP actually declined by 12%.
Not only has the ascendency of Modi’s governing prowess (what The Economist would call his ‘administrator role’) and his reforms boosted India’s GDP growth, but they’ve also produced sizeable increases of inflows of foreign direct investment (FDI) to India—often seen as the ‘put-your-money-where-your-mouth-is” vote of confidence in both an economy and its policy leadership. Here the change for India has been startling, even when compared to China.
While in absolute terms, India’s FDI inflows in 2015 were US$44 billion and China received US$250 billion, these data are not economically meaningful unless the relative size of each economy is taken into account. To this end, India’s FDI inflows as a share of GDP were 2.1% in 2015 and China’s were 2.3%. As a practical matter, this is not a significant difference. (For reference, the comparable statistic for the U.S. is 2.1%).
It is even more instructive to examine the trend in FDI inflows over time. Over the course of the still-short Modi regime, India’s FDI inflows as a share of GDP rose 24% over 2014 and 2015, whereas for China, FDI inflows as a share of GDP actually declined by 12%.
Taking a longer view, between 2005 and 2015 (obviously a period that in part predates Modi), the differences are starker: India’s FDI inflows as a percentage of GDP more than doubled, whereas in China, they declined by 50%.
The list of reforms implemented by Modi in the first three years of his five-year term is sizeable, though not huge, and of course not all of them are of equal importance. But within the context of India’s complex political culture, marked by a true—and yes, messy—system of democracy (in stark contrast to China’s and Russia’s authoritarian regimes); the challenges imposed by governing a diverse, geographically large country of 1.3 billion people; and against the backdrop of decades of reform inertia and inaction by successive administrations in Delhi, it would be unreasonable to not be impressed with what has been accomplished to date.
Some of the more notable reforms include:
a revised law on bankruptcy, which will generate freer flows of capital and the flexibility for them to be invested in their highest value in use, thus promoting a more robust, competitive Indian market both for new business start-ups as well as for forcing stale companies who cannot make ‘a go of it’ to close shop and sell their assets;
The list of reforms implemented by Modi in the first three years of his five-year term is sizeable, though not huge, and of course not all of them are of equal importance. But within the context of India’s complex political culture, marked by a true—and yes, messy—system of democracy (in stark contrast to China’s and Russia’s authoritarian regimes); the challenges imposed by governing a diverse, geographically large country of 1.3 billion people; and against the backdrop of decades of reform inertia and inaction by successive administrations in Delhi, it would be unreasonable to not be impressed with what has been accomplished to date.
Some of the more notable reforms include:
a revised law on bankruptcy, which will generate freer flows of capital and the flexibility for them to be invested in their highest value in use, thus promoting a more robust, competitive Indian market both for new business start-ups as well as for forcing stale companies who cannot make ‘a go of it’ to close shop and sell their assets;
the introduction of a nationwide sales tax, which will integrate an otherwise excessively complicated disparate system of different state and federal taxes, a reform that will not only increase tax collections but also help reduce interstate barriers to trade and distortions arising from gaming where within the country purchases should be consummated;
elimination of subsidies for diesel fuel, which will help plug a fiscal hole in government revenues, and even more important create disincentives for using an energy source that adds to, rather than diminishes, pollution and greenhouse gases;
removing regulations that forced companies to repetitively renew their business licenses at an artificially high frequency simply to generate revenues to be collected by local bureaucrats;
relaxing rules that reserved specific sectors to be the province of only small and medium sized enterprises even if large firms could produce the goods or deliver the services at lower cost and create economies of scale;
relaxing rules that reserved specific sectors to be the province of only small and medium sized enterprises even if large firms could produce the goods or deliver the services at lower cost and create economies of scale;
using transparent and competitive auctions for allocating access to the telecom spectrum;
opening investment in the railway network to majority foreign ownership, thus allowing India to tap into new sources of capital to build out its infrastructure and help the country integrate into a unified economic space to create economies of scale in both manufacturing and agriculture and thus enhance its international competitiveness;
and permitting foreign investors to participate in construction projects that otherwise were reserved for only domestic service providers, thus generating opportunities for joint ventures and other businesses to incorporate world-class construction techniques and materials.
But perhaps the most widely publicized reform that Modi has implemented—and for which he has been criticized most heavily—is the decision to take out of circulation large bank notes. The measure was announced with little warning, and once executed, caused havoc in local markets around the country.
Modi’s team did do a poor job explaining the rationale for the measure in a way that the working and middle class might understand. But to be frank, if experience in other countries is any guide that is an elusive goal. The reform did exact costs, but these costs had to be faced sooner or later. Any way you cut it, there would be a backlash. In fact, most economists would agree that the longer a needed reform is put off into the future, the costs of reform will get only larger and larger. And no matter when the reform takes place, the benefits would not come immediately, and moreover, they would be diffused economy-wide.
So, what was Modi’s rationale for the move? The announced reasoning was that he wanted to reduce both the rampant incentives and opportunities for engaging in corruption that came about through informal cash exchanges. But the fact is that the core driver behind Modi’s re-monetization policy was broader: he wants to move to an India that is characterized both by greater economic integration and uniformity, and ideally increasingly cashless.
