Political Timing

“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.