Three terms. There was no shortage of bollygarchs and financiers insisting that India’s Narendra Modi would win re-election to the prime minister’s office twice more after he swept to power in 2014. Now, in the run up to the next general election, the country’s C-suites are more circumspect even about a second run. Executives are grumbling about Modi and wondering if he can hold on. The loss of boardroom confidence is a sign that trust between New Delhi and big business is at a low.
Yet ordinary voters are far less hostile. The prime minister’s Bharatiya Janata Party has won state after state in local polls, turning the electoral map into a sea of saffron, the colour identified with his right-wing Hindu nationalist party. The BJP and its allies hold power in 22 out of 29 states. The latest test was Karnataka’s election on Saturday, with counting due to take place on Tuesday. Modi is on his way to gaining control of the upper house of parliament, opening up the possibility of serious reforms to land and labour laws.
The misgivings of executives also don’t square with the general strength of the economy. India’s famously problematic twin deficits – the fiscal shortfall and the current account gap – are under control. Inflation is in check with consumer prices rising 4.3 percent in the year to March, only slightly ahead of the central bank’s target. The currency is stable, foreign direct investment is at record levels, and GDP growth at 7.2 percent year-on-year in the December quarter is faster than in any other large nation. Large inflows of capital from global sovereign wealth funds and pension funds suggest faith in India’s long-term stability.
It amounts to a sharp contrast. Modi, on the face of it, seems better placed to win elections than last time around, but business confidence has gone the other way.
So why are Indian executives so despondent? One banker muses about the possibility of an impending financial crisis. A lawyer complains that the government has failed to draw a line under old cases of “tax terrorism”, in which New Delhi has chased companies like Vodafone and Cairn Energy for dues using a retroactive law. A chief executive moans that banks are too afraid to lend to borrowers rated anything less than AAA. In the business realm, India has swapped its twin deficits for a trust deficit.
Maybe that’s partly because Modi has shaken up how Indians do business. Executives no longer have a direct road to North Block, home to important ministries, and cannot so easily buy the outcomes they desire from policymakers in New Delhi. Some corporate grandees, like India’s Ruia brothers, have lost their crown-jewel businesses, forced into bankruptcy proceedings by a government desperate to clean up the $150 billion of dodgy corporate debts on bank balance sheets.
Meanwhile, the focus on clean government and distressed loans has ratcheted up scrutiny of the poorly-paid heads of public-sector institutions that account for more than two-thirds of lending. They are now wary of making decisions for fear of retribution. “No-one went to jail for doing nothing” is a phrase often heard in Mumbai, the country’s financial capital.
Private-sector bank executives are under pressure too. Last month M.K. Sharma, chairman of the $30 billion ICICI Bank, wondered aloud whether allegations of crony capitalism levelled against the bank’s chief executive were being re-examined by regulators to distract from scandals that have plagued public-sector banks, including the revelation of a $2 billion fraud linked to billionaire diamond jeweller Nirav Modi (no relation to the premier).
New Delhi can’t even keep the Reserve Bank of India in its corner. Politicians and the central bank are butting heads over how to resolve the bad-debt problem and how to build safeguards to prevent future abuses. Arun Jaitley, Modi’s finance minister, has blamed the RBI for lapses in oversight. The bank wants greater powers to hold public-sector banks to account.
These soured relationships are more than an intellectual problem for Modi. After years of abuse by tycoons, India Inc’s animal spirits needed taming – but not killing. The absence of boardroom confidence is manifesting itself as a prolonged lack of private investment. Total private-capital formation grew at or well below the rate of nominal GDP expansion during Modi’s tenure until March 2017, data from Ambit Capital shows.
More recent indicators from the RBI suggest private investment is picking up. But there are headwinds from rising oil prices, a banking system still clogged up with bad debt, and financiers’ unwillingness to make any but the safest loans. Meanwhile, the economy is chugging along on the spending of consumers and the government.
The prime minister does not need the vote of big business to win elections, though campaigning in India is an expensive affair. The Centre for Media Studies in New Delhi estimated spending in the 2014 poll at over $5 billion, second only at the time to the cost of an election in the United States. On the contrary, Modi’s image as a crusader against corruption works in his favour with many people.
But in a country where as many as 15 million people join the workforce each year, Modi needs big business to create jobs in the formal economy, allowing wealth to trickle down into the large informal economy. The risk for the premier if he can’t get the bollygarchs investing again is that these opportunities fall short of the potential. That in turn could leave the mass of voters – and not just the tycoons – frustrated.