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World’s Top Country Risk Analyst Is Bullish On India
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Ian Bremer, President of Eurasia Group and global research professor at New York University, spoke to BusinessWorld in an exclusive interview to Ninad D Sheth on India’s prospects as an international investment destination and the impact of the stable verdict under PM Narendra Modi. Eurasia Group is the world’s leading global political risk research and consulting firm. It provides information and insight on how political developments move markets, with a view to help their clients anticipate and respond to instability and opportunities.
With a historic mandate and a comfortable majority for the new government, is India looking more attractive to foreign investors?
India is certainly looking more attractive to foreign investors but it’ll be some time before its new shine actually plays out, especially in terms of FDI (foreign direct investment). India’s underperformance has been severe and long-lasting. The fact remains that India lags behind other emerging markets because of a variety of factors, including its poor infrastructure, crippling corruption, and a completely bogged down legal system. All of these inefficiencies make it harder to invest in India, and harder to turn the economic climate around in the near term. But Modi’s dynamic leadership does represent a sea change; it will just require a degree of patience that may elude some foreign investors. The long-term opportunity is immense here.
Specifically what does "Brand Modi" mean to investors?
“Brand Modi” connotes a focus on what makes business actually work. As the chief minister of Gujarat, Modi demonstrated an investment friendly, can-do attitude, while avoiding or shedding crippling red tape and bureaucracy. The Gujarat development “model” has become well known in India over the past decade—consistent China-like levels of growth in his home state will do that. Investors are hoping Modi can implement this model on a national scale and make a real difference. There is also an international component to the Modi mandate--we’ll also see India becoming more visible on the global stage. An activist “road show” mentality led directly by Modi will, without question, bring more CEOs to the country and encourage major multinational corporations to take closer looks at either market entry or expansion.
How important is containing government spending for putting growth back on track in India?
While containing government spending could have some benefits, it’s not a pure positive — and it’s by no means India’s highest priority. High levels of government spending are sustainable because the government can easily fund the budget deficit domestically -- the downside is inefficient capital allocation and a crowding out of the private sector. Loose fiscal policy also contributes to inflation. So containing government spending would, on the one hand, improve some of India’s structural problems. But on the other hand, sharp cuts to government spending would have an immediate negative impact on growth. The top priority for putting growth back on track will be increasing investment spending. It’s also important to ensure that the new government is stocked with responsive, transparent and competent officials at all levels.
How relevant is Modi’s three-term Gujarat experience and how much of it can be translated on a pan-India scale in your opinion?
Modi’s Gujarat experience is very relevant. In India, political power is increasingly decentralised and, knowing how state-level politics works and succeeding in an executive, managerial role at that level provides tremendous experience. Of course, that experience can’t uniformly be translated from the state to centre, in part because decision-making for 1.2 billion people is more complicated than for Gujarat’s population of 60 million. After all, despite the BJP’s historic election performance and outright majority in the Lok Sabha, the opposition Congress party and its allies still hold a plurality in the Rajya Sabha. This divided government won’t prove conducive to legislative economic fixes. But Modi’s government can still move the needle without legislative action in areas like liberalizing foreign direct investment and spurring investment. And there are other key states that can adopt more initiatives and policy implementation that resemble the Gujarat model.
In terms of the risk profile what has changed under the new India, especially given the fact that the CAD is at a 4-year-low and the total market capitalisation of Indian companies is up 25 per cent this year in dollar terms to more than $1.43 trillion with the rupee gaining significantly against the US dollar.
India’s risk profile has improved considerably because of the sharply narrower CAD, recent efforts to contain the fiscal deficit, and slowing inflation. The election results have also certainly helped perceptions of India’s risk.
India’s project execution capabilities are notoriously poor. What can be done to improve on that score?
Public-private partnerships should be refined and stepped up dramatically in areas of critical infrastructure. But more importantly, India needs clear and transparent metrics and incentive systems for performance; holding the government – including the prime minister, individual ministers, and bureaucrats -- accountable for results is paramount.
In India complacency is a way of life do you perceive that as a cultural problem that could hinder a good opportunity?
That’s not at all the case. I see tremendous changes afoot in attitudes towards work, gender and caste, as well as social and political life. This landslide election was largely the product of India’s youth and dynamism. An estimated 150 million Indians between the ages of 18 and 23 voted for the first time in this general election. More than half the population is under 25. There's a new sensibility in the country. We can expect notions of power and responsibility to change quickly as this new generation becomes enfranchised; it should make us more optimistic about India over time. This is where we can be very optimistic.