STRATFOR ANALYSIS

India: Reflecting on Modi’s first year in office

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FORECASTS: Domestic opposition will continue to stymie Indian Prime Minister Narendra Modi’s ambitious reform initiatives, likely delaying a large-scale revival of the Indian economy through 2016 and beyond.

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Modi’s busy travel schedule is more a symptom of domestic headaches than it is a sign of an impending rise in for-eign investment.

China and India will continue to pursue a mutually beneficial economic relationship, but India’s entrenched imped-iments to investment will limit the extent of this cooperation.

Analysis
May 26 will mark the one-year anniversary of Indian Prime Minister Narendra Modi’s time in office. The past 12 months have been a tumultuous ride for the charismatic leader of India’s center-right Bharatiya Janata Party since being elected amid a landslide of popular support. For the first time in three decades a single-party majority led the Indian government, while campaign promises of dynamic change under Modi’s leadership generated interest from a global audience. Both international businesses and governments are hoping that the Bharatiya Janata Party can live up to its campaign promises to tap the country’s potential and generate Indian growth. However, after on-ly a year in power Modi’s initial momentum has dissipated, and he is having a hard time living up to pre-election expectations.

Obstacles to reform
In short, Modi’s agenda has been ground to a halt by a series of domestic crises. Initially, Modi relied on his party’s supermajority in the lower house of parliament, the Lok Sabha, to pass landmark legislation on reforming India’s antiquated land acquisition systems and convoluted corporate tax structures. However, that legislation has hit a wall in the upper house, the Rajya Sabha, which is determined by the state legislatures and is still controlled by the opposition Indian National Congress party. Considering that the Bharatiya Janata Party has lost the momentum it had in the April 2014 general elections — the party lost in Delhi local elections and has an uncertain future in Bihar’s November 2015 elections — the party’s major initiatives will likely meet strong opposition in the upper house, both in the near term and beyond 2016. In addition, Modi must also overcome divisions within his own party and among traditional allies.

The parliament that was voted in with Modi represents a broad swath of interests, including a strong Hindutva, or Hindu nationalist, trend that has failed to coalesce behind Modi’s more business and economic-oriented agenda. Although the Hindutva support base overlaps with the Bharatiya Janata Party’s significantly, it is also a movement steeped in Hindu nationalism. As a result of the movement’s rise, Modi’s first year in office has seen a spate of scandals involving pro-Hindu politicians running afoul of India’s substantial minority religious communities as well as a largely secular middle class. This was seen in February’s local elections in Delhi, where the anti-incumbency Aam Aadmi Party routed both the Bharatiya Janata Party and Congress party, reflecting voters’ frustrations with a lack of meaningful economic change and with some Cabinet members’ focus on social and religious issues.

Modi eyes opportunities abroad
This parliamentary infighting has stalled and derailed a series of Modi’s plans to revitalize India’s sagging infrastruc-ture and slowing economic growth. Until recently, the national economy has been buoyed by lower energy prices and expectations of a “Modi miracle.” These sentiments have cooled in recent weeks (as have some of the suc-cesses in the Indian stock markets that followed Modi’s win). In an effort to maintain momentum and score des-perately needed policy victories, the Modi administration has set its sights on securing diplomatic and economic successes abroad, where Modi can act unilaterally and not be impeded by his parliamentary opponents.

In pursuit of this strategy, Modi has traveled extensively during his first year in office and worked to strengthen relationships with traditional partners such as Japan and Australia. Modi has also made visits to the United States and Canada — states with wealthy Indian expatriate communities — but his most ambitious engagement has been with Asia. Transitioning from years of an ineffectual “Look East” policy, which focused on counterbalancing China’s rise by pursuing ties in Southeast Asia, Modi has not hesitated to engage Asia’s largest economy directly. Modi be-gan a three-day visit to China on May 13, visiting with Chinese President Xi Jinping in the latter’s hometown of Xian, outside the traditional venue of Beijing. Through this foreign policy approach, Modi is hoping that forging better personal relationships with foreign leaders will expedite the process of garnering investment and facilitating do-mestic development — a reflection of Indian business culture and a strategy Modi has vowed to adopt as part of anti-corruption campaigns.

Although Modi has attempted several charm offensives throughout the year, his domestic policy quagmire has kept many potential diplomatic and economic breakthroughs from developing further. Bilateral visits with Japa-nese, American and Australian heads of state have generated billions of dollars (more than $33 billion from Japan alone) in investment pledges that have yet to be actualized. India’s parliamentary leaders have made their expec-tations of Modi quite clear: There will be no massive rush of investments without prerequisite reforms, running the gamut from reforming India’s lax intellectual property laws to easing investment restrictions.

In this current political context, Chinese investment — despite the history of geopolitical competition between the two Asian giants — has become more attractive. New Delhi is actively seeking a partner who can bring capital and expertise to India’s developmental goals and who is less likely to be put off by a difficult regulatory and investment climate than many potential Western investors. Although long-standing border issues and military concerns were raised leading up Modi’s visit to China, both he and Xi dismissed these issues as “irritants” during their meeting in Xian, saying that long-standing disputes should not get in the way of mutually beneficial deals. India’s potential for China, primarily as a market for exported goods and China’s infrastructure and construction firms, largely trump concerns over an assertive or aggressive New Delhi.

The Indian parliament’s inability to enact Western-leaning legislation, in addition to New Delhi’s cautious approach to entangling itself with China’s rivals, has changed Beijing’s view of India since the 1962 border war. Moreover, China’s strengthened position over Tibet has limited concerns about India’s backing of the Dalai Lama, just as In-dia’s enhanced military capabilities have helped to lessen political vitriol over China’s economic and military links with arch-rival Pakistan. Although tensions undoubtedly remain between the two countries, both are willing to cautiously engage one another even as they continue to strengthen their positions along their shared Himalayan border and in Southeast Asia.

Unfortunately, India’s partnership with China cannot offset the economic stagnation created by parliamentary in-fighting. Without domestic political unity, Modi cannot expedite foreign investment plans — or even guarantee the transfer of land — and, as a result, many road and railway projects will fail to materialize in coming years. Modi must first consolidate control over his party before he works to dismantle the varied and vigorous opposition from local parties. The strong international response has demonstrated a shared confidence in India’s future. However, Modi must first unite his domestic base to actualize that potential and make it a reality.

© 2015, STRATFOR GLOBAL INTELLIGENCE

Publishing by The Manila Times of this analysis is with the express permission of STRATFOR.

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