Doubts surface about Modi after trade deal scuppered

NEW DELHI Fri Aug 1, 2014 9:46pm IST

U.S. Secretary of State John Kerry (L) speaks with Prime Minister Narendra Modi (R) at the Prime Minister's residence in New Delhi August 1, 2014.  REUTERS/Lucas Jackson

U.S. Secretary of State John Kerry (L) speaks with Prime Minister Narendra Modi (R) at the Prime Minister's residence in New Delhi August 1, 2014.

Credit: Reuters/Lucas Jackson

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NEW DELHI (Reuters) - Prime Minister Narendra Modi came to office with a reputation as a business-friendly leader ready to open up one of the world's biggest markets and sweep away the remnants of the country's socialist past.

Now potential investors, some of them foreign firms hoping to exploit new opportunities in India's vast consumer market, are scratching their heads after Modi's party walked away from a major deal to reform customs rules and make global trade easier.

India shocked trade officials by rejecting the agreement at the 160-member World Trade Organization, one of the group's biggest initiatives since it was set up 19 years ago.

New Delhi has since said it did not believe the pact was dead, but insisted that, alongside the so-called trade facilitation agreement, the WTO must find a deal allowing India to subsidise and stockpile food in order to protect the poor.

U.S. Secretary of State John Kerry, visiting New Delhi for an annual strategic dialogue between the world's largest democracies, told Modi on Friday that by blocking the trade pact, he was sending negative signals.

"The failure to sign the (WTO) agreement undermined the very image Modi is trying to send about India," a U.S. State Department official quoted Kerry as telling the 63-year-old in a meeting otherwise described as "strong and positive."

It was a rare veto from India, a country that has long espoused the cause of global trade reform, and was one that observers said could be wielded more often as the Modi administration sticks to its nationalist roots.

Whether in foreign affairs or trade, Modi will pursue an "India-first policy" in a way Congress governments that ruled for most of India's independence did not, senior members of his party said, apparently unfazed by global criticism.

"We will not compromise on national interest," said Jayant Sinha, a lawmaker from the ruling Bharatiya Janata Party (BJP).

"That is the way (a previous BJP-led) government operated between 1998 and 2004 and this is how this government will operate," he told Reuters.

"SHINING INDIA"

The BJP has described that period as "Shining India", when it carried out nuclear tests and declared the country a nuclear-armed state, in the face of international condemnation.

By twinning a trade deal with food security, the BJP may also have an eye on India's vast rural community comprising more than two-thirds of the country's 1.2 billion people, among whom the support system is generally popular.

Coming from Modi, who fashioned himself more as a chief executive during the election campaign than a politician, the WTO rejection was a second jolt for investors in less than a month after a federal budget that left many of them cold.

Instead of unleashing a second generation of market reforms and slashing welfare spending that his economic advisers had trained their guns on during the campaign, Modi's first budget carried piecemeal measures on liberalisation in the insurance and defence sectors.

"The message that India's action on the trade facilitation agreement indicates is a black mark against being the investment-friendly, more business-friendly environment that one was hoping this government was going to seek," said U.S. National Association of Manufacturers vice president of international economic affairs, Linda Dempsey.

"It makes foreign investors a bit more skittish about what they are going to expect out of the new government."

DRIVEN FROM THE TOP

There is little doubt that Modi has been at the centre of this week's WTO saga and other key policy decisions.

Days after he returned from a BRICS summit in Brazil last month, he summoned two top ministers to his house to finalise India's position on the trade facilitation deal.

There were no aides present at the July 22 meeting, where Modi, Finance Minister Arun Jaitley and Trade Minister Nirmala Sitharaman took the decision to oppose the pact unless there was movement on food security.

Until then, Indian officials had not explicitly linked the global trade agreement to their concerns over the lack of progress on the food security pact.

India wanted an assurance because it had been "pushed to the wall", one official said on Thursday.

The Modi administration had been distancing itself from the Bali agreement last December, when the groundwork for the trade facilitation agreement was laid, in the last few weeks.

It also criticised the previous government for signing up to Bali, because it said it was not explicit on food security.

"The developed world's priorities are clear. But we won't back off from pushing ours," the official said.

(Additional reporting by Manoj Kumar in New Delhi and Krista Hughes in Washington; Editing by Mike Collett-White)

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