Minutes after tycoon Ratan Tata abandoned a two-year quest to build the world’s cheapest car in West Bengal over farmer protests, he got a text message from the frontrunner to be India’s next leader: “Welcome to Gujarat.”
Within 72 hours, Narendra Modi arranged land, power, tax exemptions, a four-lane highway and a 95.7 billion-rupee ($1.2 billion) loan for the Nano to be built in the state, according to a former chief minister and a retired bureaucrat in Gujarat who asked not to be named because the details aren’t public. Six years later, the plant employs some 10,000 people, helping per capita income in Gujarat triple since Modi took office in 2001.
Modi’s ability to expedite investments like Tata’s has made his Bharatiya Janata Party the favorite to win elections ending May 16 and underpinned a rally that has pushed Indian stocks to new highs. If polls are right and he becomes prime minister, his plans to spur investment across India will depend largely on state power brokers who control land, water and electricity.
“He’s run the state like a CEO, not a chief minister -- that’s the impression that you get in Gujarat,” Christopher Wood, chief equity strategist at CLSA Asia-Pacific Markets in Hong Kong, said by phone. “But if he doesn’t get a big mandate to control the country the way he controlled the state, he’ll have obstacles to attract investment the way he did with the Tata Motors factory.”
India’s rupee has been the world’s best performer since hitting an all-time low on Aug. 28, surging 14 percent in that time partly on optimism that a Modi government will boost economic growth, an assertion criticized by opponents who say his policies will enrich tycoons at the expense of poor farmers like those in West Bengal. The benchmark S&P BSE Sensex (SENSEX) has climbed 14 percent since Sept. 13, when the BJP named Modi as its prime minister candidate.
Polls show Modi’s BJP winning the most seats while falling short of a majority, requiring him to partner with regional parties in order to end the Congress party’s decade-long rule. That will make it tougher to implement his economic agenda at the national level than in Gujarat, where the BJP has held a majority in the local legislature since he took office.
India’s constitution gives states control over decisions that are central to attracting investment, a devolution of power at the root of uniting a nation with 1.2 billion people who speak as many as 780 languages. While the federal government can give tax incentives to industries and environmental permits for specific projects, state leaders have power to provide land-use permits along with electricity and water supply.
“The center has a very limited role in the implementation of policy for the key economic growth areas,” said MR Madhavan, president and co-founder of New Delhi-based PRS Legislative Research, which tracks Indian legislation. “They can offer a legislative framework for the states to adopt, but then the political variables come into play.”
Over the past decade, Prime Minister Manmohan Singh’s government has seen many of its economic policies stifled by India’s 28 states.
Only nine states adopted Singh’s 2012 blueprint to allow 51 percent foreign investment in multibrand retail that would let Wal-Mart Stores Inc. (WMT) and other multinationals open outlets, with two already reversing the measure. Other states resisted moves to break up rackets controlling vegetable sales, fueling Asia’s second-fastest inflation, which has eroded support for Congress.
While in the past four months Singh’s government has begun clearing federal permits for stalled projects, many still need state approvals for everything from land to fuel supply. A $12 billion steel plant planned by South Korea’s Posco (005490) has waited nine years for land and environmental clearances -- part of a backlog of 265 projects valued at $230 billion, according to the Cabinet Committee on Investment.
Investment proposals nationwide plummeted to about $95 billion in fiscal 2012 from a peak of $289 billion two years earlier, according to the latest data from the Ministry of Commerce and Industry. Economic growth slowed to 4.5 percent in the 2013 financial year, the lowest in a decade, and the government estimates a 4.9 percent expansion in the year that ended March 31.
Enter Modi. His campaign has been about convincing voters that his record in Gujarat proves he can bring India back to annual growth rates on par with China.
“India can be the most prosperous nation in the world, but right now we are stuck in a rut,” Modi, 63, said at a national party meeting in New Delhi on Jan. 19. “Look at what we’ve accomplished in Gujarat. That’s proof that in India we can prosper now, we can prosper today.”
Gujarat has long been one of India’s wealthiest states, with ports on its 994-mile Arabian Sea coastline welcoming traders from Europe and the Middle East since at least the 12th century. In the decade before Modi took charge in October 2001, Gujarat’s average annual economic growth of 6.3 percent beat India’s 5.7 percent, according to the Ministry of Statistics and Programme Implementation and data compiled by Bloomberg.
Under Modi that gap widened, with Gujarat’s gross domestic product expanding 9.9 percent per year on average from fiscal 2002 to fiscal 2013, compared with 7.4 percent for India, the ministry data shows. The state’s per capita income nearly quadrupled in that time to 61,220 rupees ($1,017), rising at a faster pace than the national average, which doubled to 38,856 rupees, ministry data shows.
Gujarat drew 1.3 trillion rupees ($22 billion) of planned foreign and domestic investment -- about 22 percent of India’s total -- in the year ending March 31, 2012, according to the latest industry ministry data, which doesn’t track manufacturing of goods such as weapons, cigarettes and alcohol. That’s up from 103 billion rupees in 2002, when Gujarat took 11 percent of the country’s investment, the data show.
To be sure, Gujarat has lagged India in other areas. Nearly one in 20 children is “severely malnourished,” the second-highest rate in the country behind Bihar, according to 2011 data cited by India’s Comptroller and Auditor General. About a third of Gujarat residents receive at least 3 hours of water supply per day, below the country’s 37 percent average, according to a 2010 report by the National Council of Applied Economic Research, a New Delhi-based research group.
