There are three international markets that should concern Canadian executives and policy makers most: the United States, China and India. The reasons the first two are on the list are obvious. And why put India ahead of Europe? It’s the one place on the planet that may replicate what Beijing did with its economy over the 1990s and 2000’s. That’s why India was the only other country besides China that was mentioned by name in Prime Minister Justin Trudeau’s mandate letter to Trade Minister Chrystia Freeland.
India is a problematic choice as saviour. At its core, the country shares the same democratic values as countries such as Canada. That makes it familiar. But India is nearly impossible to govern. States are the size of medium-sized countries and they aren’t always keen to cooperate with the federal government. Voters are tribal, grouping themselves according to language, caste and religion, creating “vote banks” that a panoply of political entities are ever-ready to exploit. Little of substance happened in parliament last year because Prime Minister Narendra Modi lacks support in the upper house. The main opposition party refuses to work with him, for spurious reasons. Outsiders who talked about Modi as an Indian version of Margaret Thatcher or Ronald Reagan have learned that even an absolute majority in the lower house of parliament isn’t enough to bring about fundamental change in India. The place isn’t made for it.
Modi, through his unsmiling finance minister, Arun Jaitley, presented his third budget on Feb. 29. As in Canada and other former British colonies, it was a big event. There also was the usual amount of anticipation that India might finally unveil some “big bang” reforms. “It’s now or never; this might be his last opportunity to introduce bold reforms and sow the seeds of future growth,” wrote Rajrishi Singhal, a senior fellow at Gateway House, a think tank. Singhal reckoned local elections in 2017 would throw up too many reasons to avoid changes that would inevitably anger one or more of those vote banks. And by the following year, the leaders of Modi’s Bharatiya Janata Party will have full control of the policy agenda as they do whatever they think is necessary to get their man re-elected prime minister in 2019. Singhal also made the case of a bit of fiscal stimulus. With the economy growing at an annual rate in excess of 7%, India has surpassed China as the world’s fastest-growing big economy. Yet not so long ago, India’s government was talking openly about the possibility of double-digit growth. Singhal and others argued that Modi should use the treasury to speed things up.
Jaitley mostly ignored such advice. He opted to stick with his plan of narrowing the budget deficit to 3.5% of gross domestic product, recognizing that India’s reputation with international bond traders isn’t solid enough to assume that any deviation wouldn’t be punished by higher interest rates. The focus of the budget was on farmers, as Jaitley announced a series of measures that he said would double farm incomes within five years. Otherwise, the budget contained a lot of small beer, showing again that just because Modi fills stadiums abroad, doesn’t mean he will bring the thunder at home. He is a cautious politician who intends to make his mark over at least two terms, not one.
India’s budget was met with the usual dollops of disappointment that critics have in ready supply when it comes to India. Jaitley’s “barnyard budget” was little more than an attempt to buy the farm vote, one such critic sniffed from behind the Globe and Mail’s paywall. Traders too were negative, at first. India’s main stock index dropped on Budget Day. Then investors had a rethink. The Bombay Stock Exchange’s Sensex surged more than 6% over the remainder of the week, posting its biggest weekly gain since the end of 2011. Jaitley’s decision to stand firm on his fiscal target was significant. India’s status as the fastest-growing big economy did nothing to keep it from getting caught in the exodus of international capital out of emerging markets last year. Jaitley need to reinforce the relatively impressive growth numbers with a sign of stability. The deficit pledge did that.
There also is merit in Modi’s decision to turn his attention to farmers. About 60% of the country’s population makes a living from agriculture. To be sure, this number is too high. India’s development is impeded by the number of people who have no better option but to try to scratch out livings on small parcels of land. But this isn’t the moment to try to force them to take jobs in the cities. India has suffered consecutive droughts. Rural demand has shriveled, which is one of the reasons Modi and Jaitley have stopped talking about growth rates of 10%. There also has been a spike in the number of farmer suicides and other indicators of human misery. No politician could ignore these circumstances. “A rural and agriculture focus is both politically and ethically correct,” wrote Mihir Sharma, a columnist at the Business Standard newspaper and the author of Restart: The Last Chance for the Indian Economy. “If this budget was not packaged and sold as a budget for the poor and for farmers, Narendra Modi would have lost the next election.”
Sharma praised the budget, notable because he ranks among the government’s most lucid and unforgiving critics. It may be time to apply a different standard to Modi’s management of the Indian economy. Sharma liked Jaitley’s financial plan because he saw evidence the government was serious about overhauling India’s financial industry, which is dominated by state-owned banks that are weighed down by bad debt. No, Modi isn’t going to try to solve that problem tomorrow. But he stands a better chance of doing it than any leader India has had in a long time. Therefore, any misstep that weakens him politically also would be a setback for India’s economy. Baby steps beat backtracking.
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