“Patience is power.
Patience is not an absence of action; rather it is "timing"
it waits on the right time to act, for the right principles and
in the right way.” - Fulton J Sheen
Since the Modi government came in, expectations
while remaining high have continued to be belied. But it seems more a case of
political campaign during elections seamlessly coalescing post government
formation to create these massive expectation (magic in 3 months!!) and the
media with lack of sensational news provided by the previous UPA regime (Anna
Hazare, CWG, 2G, Coalgate, Pawan Bansal, Ashwini Kumar...the list is endless)
helping in the process.
Modi seems keen on laying the ground prior to
rolling out the key reforms:
- Getting the right advisory infrastructure and IAS staff in place i.e. replacing the Planning Commission and getting an expert team to recommend course of action;
- India's defence and international relations in place which creates domestic room as well;
- Winning the upcoming assembly elections in Maharashtra, J&K, Haryana and Jharkhand;
- Revamping governance at PSUs to be able to deliver on the change plan when implemented.
When this basic ground work
is in place pretty much in time with the 2015 budget, one should expect the
real work to begin - the move to a more open economy and realignment of laws
and governance to a post-modern economy of the 21st century. The man from
Gujarat with its tradition of commerce and globalization from millennia should
begin to change India. Gujaratis have used their ports for thousands of years
to do commerce with Africa, Middle East and beyond with large numbers settling
in these countries. This historical openness of mindset that Modi hopefully
brings comes at a time when the interiors of India has been pried open by media
and telecom revolution of the last 2 decades.
While this is at play the change in global
dynamics need to be navigated. The euro zone is battling the twins of recession
and Russian aggression in Ukraine. With no appetite to resist Russia, the
Europeans are providing limited resistance to Russian designs. The Middle East
continues to convulse with ISIS redrawing borders pressuring the Turks,
Iranians and Kurds and leaving the Sunni Arabs unsure to let this go on to what
extent before it becomes a real threat to them. Syria and Iraq, which were
agglomeration of different religions and cultures (Allawites, Kurds, Shias,
Sunnis, Christians) with allegiance to respective tribes kept together by
dictators in so called countries formed by the British and the French post WW1,
are now re-aligning.
The Americans with their energy security (shale
gas) and tired military have developed (and in perfecting phase) the doctrine
of talking more and doing less and correctly so. As much as the Chinese and
Russians would like to see them involved in the Middle East, the Americans are
not likely to oblige unless a 'coalition of the willing' comes in place from
the threatened Middle Eastern countries. If the Americans can get the Turks and
Iranians to coordinate, it would not only check ISIS but also initiate putting
in place a balance of power which devolved when Saddam Husain's regime of
crushed. The Arabs will resist but it's an affair that has to be managed and
will also force them onto the table for the fear of losing influence.
The Chinese economy continues to suffer the
downturn in property prices and construction activity, threatening growth and
their banking system. Rebalancing from very high investment to a consumption driven
economy will likely result in sub-5% growth. Any attempt to push growth with
additional credit will only make future slowdown deeper. With Europe and China
below trend, global growth consequently should be below OECD and IMF forecasts
with deflationary pressures continuing.
The US economic recovery will create divergent
interest rates scenario with ECB likely to embark on further loosening. The
Chinese are also likely to push up interest rates as beginning of the end of
financial repression. With interest rates differentials widening in favour of
US and low cost / safe energy supplies playing their role it should create a
strong push towards US investments and a strong dollar.
The strong dollar (already heading to the north
end of the 3 year band) and lower aggregate global growth will put massive
pressure on emerging market economies through lower capital flows and weak
export markets (though the depreciation against Chinese currency of ~15% in the
last year helps). India needs to counter this trend through a pre-emptive
build-up of foreign reserves and re-start the reform process (education,
labour, electronic manufacturing, coastal infrastructure, defence industry and
many others) to accelerate growth and attracting capital. One of the major
tasks will be correcting the bad asset malaise in the banking system which
makes it unable to support credit creation. Reducing government holdings in PSU
banks to help raise capital and developing bond market to reduce pressure on
banks for long term capital are two critical steps.
Since antiquity political strategy has been a function of military
prowess and economic strength and these two variables have in turn been a
function of the other. As Modi buys time to build the former, he needs to
leverage the latter in a world desperate for demand and growth.
