(The author is a Reuters Breakingviews columnist. The
opinions expressed are his own)
By Andy Mukherjee
SINGAPORE, Dec 10 (Reuters Breakingviews) - Narendra Modi
could be India's Shinzo Abe. If the recent state polls are any
indicator of the electorate's mood, the opposition politician
will be prime minister of the world's largest democracy by May
next year. Just like his Japanese counterpart, Modi would
oversee higher asset prices and revive growth, but struggle with
Financial markets would cheer a Modi victory just as loudly
as they hailed the Japanese prime minister's ride to power. Both
Goldman Sachs and UBS expect India's benchmark stock index to
rise by 10 percent by the end of next year, a prediction that's
bound to be raised if Modi manages to cobble together a
majority. Add a recovery in the battered rupee, and the gains
for foreign investors could be quite lucrative.
The economy will also revive, as it has in Japan. But when
the euphoria subsides, questions will arise about Modi's resolve
to usher in structural reforms. If the February 2015 budget
disappoints, confidence will take a knock.
Modi will face a tougher job than Abe. The Japanese prime
minister's Liberal Democratic Party won a decisive mandate in
December 2012, and took control of the upper house of parliament
the following July. Unlike the all-too-entrenched LDP, Modi's
Bharatiya Janata Party will need the support of a number of
coalition partners to wrest power from Sonia Gandhi's Congress
Party. These smaller regional parties prefer populism to
reforms, and will expect Modi to make costly concessions.
Moreover, the Indian leader doesn't have a well-articulated
vision for the economy. That's quite unlike Abe, who has made
slaying deflation his mission. Modi has attacked the Congress
for inhibiting growth and stoking inflation, but hasn't spelt
out just what he will fix and how. There is no "Modinomics".
Electoral tactics may be part of the reason. Tackling
India's stagflation requires tighter government finances, but
cutting spending will depress growth further. The obvious
solution is to raise money by privatising state-owned
businesses. But Modi can't talk about that now for fear of
upsetting unionized state-sector employees. The closest Modi has
come to supporting the idea is saying: "I believe government has
no business to do business." This suggests he would restart the
process of selling controlling stakes in state-owned
enterprises, the BJP's strategy before it lost the 2004
It's doubtful Modi will invest much of his political capital
in labour reforms, which Abe has also avoided. Reviving the
stalled credit cycle will also prove a challenge for both
countries. Japanese banks aren't boosting domestic lending
because credit demand is still weak. India's banking system is
dominated by poorly run, government-owned lenders, saddled with
bad loans. Privatizing them is a non-starter because these
lenders keep uncompetitive businesses - and their politically
connected owners - afloat.
Modi's best hope is to revive credit demand. That won't be
an insurmountable problem given just how strongly big businesses
are rooting for him. As chief minister of the Gujarat state,
Modi has built a reputation for cutting red tape and making it
easier to do business. Those skills could help him revive
private investment nationally. As prime minister, however, he
will also need to make states agree to taxation reforms. A
nationwide value-added tax that subsumes many bad local levies
remains an elusive goal.
Indeed, Modi and Abe could help to solve each others'
problems. Japanese businesses, banks and pension funds want to
invest, but Japanese society is too old to utilize many new
investments. The solution might be to invest more in India,
which has a young population and desperately needs
As in Japan, foreign affairs could upset the optimism.
Investors will be spooked if they see any evidence that Modi is
allowing nationalism to get the better of his reformist zeal.
How Abe deals with China and South Korea will be crucial for
stability in north Asia. Modi's approach to China and Pakistan
will determine the security landscape of the south.
In 2013, Abe raised hopes that decisive leadership can help
tackle Japan's deep-seated economic problems. Next year, Modi
could do the same for India.
- India's opposition Bharatiya Janata Party (BJP) won
assembly elections in Madhya Pradesh, Rajasthan, and
Chhattisgarh and finished as the single-largest party in the
National Capital Territory of Delhi, according to Reuters and
other media reports on Dec. 8.
- Elections for India's national parliament are expected to
take place as early as April 2014. Narendra Modi, the chief
minister of the western Gujarat state, is the BJP's prime
ministerial candidate. The ruling Congress Party is led by Sonia
Gandhi and her son Rahul Gandhi.
- For previous columns by the author, Reuters customers can
(Editing by Peter Thal Larsen and Katrina Hamlin)