Saturday, September 27, 2014

India, change slower than expected?


When Narendra Modi’s Bharatiya Janata Party won a thumping majority for its pro-growth promises in India’s elections in May, hopes swelled that the new government would adopt economic reforms that had proved beyond the brittle coalitions of the past. Yet in defiance of the maxim that the boldest steps are best taken early, Mr Modi has so far eschewed dramatic change.


The small measures taken so far have at least focused on some big problems. One cause of the slowdown was a sudden drop in investment, as big projects, such as power plants and roads, got snarled up in bureaucracy (see chart 1). Sajjid Chinoy of JPMorgan Chase, a bank, attributes almost 30% of the peak-to-trough fall in the growth rate to this backlog. Civil servants were already struggling to keep up with the paperwork before a rash of corruption scandals made them especially cautious.

Mr Modi has cracked heads. Shocking tales of civil servants working late have become commonplace. Many permits can now be obtained online. By the start of September the government had approved 175 stalled projects, according to Citigroup, another bank.

There has been some criticism of Mr. Modi since he got elected that he and his party have not gone "big" with reforms. However one has to remember that India has an entrenched bureaucracy and special interests that go back to colonial times. In addition, subsidies for fuel and fertilizer, that mostly go to poor rural voters, will take time to roll back. I see Mr. Modi's strategy being to get in the weeds and grease the skids to get private investment projects moving (as the article states they have gotten 175 stalled projects moving again). He has been doing this and investment is beginning to increase again in India. This should lead to higher growth next year, which even the Asian Development Bank is predicting. Higher growth and lower inflation will then give Mr. Modi room to maneuver on lowering subsidies and chipping away further at the bureaucracy. These things take time but he will be under scrutiny because he was not the media or establishment candidate. I am still bullish on India and think he will be successful.

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