© 2014 Prof. Farok J. Contractor, Rutgers University
Narendra Modi, Bharatiya Janata Party, faces off against Rahul Gandhi, Congress Party, in the Indian General Election this spring.
Narendra Modi, the candidate of the Bharatiya Janata Party (BJP) and presumptive Prime Minister, is portrayed as pro-business and a man of decisive action. The rival Congress party, in power for the last 10 years, actually did more to weaken the apparatus of bureaucratic controls and open the door to incoming foreign investment than in any prior decade. However, the Congress Party’s record has been sullied by exposure of hundreds of cases of corruption and misdemeanors by the raucous free press that exists in India.
Whether it is a BJP or a Congress Party-led coalition makes little difference—since the two parties are not too far apart in economic policies—compared with how India tackles the real impediments to growth, such as infrastructure, electricity, a unified tax structure, and labor law reform.
For the world’s fourth largest economy, India receives a rather paltry 28 billion in Foreign Direct Investment (FDI), although that inflow has accelerated in the past decade. (By comparison, annual inflows of FDI into China have exceeded 120 billion.) To understand why India has not received more FDI, despite economic growth rates that would be envy or other countries, I focus on some salient facts that also relate to the Indian election and how the nation is governed:
India is one of the most diverse nations on the planet: Within a land area barely three-quarters that of the European Union (EU), or one-third the area of the US, coexist 22 major languages; 5 major religions; an ethnic diversity that includes Caucasian, Dravidian, Tibeto-Burmese, and Mon-Polynesian tribes; and a society still stratified by caste.
Diversity and multiculturalism make coalition democracy the only viable form of government: The 543 seats in the lower house of parliament are fragmented over a bewildering array of regional and caste-based parties, although the Congress Party and the Bharatiya Janata Party (BJP) constitute the two major nationwide blocs. India is also a federation of 35 states and territories. For FDI investors, additional layers of bureaucratic complexity come from having to deal with state and local officials (often with their palms extended). Government therefore requires forging difficult consensus, on issue after issue.
India has a 2500-year tradition of commerce and entrepreneurship: But this tradition is confined to Brahmins and trading castes (such as Banias), who dominate management and companies: Some see hope in the fact that Narendra Modi (the presumptive BJP Prime Minister candidate) is a Ghanchi, a mid-level trading caste of oil-pressers and grain sellers in north India. Indeed, Modi’s record as Chief Minister of Gujarat State is pro-business, and with quick execution of investment proposals. (Although this quick execution has worked principally in favor of companies large enough to get Modi’s ear and attention.)
Indians who are not from the business castes still exhibit traces of xenophobia and suspicion of foreigners: The British colonial experience and the prior rule by Mughal emperors (of Turkic ancestry) left many Indians xenophobic and willing to embrace socialism or a strangling bureaucracy. One of the founders of modern India, the Congress Party, and its first Prime Minister, Jawaharlal Nehru, fell in with Fabian socialists at Cambridge University and later flirted with Soviet-style economic planning. Indian bureaucrats still exhibit an unfortunate tendency to delay, impede, and regulate. Its antecedents may even go farther back to the rule of Henry VIII, when English officials began to file bundles of papers by tying related papers with “red tape”—a practice then brought to India by the East India Company.
The real impediments to FDI and economic growth in India are a grossly inadequate infrastructure, lack of electricity, and antiquated labor and tax laws: To move a truck a mere 1000 kilometers can sometimes take a week because of bad and congested roads and “octroi checkpoints.” (Each municipality used to put up roadblocks and demand a small tax, or octroi, as trucks passed through its jurisdiction.) When an export cargo finally reaches a port, it may often have to wait for days because the port capacity is overloaded. In many parts of India, electric supply is subject to (unpredictable and, in the hot season, daily) blackouts lasting hours. Companies that hire more than 50 workers find it difficult to lay off any of them.
India will continue to eliminate such impediments, but achieving consensus at multiple levels will remain slow: Either Narendra Modi or a Congress-led government will go farther down the path of liberalization and elimination of bureaucratic controls and laws. But being a multicultural democracy and a multilayered federation of states and municipalities, change is slower than in autocracies such as China.
 By PPP-based ranking of GDP.
 Inward FDI is direct investment made by foreign companies investing in operations in India. This category does not include portfolio investments in stocks, bonds, or bank deposits.
 Oddly, India is one of the few major nations where outward FDI (by Indian firms investing in the rest of the world) often exceeds the volume of inbound FDI. No surprise. The entrepreneurial drive of Indian companies, thwarted by constraints in the domestic market, finds expression in foreign markets. See my article ‘Punching above their weight’: The sources of competitive advantage for emerging market multinationals. International Journal of Emerging Markets, Vol. 8 No. 4, 2013 (pp. 304–328).