Queen's Global Markets - Modi and the New India Will He Clean Up the Indian Economy?
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Queen’s Global Markets
A PREMIER UNDERGRADUATE THINK-TANK
Modi and the New India
Will He Clean Up the Indian Economy?
P. Graham, Y. Pan, J. Wine
October 8th, 2014
The Post Independence Indian
Economy
45 years of government protectionism and exposure to the free market
Attempts at Self- Free Market Reforms of Still Not Living to its
Sufficiency (1947-1991) the (1991-present) Potential (2008-present)
A Period Marked by Heavy The collapse of the Soviet Union India has greatly underperformed
Government Control creates a number of economic expectations
• Allies with the Soviet Union difficulties • India has not kept with China’s
o Relied on discounted oil • Requested a loan from the IMF pace, a historically and
imports o Required to shift to demographically similar
• Severe economic open economy country
mismanagement and o Partially due to internal
indifference issues
o Partially due recently to
GDP
India
(1980-‐2013)
financial crisis
2000
1800
1600
GDP
(USD
Billions)
1400
1200
1000
800
600
400
200
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Source: The World Bank QGM
2
The Indian Economy Today
And the issues it faces
Composition of the Indian Economy
• Since 1991 economic reforms India has seen significant economic growth
• India has a highly talented workforce, improved protection of intellectual property and low cost, all of which
make it very appealing to western firms
• Three major driving forces behind growth:
o Increased foreign direct investment
o Expertise in IT and outsourcing of western firms
o Increased domestic consumption due to growing middle class
• Shifting towards a service based economy
Issues Currently Faced
• Bureaucracy and red tape
• Corruption
• Politicians are by in large willing to accept the status quo
à hard to make any changes 70%
• Some populist policies live on Sector
Contribution
to
GDP
60%
• Recent economic downturn
50%
40%
30%
20%
10%
0%
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Agriculture Industry Services
Source: The Economist, BBC News, The Guardian QGM
3
Leading up to the Election
Manmohan Singh’s term
• Changes were a long time coming
o Manmohan Singh had tried to implement growth policies throughout his time in office but did
not find the support within his party (the INC)
o Was not in a position to make such changes
• Wakeup call following the 2008 financial crisis
• Indians were becoming frustrated with the lack of growth, increasing food costs, employment,
infrastructure, health and education
Source: The Economist, BBC News QGM
4
2014 Indian General Election
Modi’s decisive victory
• Biggest victory in India since 1984
o “First strong government who’s priority is growth”
• Demonstrated that the country was in eager need of change
• Modi is a hugely charismatic speaker
o Broke many of the barriers in Indian politics
o Conservative Hindu Nationalist (former member of RSS)
o Some fears regarding the lack of action in the 2002 Gujarat riots
• Modi is significantly more pro-business and open than his predecessors
o Lead to positive reactions from stock market and western nations
Source: The Economist, BBC News QGM
5
Indian Politics
The world’s largest democracy is bloated with a variety of parties and bureaucratic levels
Bharatiya Janata Party & Indian National Congress
National Democratic & United Progressive
Political Structure Alliance Alliance
• The modern Indian state was • The NDA is a coalition of • The UPA is a coalition of
founded in 1947 after years of centre-right and far right centre-left and left wing
nonviolent protests against political parties, led by the BJP political parties, led by the INC
empirical British rule
• The Alliance was founded in • The alliance was formed in 2004
• Independence granted, India’s 1998 under then Prime Minister after Prime Minister Singh’s
state is governed by its 1950 Shri Atal Bihari Vajpayee with first election victory in order to
Constitution and English the goal of ending political create a ruling majority
common law instability in the national coalition
legislature and creating a
• India has a bicameral national proud, prosperous India • The INC was formed in 1885 as
legislature consisting of a lower the and has been dominated by
house, the Lok Sabha, voted in • The NDA is comprised of the Nehru-Gandhi family
by general election and the several fringe parties with fierce
upper house, the Rajya Sabha, nationalist beliefs; it was able • The family has claimed to stand
elected by weighted votes of to tone down its nationalist for responsible leadership and
state and lower-house legislators rhetoric and focus on economic liberal-secular society, however
issues when in swept to power have been plagued by
• The Indian head of state is the in the most recent election controversies and have
President while the head of the instituted subsidies and
executive branch is the Prime protectionist measures
Minister
Source: Economist Intelligence Unit, The CIA World Factbook, Indian Elections, INC Website QGM
6
Political Divide
Reform will require cooperation that may be hard to find in India’s contentious political system
Modi has a Majority, but his power is far from absolute
• For years, India’s economy has stagnated because the government has resorted to bickering and blocking any
reform instead of investing for growth
• The recent election gave a clear majority to the BJP party, but it comes with a few caveats:
• The BJP has formed a coalition with several other smaller parties to cement its position as the country’s
clear leader; many of these parties representative hold extremist views
• The government risks significant pushback from a left wing coalition which puts forth a united stance
• The upper house of parliament, the Rajya Sabha, is controlled by an INC led alliance; certain bills
passed by in the lower house risk rejection by the unelected upper house
Election Results by Coalition Election Results by Party
BJP INC Other
BJP
INC
ADMK
TMC
BJD
SS
TDP
Other
Source: NDTV India, The Wall Street Journal QGM
7
How to Overcome Stagnation
Political savvy will be required, should Narendra Modi wish to proceed with reforms
• The Modi government’s budget passed the lower house with ease, but contained little in
terms of effective reform; there was little mention of scaling back costly subsidies that have
increased by 500% over the past decade and now represent 14.53% of all government
expenditure
• The budget passed only 45 days after Modi took office; the government likely views this as an
interim budget, with its real goals expected to be revealed through motions in the coming
months
• Recently, Modi has engaged in a “Clean India” campaign, whereby citizens are encouraged to
pick up trash on the street and refrain from littering through a social media campaign
• While India’s electorate is fed up with their political system, the BJP’s overwhelming
majority gives him a clear mandate to impose reforms
• Modi likely wants to roll out his plans cautiously to avoid worrying his detractors about the
nature of the change he wants to bring, given his party’s nationalist tendencies
• Good governance would be restoring faith in India’s political system; this can only be
accomplished through reforms that would push economic liberalization, not amateurish social
media pledges
Source: Bloomberg QGM
8
Modi’s Goals
From Campaign to Construction
Infrastructure Economy Trade
Running water, toilets and New general sales tax Coal sector reforms to attract
power to every home in India private investment
by 2022 Containing food inflation
(currently at ~9.5%) Opening Chinese-style
Creating 100 new cities to “special economic zones” to
keep rural areas thriving Privatization of several expand manufacturing
government-owned businesses
Source: XXXX QGM
9
Food Policy
Feeding the 99%
Why is food so important?
• India has to feed 1.2 billion people,
and is the second-largest producer of
fruits/vegetables after China
• Production is not the issue – est.
need for 225-230 million tonnes/year,
production at 263 tonnes/year
• 40% goes to waste every year
(est. value of $8.3 billion) à
inadequate harvesting techniques,
cold storage
• Food inflation is incredibly high, and
accounts for 48% of India’s consumer
price index as well Source: World Bank
• Currently account for ~35% of the
median household’s budget, which
limits discretionary spending
Source: XXXX QGM
10
What has Modi done about food?
1. Curb exports to keep food in the country
2. Tightened controls/punishments for hoarding
3. Allocated $822 to improve cold supply chain for food
4. Established a food price stabilization fund
5. Banned foreign supermarkets from entering India
Source: XXXX QGM
11
Modi’s Manufacturing Plans
Turning India into a Chinese-style manufacturing powerhouse
Indian SEZs
• Historically difficult to establish in India
because of conflicting economic interests
• Does Modi believe he can manage the
displaced in SEZs better than other leaders
could?
• Has not budgeted in any plans for SEZs yet,
but has hinted strongly at tax incentives to
establish more
• Current # of SEZs (approved): 589
Source: Centre for the Advanced Study of India
Source: XXXX QGM
12
Growth Via Privatization
Modi aims to use proceeds from privatization to bolster growth
Modi’s Plans to Sell Assets
• Current government aiming to raise $11.7 billion (last government had penciled in $9.5 billion)
• Reduction of stakes in firms that the government has already reduced their stakes in
• Modi is backing a gradual decrease in the free-float requirement for stocks in Indian
benchmark indices to 10% (from 25%)
BSE
Sensex
30,000
27,000
24,000
21,000
18,000
15,000
02-‐Dec-‐13
02-‐Jan-‐14
02-‐Feb-‐14
02-‐Mar-‐14
02-‐Apr-‐14
02-‐May-‐14
02-‐Jun-‐14
02-‐Jul-‐14
02-‐Aug-‐14
02-‐Sep-‐14
Source: BSE India
Source: XXXX QGM
13
Can Modi Do All These Things?
The future of a Modi-led India
The Results So Far
• GDP increased by 5.7% in 2Q14 – third-largest PPP in world (behind US, China)
• Manufacturing increased to 15% of Indian GDP
• Industrial production growth hitting an almost 3-year high of 3.9% YoY
• 2015 inflation expectation of ~12.8%
Constraints Modi Faces
• BJP only has direct control over 5 of India’s 29 states
• Impending possible GST hard to implement and enforce
• Infrastructure limitations on how much power India can generate
• Can he remain the face of modern Indian populism?
Source: BSE India
Source: XXXX QGM
14
Why Modi Can’t Deliver on Everything
India Needs More Than Just Talk
Government Spending in India
15.00%
12.00%
9.00%
6.00%
3.00%
0.00%
1991 1995 1999 2003 2007 2011 2015
Fiscal deficit (% of GDP) Tax Revenue (% of GDP)
Source: Government of India
• Modi needs to make good on reducing the deficit, curbing inflation and ensuring local trade
remains robust
• He cannot simultaneously increase spending and reduce the deficit, even with asset sales
• Modi will not throw away an opportunity to make real impact – it will come at a political
cost
QGM
15
Q&A
QGM
16
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