On the campaign trail, Modi uses Gujarat to win votes. Pamphlets trumpet state programs to conserve water and build modern roads, and his website declares: “If Gujarat can, so can India.” He tells farmers they can enjoy an unhindered power supply and asks investors to submit proposals online.
Focusing on the economy has helped Modi blunt criticism over his handling of 2002 riots in the state that killed about 1,000 people, mostly Muslims, and prompted the U.S. to refuse him a visa. Modi has denied wrongdoing, and a panel appointed by India’s Supreme Court said two years ago it found no evidence that his decisions prevented victims from receiving help.
Eighteen months after the riots, Modi held the first Vibrant Gujarat, a forum that has attracted top executives, including Tata and Mukesh Ambani, India’s richest man and the chairman of Reliance Industries Ltd. The biennial event has grabbed headlines for non-binding investment pledges totaling $876 billion since it started in 2003, a figure that would surpass India’s total from 2009 to 2012 if actually realized.
Modi’s reputation received another boost in 2005, when an institute backed by the Rajiv Gandhi Foundation -- led by Sonia Gandhi, president of the ruling Congress party -- ranked Gujarat as the best state for economic freedom. The organization has since stopped publishing the rankings.
The Vibrant Gujarat conferences and the Rajiv Gandhi Foundation report have helped shape Modi’s image as pro-business even if there is little evidence he’s done things that stand out compared with other top-performing states, said Mohan Guruswamy, chairman of the Centre for Policy Alternatives in New Delhi.
“I don’t think there’s something that Modi knows that no one else knows, and that when he comes to Delhi he’s going to let everyone in on a secret that’s going to save India,” said Guruswamy, a former finance ministry adviser under a BJP-led government in the 1990s. “Gujarat has been a historically successful state in terms of growth. What Modi has done is made sure that everyone in the world knows about Gujarat’s growth.”
For Tata Motors Ltd. (TTMT), Modi’s offer was too good. The loan it secured to build the Nano, which sells for as little as 141,200 rupees ($2,346) in Delhi, had an interest rate of 0.01 percent, according to state government documents obtained by Bloomberg. Jagdish Thakkar, a spokesman for Gujarat’s government, did not answer calls made to his mobile phone.
Minari Shah, a Tata spokeswoman, declined to comment when asked about the deal to build the Nano in Gujarat.
“Gujarat stands out as different and perhaps better than anywhere else in the country for meeting the demands of investors,” Tata, 76, said at the 2013 Vibrant Gujarat. “The credit goes to Mr. Modi for his vision for setting high standards.”
While sales of the Nano have sputtered since several early models caught fire, reaching about a fifth of the plant’s operating capacity in the year through March 2013, Tata’s investment spurred other companies to follow. Ford Motor Co. (F) and Maruti Suzuki India Ltd. have since announced plans to build factories in Gujarat.
Modi’s political opponents accuse him of forcing farmers off their land and giving favorable land deals to investors such as Adani Enterprises Ltd. (ADE)’s Gautam Adani, who runs the state’s biggest port.
Adani Enterprises shares, which surged by a record 23 percent yesterday, fell 6.8 percent in Mumbai trading. Since 2002, the shares have seen a 60-fold increase, gaining about 10 times more than the benchmark Sensex. Devendra Amin, a spokesman for Adani, declined to comment on the allegations.
Tata Motors pulled out of West Bengal in 2008 because of violent protests from farmers backed by Mamata Banerjee who demanded the return of land used to build the factory. In 2011, Banerjee’s All India Trinamool Congress won 184 seats in her state’s 294-member assembly, six times the 30 it secured in 2006.
Rahul Gandhi, who is leading the campaign for the ruling Congress party, has also said Modi stole land from farmers in order to build the Nano factory and that Congress favors a more collaborative approach to governance.
“One person cannot apply what’s happened in one state and expect it to fix the country,” Gandhi told a campaign rally today in Uttar Pradesh, India’s biggest state. “It’s up to the people of each state and each community to solve their problems.”
Under Modi, small businesses didn’t get the same benefits as large investors, according to Hitesh Bagdai, a real estate developer who served on the executive committee of the Gujarat Chamber of Commerce and Industry from 2007 to 2010. Every agreement is a customized package rather than a transparent set of benefits, he said.
“If larger investors come, they’ll roll out the red carpet,” said Bagdai, adding that he could rarely get meetings with Modi even though he headed the main business organization in his constituency. “To a person like Tata you would say ‘Here’s 100 billion rupees for free. Please come to us.’”
To avoid the pitfalls that hampered Singh at a national level, the BJP has vowed to transform ties between federal and state governments. The party controls only five of India’s 28 states, and will fall 54 seats short of the 272 needed to rule even in the best-case scenario, according to a CNN-IBN opinion poll published on April 4.
The prime minister and state chiefs would serve as “equal partners” in implementing megaprojects, speeding up investment approvals and passing a goods and services tax, the BJP said in its campaign manifesto released on April 7. Credit Suisse Group AG called the party’s focus on improving relations with state governments the “most remarkable” part of the document.
While Modi may have attracted Tata in three days, it’ll take more time to convince investors he can jump start Asia’s third-biggest economy, according to Hugh Young, a Singapore-based managing director at Aberdeen Asset Management Plc, which manages $313 billion.
“I’ve been covering India for 30 years, and it’s hard not to be skeptical when everything takes forever to come through,” Young said. “India is notoriously frustrating.”
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