Narendra Modi - The Good, The Bad, & The Ugly

Given the surge in India's stock market, echoing the reflexive pro-business exuberance of last year's Japanese stock market, the similarities between India's newly-elected PM Narendra Modi and Japan's Shinzo Abe are coming thick and fast... some good (pro-business), some bad (potential dislike of the US) and some potentially ugly (strong nationalist tendencies).

Via Brahma Chellaney via The Diplomat,

After a prolonged period of political drift and paralysis, India’s new government will be led by a man known for his decisiveness. Just as Japanese Prime Minister Shinzo Abe’s return to power in late 2012, after six years of political instability, reflected Japan’s determination to reinvent itself as a more competitive and confident country, Narendra Modi’s election victory reflects Indians’ desire for a dynamic, assertive leader to help revitalize their country’s economy and security.

Like Abe, Modi is expected to focus on reviving India’s economic fortunes while simultaneously bolstering its defenses and strengthening its strategic partnerships with likeminded states, thereby promoting regional stability and blocking the rise of a Sino-centric Asia. The charismatic Modi – a darling of business leaders at home and abroad – has promised to restore rapid economic growth, saying there should be “no red tape, only red carpet” for investors.

The 63-year-old Modi mirrors Abe’s soft nationalism, market-oriented economics, and new Asianism, seeking close ties with Asian democracies to create a web of interlocking strategic partnerships.

In a country where the gap between the average age of political leaders and citizens is one of the world’s widest, Modi will be the first prime minister born after India gained independence in 1947. This constitutes another parallel with Abe, who is Japan’s first prime minister born after World War II.

There is, however, an important difference in terms of the two leaders’ upbringing: While Modi rose from humble beginnings to lead the world’s largest democracy, Abe – the grandson and grandnephew of two former Japanese prime ministers and the son of a former foreign minister – boasts a distinguished political lineage. In fact, Modi rode to victory by crushing the dynastic aspirations of Rahul Gandhi, whose failure to articulate clear views or demonstrate leadership ran counter to the Indian electorate’s yearning for an era of decisive government.

Modi, like Abe, faces major foreign-policy challenges. India is home to more than one-sixth of the world’s population, yet it punches far below its weight. A 2013 essay in the journal Foreign Affairs, titled “India’s Feeble Foreign Policy,” focused on how the country is resisting its own rise, as if the political miasma in New Delhi had turned the country into its own worst enemy.

Many Indians want Modi to give a new direction to foreign relations at a time when the gap between India and China in terms of international stature has grown significantly.India’s influence in its own backyard – including Nepal, Sri Lanka, and the Maldives – has shrunk. Indeed, Bhutan remains India’s sole pocket of strategic clout in South Asia.

India also confronts the strengthening nexus between its two nuclear-armed regional adversaries, China and Pakistan, both of which have staked claims to substantial swaths of Indian territory and continue to collaborate on weapons of mass destruction. In dealing with these countries, Modi will face the same dilemma that has haunted previous Indian governments: the Chinese and Pakistani foreign ministries are weak actors. The Communist Party and the military shape Chinese foreign policy, while Pakistan relies on its army and intelligence services, which still use terror groups as proxies. The Modi government is unlikely to let another Mumbai-style terrorist attack staged from Pakistan go unpunished, employing at least non-military retaliatory options.

Restoring momentum to the relationship with the United States – damaged recently by grating diplomatic tensions and trade disputes – is another pressing challenge. But Modi’s commitment to pro-market economic policies and defense modernization is likely to yield new opportunities for US businesses and lift the bilateral relationship to a new level of engagement.

America’s strategic interests will be advanced by likely new defense cooperation and trade that boosts U.S. arms sales and creates avenues for joint military coordination.The U.S. already conducts more military exercises with India than with any other country.

Modi is the sort of leader who can help put U.S.-India ties back on track and boost cooperation. Yet there is a risk that his relations with the U.S., at least initially, could be more businesslike than warm, owing to an American slight that is hard for him to forget. In 2005, the US government revoked his visa over unproven allegations that he connived in Hindu-Muslim riots in 2002, when he was Chief Minister of Gujarat. Even after India’s Supreme Court found no evidence to link Modi to the violence, the US continued to ostracize him, reaching out to him only on the eve of the recent election.

With the US having expressed no regret for its revocation of his visa, Modi is unlikely to go out of his way to befriend the U.S. by seeking a White House visit. Instead, he is expected to wait for US officials to come calling.

By contrast, Modi is likely to remember states, such as Japan and Israel, that courted him even as the U.S .targeted him. Modi’s 2007 and 2012 visits to Japan opened new avenues for Japanese investment in business-friendly Gujarat.

Moreover, Modi has forged a special relationship with Japan and built personal rapport with Abe. When Abe returned to power, Modi congratulated him with a telephone call.