To many readers these may sound far-fetched for India; yet Modi did not have to look to only advanced economies to see why and how this should be done.
With respect to a move towards a cashless economy, he only had to cast his gaze on East Africa of all places. Yes, it was in Kenya that mobile money was first hatched; only later did the invention make its way to the US, EU and Japan. To the surprise of many, it was not the other way around. At this juncture, the trend towards electronic rather than cash-based transactions is becoming more widespread, not only among advanced countries, but also many emerging markets—though by no means the majority of them.
Modi’s lure towards a cashless economy is not simply for the sake of being cashless. Rather it is to bring into India’s formal economy informal transactions; create consistent modes under which transactions take place economy-wide; and to expand India’s tax base and thus get its fiscal revenues to the point where funding can be provided for truly essential ‘public goods’ that are the engines of economic growth.
What might these ‘public goods’ be? They include a modern, robust multi-modal infrastructure network linking the North of India with the South, the East with the West, and everything in between, including bridging rural and urban areas; modern school facilities at both the primary and secondary levels equipped with the latest teaching materials (increasingly in digital form) and well-trained teachers necessary to ensure the school buildings do not just sit as empty white elephants; and state-of-the-art medical installations staffed by medical professionals capable of providing where necessary world-class health care services, not just in the wealthy urban centers, but in the large swaths of India that is rural.
These are exactly what are needed to build a more inclusive, economically integrated and sustainably growing Indian economy, a goal that frankly has been elusive since independence.
But perhaps the most widely publicized reform that Modi has implemented—and for which he has been criticized most heavily—is the decision to take out of circulation large bank notes. The measure was announced with little warning, and once executed, caused havoc in local markets around the country.
Modi’s team did do a poor job explaining the rationale for the measure in a way that the working and middle class might understand. But to be frank, if experience in other countries is any guide that is an elusive goal. The reform did exact costs, but these costs had to be faced sooner or later. Any way you cut it, there would be a backlash. In fact, most economists would agree that the longer a needed reform is put off into the future, the costs of reform will get only larger and larger. And no matter when the reform takes place, the benefits would not come immediately, and moreover, they would be diffused economy-wide.
So, what was Modi’s rationale for the move? The announced reasoning was that he wanted to reduce both the rampant incentives and opportunities for engaging in corruption that came about through informal cash exchanges. But the fact is that the core driver behind Modi’s re-monetization policy was broader: he wants to move to an India that is characterized both by greater economic integration and uniformity, and ideally increasingly cashless.
To many readers these may sound far-fetched for India; yet Modi did not have to look to only advanced economies to see why and how this should be done.
With respect to a move towards a cashless economy, he only had to cast his gaze on East Africa of all places. Yes, it was in Kenya that mobile money was first hatched; only later did the invention make its way to the US, EU and Japan. To the surprise of many, it was not the other way around. At this juncture, the trend towards electronic rather than cash-based transactions is becoming more widespread, not only among advanced countries, but also many emerging markets—though by no means the majority of them.
Modi’s lure towards a cashless economy is not simply for the sake of being cashless. Rather it is to bring into India’s formal economy informal transactions; create consistent modes under which transactions take place economy-wide; and to expand India’s tax base and thus get its fiscal revenues to the point where funding can be provided for truly essential ‘public goods’ that are the engines of economic growth.
What might these ‘public goods’ be? They include a modern, robust multi-modal infrastructure network linking the North of India with the South, the East with the West, and everything in between, including bridging rural and urban areas; modern school facilities at both the primary and secondary levels equipped with the latest teaching materials (increasingly in digital form) and well-trained teachers necessary to ensure the school buildings do not just sit as empty white elephants; and state-of-the-art medical installations staffed by medical professionals capable of providing where necessary world-class health care services, not just in the wealthy urban centers, but in the large swaths of India that is rural.
These are exactly what are needed to build a more inclusive, economically integrated and sustainably growing Indian economy, a goal that frankly has been elusive since independence.
Indeed, these form the critical planks under which a geographically huge country such as India can not only begin to build economic clusters that have the scale to reduce production costs, but also to foster vibrant internal trade among India’s 29 states and 7 union territories and ultimately enhance the country’s competitiveness in the world marketplace.
In many respects, these features are not a whole lot different from what defines the barebones structure of the U.S. Of course, it has taken us more than a century to integrate our own large internal market—perhaps best epitomized by our interstate highway system—an objective that in no small way has contributed to not only our domestic economic resilience but also our prowess in international commerce.
Perhaps this is the secret sauce that the clever Mr. Modi is latching on to. No earlier leader of India dared to think quite this way.
In many respects, these features are not a whole lot different from what defines the barebones structure of the U.S. Of course, it has taken us more than a century to integrate our own large internal market—perhaps best epitomized by our interstate highway system—an objective that in no small way has contributed to not only our domestic economic resilience but also our prowess in international commerce.
Perhaps this is the secret sauce that the clever Mr. Modi is latching on to. No earlier leader of India dared to think quite this way.
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