Markets are embracing India’s Modi for what he would not do

• By Andy Mukherjee / Bloomberg Opinion

In late 2013, when Goldman Sachs Group turned optimistic on India after a sharp slowdown in growth, the bank titled its report “Modi-fying Our View.” The reference was to Narendra Modi, by then the market’s favorite to become prime minister. As if to prove that investors were right to back him as an agent of change, Modi’s Bharatiya Janata Party (BJP) peppered its 2014 poll manifesto with 22 references to “reform.”

Ten years later, little remains of that zeal. The BJP’s manifesto still promises to “reform, perform, transform,” but the few specifics it offers on the economy are modest — such as automatic approvals for standard housing designs. Gone are the days when Modi pledged to change everything from inefficient markets in labor and farm produce to entire sectors like banking.

Nevertheless, the appetite for a third term for the Indian leader is high in the global financial industry.

“Modi has done an unbelievable job in India,” JPMorgan Chase & Co chief executive officer Jamie Dimon said on Tuesday last week at the Economic Club of New York.

Goldman and JPMorgan are predicting a deluge of overseas capital after general elections are over on June 4. (The BJP is favorite to win the contest.)

Still, this is the start of a new compact between markets and Modi, one in which investors are betting on what he would not do, rather than what he would.

The first belief is that while Modi 3.0 might take a more authoritarian turn, the Indian leader would not follow the lead of Chinese President Xi Jinping (習近平). The stock market would still have to read the tea leaves to figure out which business group is likely to be blessed with juicy contracts and favorable policy, but there is little risk of New Delhi turning the screws on the private sector. In other words, no nasty surprises like Beijing’s crackdown on its technology industry.

That should be good enough for investors. After all, China has not made them money in three years. India — and Modi — have.

The second understanding is that the Indian prime minister would not be like Turkish President Recep Tayyip Erdogan, who has been forced to give up his push for ultra-low interest rates, but not before his unorthodox policies sparked an inflation crisis. Even during the COVID-19 pandemic, New Delhi stuck to a fairly conservative fiscal stance whose only pro-poor flourish was free food rations.

It did that in the face of an anemic job market that is still plagued by low-quality work. Young graduates are nine times more likely to be unemployed than those who cannot read or write.

Yet, Modi is not inclined to take the opposition parties’ bait on expanding the welfare state beyond free food. He would rather face the country’s disillusioned youth than annoy bond vigilantes. Speaking in an election rally this week, Modi said that the Indian National Congress party would “calculate the gold with mothers and sisters,” and redistribute it among Muslims and “infiltrators.”

It does not matter that the opposition group has said nothing of that sort. What markets heard is this: The Indian prime minister is so successful at polarizing the majority Hindu vote by playing on its fears, he does not have to pursue profligate — or even populist — fiscal policies to remain popular in the country’s poor, overpopulated north.

It is reassuring to fixed-income investors who would be raising their paltry exposure to India’s US$1.2 trillion public debt as it enters JPMorgan’s global indices from next month. The emergence of a new set of buyers would allow local banks, currently the largest holders of government securities, to offload some of their exposure and put the liquidity at work where there is greater risk and higher returns.

That brings us to what Modi would actually do if he does emerge victorious with a sizable majority: a lot of investment, with the help of discretionary incentives and protective trade barriers.

There is no dearth of balance sheets to execute the prime minister’s vision of Indian growth with Chinese characteristics. Gautam Adani, a tycoon close to Modi, is ready to do everything: ports, airports, electricity, fuel, roads, slum redevelopment, metals, drones, ammunition and missiles.

He is not alone. The Tata Group wants to be big in everything from aviation to semiconductors, while Mukesh Ambani’s Reliance Industries Ltd wants to own 1.4 billion Indians’ digital lives and retail spending. JSW Steel Ltd chairman and managing director Sajjan Jindal sees opportunity in electric vehicles, even as the government lays out the red carpet for Tesla Inc. They are the Big Four in the national team to watch.

There is a good reason why the agenda is no longer about reform. After all, Modi tried in his first term to make it easier for investment projects to acquire land. That effort failed. Then the prime minister attempted to rewire the agricultural markets. He was beaten again, not by political opposition, but by grain farmers in the north. The bankruptcy reforms of 2016 have been hijacked by vested interests.

The BJP government passed new labor laws in 2020, codifying 29 separate legislations into four. Four years later, they are still being promised as an impending reform when they have little to offer, especially on social security. Healthcare, too, remains underfunded, despite an estimated death toll of nearly 5 million during COVID-19.

In a country where 90 percent of the population does not even earn the average income of US$2,800 a year, people cannot afford steep out-of-pocket medical expenses. They would rather the government collected taxes and provided universal healthcare free of cost.

India is struggling to afford even the soap and detergent that Unilever PLC has been selling them since 1888. Mass consumption is stressed, especially in rural areas. Shrinkflation is back. Purchasing power is limited to a tiny affluent class, but markets have nothing to worry because despite extreme inequality, the society is broadly peaceful, and the economy is getting “Modi-fied.”

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.