In late August 2014, after roughly 100 days of the Modi Government in India, the Swedish Ambassador to India, Harald Sandberg, made presentations to the Swedish business communities in Stockholm, Gothenburg and Malmö. The following is a slightly updated and abbreviated version of his presentation, translated into English.
Before diving into current political and economic developments in India, let us just remind ourselves about the proportions of this market, and its potential.
India will be the most populous country on earth within ten years. Its workforce, as a percentage of its population, will continue to grow well into the 2040s. In the western world, in Japan and Korea, and in China, the group of pensioners and the elderly is already increasing its share of the population. Much has been said about the demographic dividend available for India, and I will not repeat that here. But let us remember that there is also a demographic challenge – to deliver a good life to its population, and to meet the high expectations of a rapidly growing middle class, India will need policies that will deliver sustainable and inclusive growth.
The elections of 2014 delivered a unique mandate for the new Indian Government. For the first time in thirty years a majority Government was elected, and for the first time ever India has a majority Government that won its election on a program stressing reforms for growth.
It is of course, after 100 days, too early to draw conclusions about the political path of India’s new Government. But a few comments can certainly be made.
The new budget was well received by the markets and it was perceived as pragmatic and sound. It indicates prudent policies aimed at decreasing deficits and a more investment-friendly environment. It prioritizes infrastructure development and more efficient procedures.
Prime Minister Modi, as expected, held an impressive speech at the Red Fort in Delhi on Independence Day on August 15. To the point and straightforward. A message to the people on social issues. The campaign rhetoric on changing India in 60 months was back. He talked of eradicating poverty, safety for women and girls, ‘skilling India’ and letting free the entrepreneurial capacity of the young population. The Prime Minister spoke about e-governance. He invited the world to “come and make in India”. The PM’s speech showed a strong will to establish ‘good governance’.
At the same time, the new budget did not establish the clear break from the economic policies of the former UPA Government that some people had expected. The subsidy programs, particularly the food subsidy, are intact. FDI decisions, as in the defence sector, are cautious. Finance Minister Jaitley has been clear about the need for a stable and predictable tax regime. However, there is no change in the Government’s stand on the Vodaphone dispute, and while criticizing the principle of retroactivity, the Finance Minister states that a sovereign country has the right to take that step, when necessary.
The debacle in the WTO belongs to this picture. India was, in essence, alone in the world community in toppling the WTO agreement on Trade Facilitation through coupling its time-table to a solution to India’s food security and food subsidy issues. Additional global growth estimated at 1000 billion USD, and up to 21 million new global jobs are now at risk if no solution is found in Geneva. Obviously, the developments damaged to some extent India’s negotiating credibility, as it probably damaged the image of the WTO’s in India. We sincerely hope that our Indian and international friends in Geneva can find a way out.
Regarding the subsidy issues, what is said on FDI, the developments in trade etc., we may see a fairly traditional sceptical Indian attitude to openness and competition. We might see more of what I would call ‘industrial policy’ and export-led mercantilism.
At the same time, there are reforms taking place to improve the business climate, such as giving priority to solving the long-standing issue on a national goods and services tax (GST) and to simplifying bureaucratic procedures for companies. The hope is that this new Government will not be caught up in what used to be called “the strong Indian consensus for weak reforms”.
All in all, good governance, predictability in legislation and implementation, reforms like the GST etc. certainly have the capacity to return the Indian economy to a higher growth trajectory. It remains to be seen to what extent, and if this is enough to reach the desired 7-8 per cent, or more, economic growth that the India would really need. In a longer term, I would also hope that India would rely on openness in trade, liberalisation and reforms for increased competition. This would lead to sustained growth that could create the wealth needed to lift India’s masses out of poverty.
Yes, too high expectations for quick-fix large scale economic reforms proved overblown. However, fears that the new Government would support a more radical religiously inspired nationalistic agenda have also been overstated. While there is opposition criticism that the Government is meant to have said too little in reigning in radical hindu nationalistic statements, there is much more of continuity than some expected. Eventually, in huge India, a test is unfortunately unavoidable. How will this Government act if communal interreligious difficulties break out somewhere in India?
Many observers of India will tell you that it is in foreign policy the new BJP-led Government has made its first and strongest impression. We see a majority Government with a steady international hand. The invitation to the neighbouring countries’ leaders, including PM Sharif, to come to PM Modi’s inauguration was a clear signal, as was the cancelled consultations on Foreign Secretary level between the two countries later in the summer, motivated by Pakistani consultations with Kashmiri separatists.
The stated priorities in India’s foreign policy are India’s neighbourhood in South Asia, and both regionally and globally, for its foreign service, India’s economic interests. Modi’s first meetings in India’s neighbourhood were followed up with a highly successful visit in Japan, where he met promises of promising doubling Japan’s FDI in India. The political signal was as clear however, the visit coming only weeks before China’s President Xi’s visit to India, and Modi’s planned trip to Washington D.C
China constitutes somewhat of a strategic headache for India. India has unresolved large border issues with China, China has a worryingly large surplus in bilateral trade and China is traditionally an important arms exporter to Pakistan. At the same time, New Delhi is well aware of the potential opportunities in better and growing economic relations between Asia’s obvious future two behemoths. It is in this light that we should look at the deepening relations between Japan and India as well as the very clear signals that India is seeking good relations to Beijing. The U.S – India relations, burdened by an unusually difficult year in bilateral relations, and Modi’s planned visit to Washington, should be seen in the same triangular perspective.
What we call “The Middle East” is naturally called “West Asia” in India. It has always been a foreign policy priority for India. The region stands for 2/3 of India’s large and strategically important energy imports. The region is also home to six million Indians living and working abroad. Relations to Iran and Afghanistan are traditionally close; note that these two countries were once India’s direct neighbours.
Stability in the Middle East is of enormous importance for India, not least given the size of the Indian diaspora in the region – how do you evacuate six million people? India has also over the years been successful in upholding good relations in several directions in this area at the same time. One may, as an outsider, be critical to one or the other aspect of India’s policies towards this region, but one cannot but admire its capacity to maintain good relations with basically all the competing forces in the region.
As to relations with Europe and the EU, there were positive words in the Governments first declaration of policy. We share so much of pluralism, linguistic plurality and democratic societies. We have so large opportunities to build on in the economic field. The FTA is a case in point; a successful conclusion would be highly beneficial for both sides. At the same time, we need to deepen mutual political understanding that sanctity of boarders, as in Ukraine, is as much in India’s interests as in ours, and we need to deepen the dialogue with India on this score.
To sum up where I started, the 1250 million people India is at the beginning of a period with majority government and determined policies. A diplomat should of course not publically evaluate the Government of a country where she or he is serving, he should try to analyse its policies and try to draw conclusions on how to deepen and broaden friendly relations between his home country and the country where he is serving. I think that even the pundits and the think-tanks will agree that it is too early for a serious attempt to draw conclusions as to the policies of India’s new Government.
India is moving from an agrarian economy to a modern IT-based society and a wish to become a manufacturing hub. On the way, India will have to build a major manufacturing base which is competitive in an increasingly globalized economy and with increasingly internationalized supply chains.
The international economic and political environment is changing rapidly, production capacity will move to the most advantageous country and location. Will India be able to grasp the opportunity? The answer is clearly yes – if infrastructure development will be speeded up, if transports become more efficient, if competitiveness is increased through liberalising reforms, if tax and other legislation is modernised, if the country puts emphasis on education, R&D, health, water and food for a growing population, energy for growth and on environmental sustainability. India is moving in all these areas. The question is not if it will take its full and rightful economic and political place in the community of nations. It is a question only of when.