The risk is that Modi fatigue might extend to a broader reassessment of perhaps the greatest capital boom in India’s history. The India macroeconomic story is still impressive. The economy is expected to grow by 6-7 per cent this year. But the case for Mumbai stocks relies more on the belief that “Modinomics” is revolutionising India’s competitive game.
Even before his recent chastening, Modi’s claims to global reform fame were more myth than reality. Under “Modi raj”, as The Economist calls it, India trimmed some bureaucracy, opened some sectors to increased foreign investment and pursued a broadly business-friendly approach. But the reforms most vital to levelling the playing fields – concerning land, labour, taxes and the legal system – remain on the to-do list.
The bet global punters made was that winning a third term in a landslide would catalyse Modi-the-reformer as never before. That’s now moot. A weakened mandate means the BJP has less political capital to enact difficult upgrades, particularly against newly emboldened vested interests. Modi’s biggest economic failing – inadequate job growth – has come back to haunt him.
03:14
Modi’s BJP claims ‘historic’ victory in Indian election despite smaller majority
Modi’s BJP claims ‘historic’ victory in Indian election despite smaller majority
Since the BJP failed to win an outright majority, it must form a coalition government and work with allies. Odds are, those allies will be less enthusiastic about economic disruptions, more predisposed to a populist spending surge and less focused on narrowing India’s budget deficit.
Late last month, S&P Global Ratings raised its outlook for India’s sovereign rating, citing expectations of “deepening economic reforms”. It’s reasonable to think S&P analysts are back at the drawing board.
Complicating Modi’s support among global investors is a sense that China, at long last, is acting to end its property crisis. Plunging real estate values were largely behind the 2021-2024 capital flight that flattened mainland bourses.
Oanda analyst Kelvin Wong spoke for many recently when he noted green shoots in China’s factory purchasing managers’ activity. “This latest set of positive macro data suggests the piecemeal stimulus measures from China’s top policymakers are working to negate the deflationary risk spiral that has been triggered by the significant slowdown inherent in the domestic property market,” he said.
China has lots more to do, of course. And economic realpolitik is warranted. Given how many times Xi’s team has pledged to end the property debacle, and concerns over it echoing Japan’s 1990s bad-loan crisis, this is very much a trust-but-verify moment for “Xiconomics”. Even so, investors have valid reasons to think mainland stocks are now better value than Indian stocks.
The Shanghai Shenzhen CSI 300 Index is trading at a price-to-earnings ratio of about 14, suggesting it is undervalued, against over 23 for the Bombay Stock Exchange’s Sensex index. But what matters more is the split-screen dynamic of Xi’s latitude to marshal Beijing’s resources to revive the economy in his third term and Modi’s legislative limitations.
Again, there are myriad reasons to worry that Xi’s inner circle will overpromise and underperform. But the great China vs India debate might once again be pivoting back China’s way as strongman Modi suddenly has to play nice with opposition lawmakers.
At a minimum, Modi and his alliance partners will clash over his Hindu nationalist policies, distracting New Delhi from economic retooling.
27:28
Why India’s Citizenship Amendment Act (CAA) is so controversial
Why India’s Citizenship Amendment Act (CAA) is so controversial
Since his days as chief minister in Gujarat state, Modi has pursued pro-Hindu legislation and indulged in anti-Muslim rhetoric. His campaign-trail attacks on the opposition’s welfare policies may create issues of trust with his governing partners, even if the BJP is leading things. Should Modi push ahead with what the opposition says are plans to amend India’s secular constitution, political chaos could ensue.
It was the success of Modi’s “Gujarat model” that helped shape his image as a national folk hero. From 2001 to 2014, Modi’s policies produced in Gujarat faster economic growth than that of the country as a whole and made the state known for less bureaucracy, greater innovation, reduced corruption and better infrastructure than many other states. Voters hoped he would supersize that programme and propel India into the Group of Seven club.
Had the BJP won a clear and resounding mandate, investors might have more confidence in Modi’s third term being a charm for raising India’s economic game. This is now in doubt – just as China makes progress in altering its economic narrative while Modi’s gets old.
William Pesek is a Tokyo-based journalist and author of “Japanization: What the World Can Learn from Japan’s Lost Decades”
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