Mandate for Modi: A Business Agenda
Comment of the Day

May 20 2014

Commentary by David Fuller

Mandate for Modi: A Business Agenda

My thanks to a subscriber for this detailed article from Knowledge@Wharton.  The first half has been more than covered on Fuller Treacy Money but the second half is revealing in terms of what the outgoing Congress party messed up and what India and Indians actually require.  Here is a sample from the conclusion:

Along with the big picture, it is necessary to look at the small picture. The real wealth of a nation comes from entrepreneurship, not mega-investments by government or big business, observers say. According to Bharti Jacob, managing partner at SeedFund, there is urgent need to encourage and enable entrepreneurship in India. “The government should stay out of it,” she says. “But it should create an environment that encourages innovation and new company formation.”

“India is a hostile habitat for entrepreneurship in terms of regulations that make it complicated and painful to start and run a business,” adds Sabharwal. “The biggest manifestation of this is the substantially stunted firm size. (Companies with less than 49 workers account for 84% of manufacturing employment). India has more dwarfs — companies that are small and will stay small — rather than babies — companies that are small but will grow. The reason obviously includes the labor laws, but the inspector raj, the compliance raj and the permission raj, which have remained unchanged since 1991, are also responsible.”

Laurent Demortier, CEO & managing director of Avantha Group-owned company Crompton Greaves, says the country also needs to bolster research and development capabilities. “With the increased global footprint of the Indian manufacturing industry, India should incentivize R&D and aim to make the country a global R&D hub in select sectors. This will encourage product innovation to make a home in India.”

According to Vinayak Prasad, co-founder ofFrog8, a company in the payments space, the new government needs to force regulators to stop taking baby steps toward enabling adoption of electronic payments. “Cash is still king and extremely costly,” he notes. “The requirements of [identity verification] make it very expensive to get customers. Digital [identity verification] is key, and the government or regulator needs to be more aggressive.” Prasad is talking about one end of the problem. The other end — inclusive banking — is probably more important; 41% of the population in India is unbanked. The only way to get them into the fold is to marry technology to banking. Banking spread has been hindered by over-regulation. “The RBI is in anxiety management mode,” says Prasad.

Sabharwal talks about another issue. “India only has 50 cities with more than a million people while China has 400,” he notes. “We have 600,000 villages; 200,000 of them have less than 200 people. Politicians dream of taking jobs to people, but what we need is to take people to jobs. Unlike Chinese New Year, where 300 million people get on a train and go home, we don’t have a mass migration at Diwali, Chaath, Eid or Christmas. We should.”

India “[does] not need a business-friendly regime,” Aron notes. “What we need is an administration that pursues a rational regime of laws that will grow the economic pie as well as redistribute it equitably. In early 2000, the share of manufacturing in FDI inflows was more than 60%; it fell to about 40% in 2005 and to 20% in 2008. The drought of investment in manufacturing and in increasing the productive capacity of business in India is a self-inflicted misery…. It is time that we went from ‘made in spite of India’ to ‘well-made in India.’”

David Fuller's view

A lot of these problems of bureaucracy and overregulation are due to corruption.  The rest is unhelpful socialism. 

Fortunately, Narendra Modi has already shown that he knows more about what is wrong with India’s economy, and importantly, how to address it, than anyone else.  Crucially, he has been given an overwhelming majority by India’s electorate.  People all over India understandably want jobs, economic growth, and rising standards of living. 

This does not require miracles.  Modi will quickly roll back the bureaucracy and cut unnecessary regulation, while accelerating infrastructure development.  He will also inform the world that India is now open for business.

India definitely has some first class corporations and skilled business leaders.  However, much of the country is very backward and underdeveloped.  Consequently, good economic governance, which Modi has certainly shown in Gujarat, will be significantly transformative for India over the next five years, with the potential to double its GDP growth rate from its current low base.

There are also millions of extremely talented and successful Indians living all over the world.  Many are potentially useful business contacts and will take great pride in the development of their native country.   

India is one of the top performing stock markets this year, currently up over 21.5% in US dollar terms for the CNX Nifty and also the S&P BSE Sensex, according to Bloomberg.  Only two other world stock markets have bettered this performance on some of their indices, Qatar and the UAE, the latter is shown only on a daily basis but both are very overextended and losing momentum after persistent gains.  These are also weight of regional money plays in small, thinly traded stock markets of oil and gas producers.  India’s bull market has barely started in my opinion, and could be huge over the next 4 to 5 years.  It will also be volatile from time to time, so I would continue to buy India on pullbacks towards the 200-day MA. 

The only other stock market to rival India’s performance this year to date is Indonesia.  It is promising, as Eoin has pointed out recently, and also a change of governance play.  However, there are still some uncertainties pertaining to Indonesia’s presidential election which takes place in July.  This article from ETF Trends: IndonesiaIndia, is informative.    

See also this article from Business Standard, quoting the comments of a distinguished US Congressman: Modi will usher in India's new era: US Lawmaker..

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