Modi’s India – Finally Open for Business from the City of London?
May 31, 2014
Few would dispute that we have been here before. The opening up to UK investment of commercial opportunities in India has had many a false dawn over recent years.
However, the assent of Narendra Modi to the Indian Prime Ministership promises a new era for the City of London, whose professional services have frequently felt themselves thwarted by red tape and bureaucratic obstruction when doing business there.
It was commonplace until recently to speak of India and China in the same breath as the twin engines of global growth in the twenty-first century. It has understandably pained many Indians to see China storm ahead in the eyes of most global observers over the past decade. India’s GDP annual growth rate has plummeted from 10.5% in 2010 to 4.8% last year. Whilst Beijing and Shanghai now feature in the top twenty of the Global Cities Index that compares everything from human capital to cultural and business activity, this year shabby Delhi and chaotic Mumbai rank 57 and 41 respectively. As China’s extensive high-speed rail network is on course to expand by nearly two-thirds by 2020, progress towards India’s avowed goal of adding 25 000km of new track to its own, rustier rail network is painfully slow – in the five years to 2011, only 1750km was laid out.
India may have been battered by the storms afflicting global finance over the past five years, but it has many stubborn difficulties of its own making. Assuming continued annual growth of 8%, the Congress-led coalition government of the past decade complacently failed to address India’s serious structural problems, all the while undertaking major redistributive welfare programmes that risked higher fiscal and trade deficits.
Similarly, while the nation very successfully carved itself a niche as the world’s preferred back office, supplying competitively priced, skilled labour in sectors such as the IT industry, it failed to harness its vast pool of unskilled workers to help build a broad manufacturing base of the kind that China so effectively engineered for itself. That would have required India’s government to tackle the many barriers deterring investors. Instead, inflexible labour laws, crumbling infrastructure, hopelessly unreliable power grids, rigid policies on Foreign Direct Investment (FDI) and confusion over land rights remained unaddressed.
A package of sweeping measures announced in September 2012 had stoked optimism that India would finally start to tackle those problems head-on. But apathy and indecision soon took hold and last summer, India’s economy hit a crisis point that saw the rupee tumble and inflation run riot. Small wonder that the nation opted for change as it went to the polls. The mere prospect of a Modi government in the months preceding had already begun to enthuse the capital and equity markets, and attract talented Indians living abroad to consider returning home to join the Modi campaign.
As the Finance Minister who had overseen India’s first, ambitious and highly effective programme of economic liberalisation in the early 1990s, there had been hope that Manmohan Singh would usher in a fresh round of deregulation when he took the reins as Prime Minister in 2004. That optimism got buried in red tape and central government indecision, so Indian leadership has form in dashing hopes. Nevertheless, Modi does have a recent, promising record for implementing economic change. Few doubt that Gujarat’s infrastructure and economic activity improved markedly under his tenure as that state’s Chief Minister, where he achieved a far higher benchmark for growth than most Indian states and built a reputation for ‘fast-tracking’ decision making over key infrastructure projects. His state, which accounts for just five percent of the Indian population, now produces a quarter of the nation’s exports.
Modi’s election manifesto focused heavily on the promotion of job-creating, labour intensive manufacturing. As Prime Minister, he will implicitly understand that his greatest chance of re-election lies in providing jobs to the low-skilled masses, particularly the young. Meanwhile in China, wages rise, the workforce shrinks and Beijing is beginning to refocus from a state-led investment model to one of higher domestic consumption. It is thought that up to 85 million Chinese manufacturing jobs are now up for grabs, providing a unique opportunity for India to step into the space China is vacating.
If that is to happen, however, Modi needs to use his mandate to overhaul India’s infrastructure, and use it quickly. Urgent action will be required to build new or upgrade existing ports, power grids, rail and road networks and more. The ending of electoral uncertainty alone may be sufficient to bring many stalled projects back on course – fortuitously there are several in the pipeline that are well placed to transition quickly from aspiration to reality. UK expertise is already at hand when it comes to providing technical, construction, consulting, and legal services for precisely these types of projects, while a number of participants have been able to tap into the immense funding opportunities that the City of London provides through public and private markets for both equity and debt.
Modi avoided specifics in his campaign but is reportedly keen to privatise or give greater autonomy to a slew of state-owned enterprises (only four out of India’s ten largest companies is currently in private hands), possibly starting with the loss-making Air India. Hopes are high that he will also give the green light to the liberalisation of a broader range of industries in the hope of attracting fresh foreign capital and expertise in a market of 1.2 billion. The BJP manifesto stated it would permit FDI in any sectors where it would bring job and asset creation. While it specifically excluded supermarkets, Modi began backtracking on that exception in the latter stages of his campaign, suggesting that his government need not stick to reversing the decision to allow FDI in multi-brand retail.
Might he also be the man finally to crack open the professional services sector? Top US and UK professional services firms have been successful at building a presence in leading Chinese cities via joint ventures. However protectionist sentiment has hitherto crowded this route out in India, which has been a closed market for English law firms in spite of the similarities between our legal systems. It will require great political will from the centre to overcome stiff opposition to liberalisation from Indian corporate law firms, but the UK government must give vocal support to City professional services in working with Indian business.
In short, should the Modi premiership live up to its hype, there will be an array of sectors in which British expertise might be utilised.
This will all be music to the ears of David Cameron. At the outset of his coalition administration in 2010, he placed an expansion of trade with the East, in particular India, as a top priority. However his high profile trade missions, while entirely correctly intentioned, have failed to reap the rewards we all hoped they would. Nevertheless, the window of opportunity for British business in the subcontinent may prove narrow. In truth, Modi probably has only a couple of years to make his mark before vested interests begin to hammer at his door and the inherent inertia of Indian political culture sets in.
Furthermore, British firms will not be alone in wishing to take advantage of opportunities in the new-look India. In search of a home for some of its $3.8 trillion of reserves, the Chinese government earlier this year offered to finance thirty percent of India’s infrastructure in a targeted plan. It was an offer turned down by the Congress-led coalition, wary of relinquishing too much control to its regional rival. However Mr Modi may well see a review of that offer as a key way to reset relations with his Chinese counterparts and a mark of his outward-looking intent. Meanwhile both Japan and the US already have extensive involvement in the financing and engineering of Indian infrastructure, where they have been far more successful at taking advantage of the country’s vast opportunities than the UK has, in spite of India’s tough trading climate.
As this great Asian giant awakes to an exciting new era, there is a unique – but potentially only brief – opportunity for UK professionals and service providers to place themselves at the forefront of India’s reform process. We must all now firmly hope that Modi’s victory does not prove another false Indian dawn for British firms from a trading relationship that should hold such incredible promise.