For the past 30 years, India has been governed by a series of raucous coalition governments. At least some of the caution, vacillation, and even backtracking on investment and taxation policies that have dismayed foreign companies contemplating foreign direct investment (FDI) in India can be attributed to this. At the federal level (as well as in many states), coalition viewpoints had to be accommodated, often leading to legislative paralysis and lack of policy clarity.
In my April 12, 2014 post What the Indian Election Means for Foreign Direct Investment (FDI) in India, I described how India is a multicultural and multireligious pastiche, with more than 22 official languages (some say more than 780). Every religion on earth has adherents in India, although India’s 2011 census shows six major religions dominating. Even within Hinduism, which includes 81 percent of the population, the worldview varies depending on which of the 3,000 subcastes a person belongs to.
Democracy in India functions as a noisy forum for a thousand interests and viewpoints. Coalitions have been the political norm. Given India’s diversity, one party gaining a majority has been an unlikely event. However, in the 2014 election, the BJP (Bharatiya Janata Party) has been handed a rare opportunity—an outright majority, having captured 52 percent of the 543 lower house seats. With its coalition partners, Narendra Modi’s government will enjoy a comfortable 62 percent.
Under the previous Congress Party government, opening the gates to FDI and dismantling bureaucratic obstacles progressed well until 2008. The Indian economy grew at previously unprecedented rates of 7 or 8 percent annually. But after 2009, all reform came to a halt because of infighting among the ruling coalition, as well as the global slowdown. Each budget year saw backtracking and zig-zagging on taxation, industrial policy, and FDI policies, as well as hundreds of corruption cases. The slowing of economic growth to below 5 percent sealed the image of the Congress government as paralyzed, incompetent, and unable to meet the job aspirations of millions of new voters since 2009. Although India’s population growth has slowed, nevertheless as many as 150 million crossed the threshold from adolescence to adulthood in the last five years, during which time job creation has been inadequate.
The last five years also saw a number of well-publicized FDI disasters. Posco Steel of Korea would have made the largest investment in India to date, $12 billion, and Vedanta Resources based in London proposed FDI in the aluminum sector worth more than $8 billion. But both were torpedoed by regulatory and land acquisition snarls at the state level, with the federal government too weak to intervene. Tata Motors, part of the multinational Tata Group, had to withdraw from a partially initiated project to build Nano cars in West Bengal.
To the rescue came a decisive Gujarat State Chief Minister, Narendra Modi, who induced the Tata Group CEO, Ratan Tata, to switch his investment to Gujarat. Regulatory clearances and land were obtained in less than one month’s time. This is only the latest illustration of investment flocking to Gujarat State because of a dynamic leader who cuts through bureaucracy and is widely regarded as a decisive, straight-arrow, no-nonsense, pro-business leader. While over the past five years the rest of India grew only modestly at 5 percent per year (still a growth rate that would be the envy of most other nations in today’s economy), Gujarat State grew at more than 10 percent annually—a remarkable achievement.
Narendra Modi (center) with the CEOs of India’s two largest business conglomerates (Mukesh Ambani of the Reliance Group is at the extreme left and Ratan Tata from the Tata Group is second from the right) with other foreign executives.
With a comfortable outright majority in Parliament, Narendra Modi has been handed a historic opportunity in Indian politics. His singleness of vision, unsullied resumé (except for serious allegations of an anti-Muslim animus), insistence on quick action, and ability to cut through bureaucratic red tape all bode well for investment in India.
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