Modi’s victory is likely to turn Indo-Japanese ties – Asia’s fastest-developing bilateral relationship – into the main driver of India’s “Look East” strategy, which, with America’s blessing, seeks to strengthen economic and strategic cooperation with US allies and partners in East and Southeast Asia. Abe, who has sought to build security options for Japan beyond the current US-centric framework, has argued that his country’s ties with India hold “the greatest potential of any bilateral relationship anywhere in the world.”

A deeper Japan-India entente under Abe and Modi could potentially reshape the Asian strategic landscape. It is no surprise that Abe rooted for a Modi victory.

But it's not all silver linings... (as The Diplomat's Ankit Panda notes)

The BJP’s massive margin of victory might yield a new type of Indian politics, effectively reducing parliamentary barriers to passing new legislation. With 274 seats, the new prime minister and his party will be able to maneuver whatever measures they see fit through parliament without the hassle of having to deal with often-fickle coalition partners or a recalcitrant opposition. It remains to be seen how the BJP will manage its coalition partners within the NDA. The smaller parties within the NDA, including the Shiv Sena and the Telugu Desam Party, might find their influence wane within the coalition given the BJP’s majority. Additionally, the outcome in the next Rajya Sabha (the upper house of India’s bicameral legislature) elections will likely moderate the BJP’s ability to wield power unchecked — the party is expected to be the minority in the Rajya Sabha.

Even before the NDA had conclusively reached a majority in parliament, investors took the took India’s SENSEX Index to an all-time high, bringing the Indian Rupee to a 10-month high against the U.S. dollar as well. Modi and the BJP are widely perceived to be able to succeed economically where the Indian National Congress failed. Although the BJP will not immediately reverse several of the Congress’ populist schemes that have driven the Indian government into fiscal unease, it is expected to address broader economic issues such as inflation and development. Part of Narendra Modi’s popular appeal is also rooted in his image as a politician free of the taint of corruption. During the UPA’s 10 years in power, several high-profile scams exposed corruption at the highest levels of Indian government, jading voters and driving them to the BJP.

Among Modi’s critics, concerns will persist about the future of India’s secularism and the fate of India’s Muslim minority. Modi’s record as the chief minister of Gujarat has come under incessant scrutiny by observers both in India and abroad. Some allege that his complicity in the deadly 2002 Godhra riots that resulted in the deaths of hundreds of Muslims render him unfit to lead a country as pluralistic as India. Despite widespread concern, both in India and abroad, it appears that Indian voters have chosen to elect Modi on the merits of his economic vision rather than whatever his views towards India’s Muslims might be. The BJP as a whole is a Hindu nationalist party, influenced heavily by the often-militant Hindu organization, the Rashtriya Swayamsevak Sangh (RSS).

Overall, these elections demonstrate that Indian democracy is functional where it counts: holding a government accountable for poor political, economic, and social outcomes. It remains to be seen if the BJP will deliver what India’s voters want, but for now, the party seems to have won the broadest mandate of any single party in Indian politics in decades.

And, from Morgan Stanley,

Reforms Are Critical...

The two key variables that will be critical in reviving India’s growth trend are: (a) improvement in the external environment and (b) a pickup in the pace of structural reforms. Our global economics team expects that global growth will improve further to 3.7% in 2015, moving closer to the last 30 years’ average, giving us the confidence that the external environment will be supportive of India’s growth recovery.

Policy reforms at home will be even more critical. Over the past five years, the government’s policy was focused more on redistribution and less on boosting productive income growth. Moreover, bureaucratic hurdles and corruption-related investigations have exacerbated the challenges of weak demand and low corporate confidence. This has held back the much needed capex cycle and has been a drag on economic growth.

And Imperative

Overhauling bureaucratic processes and enacting reforms to lift sustainable growth is imperative. The macro stability risks of higher inflation, a wide current account deficit and asset quality issues in the banking system associated with such a policy approach has forced a recognition among policy makers of the need to pay greater attention to reviving the productive dynamic.

Higher economic growth rates are needed to generate the productive employment opportunities for India’s large and growing working age population. Moreover, India’s literate and well-connected middle class is now reaching critical mass.

It seems the visa issues have been cleaned up (having sacrificed the ambassador):

President Barack Obama tonight congratulated Narendra Modi for his electoral victory during a telephone call and invited him to visit the US at a mutually agreeable time to further strengthen the bilateral ties.

"The President invited Narendra Modi to visit Washington at a mutually agreeable time to further strengthen our bilateral relationship," the White House said following the maiden telephonic conversation between the two leaders.

The phone call was stated to be brief.

Modi, during his US visit would be eligible for an A-1 visa, State Department Spokesperson Jen Psaki said.

"The Prime Minister of India will be welcomed to the United States. As Head of Government, Modi would be eligible for an A-1 visa," she said.

We assume the US needs all the friends it can right now.