Attempting to be both pro-business and pro-poor, the Modi administration’s communication struggles are starting to disturb both groups in India.
The most costly misstep occurred in April, when Finance Minister Arun Jaitley overstated the amount of tax demands on foreign funds to make a point about helping the poor. The comments triggered a stock selloff, wiping about $10 billion off investor wealth over the next four days.
Prime Minister Narendra Modi has since trumpeted policies for the poor to counter opposition claims that he’s running a “suit-boot government,” an attack depicting the cabinet as executive-friendly that’s gaining traction among farmers. Modi has offered to make a land bill more farmer friendly and slowed down a push to overhaul labor rules and food handouts.
“Here is a government that’s pro-business and pro-jobs, but is so much on the back foot and having to embellish its pro-poor credentials,” said Rajeev Malik, senior economist at CLSA Singapore Ltd. “Apart from a course re-direction, I think they also just need to make sure the right message is going out.”
A clear vision is crucial for Modi to capitalize on renewed optimism over India since his election win. While growth in the year through March reached 7.3 percent, just shy of a slowing China, other indicators such as private investment, exports and corporate earnings suggest weakness in the economy.
The lackluster data prompted Goldman Sachs Group Inc. to predict that central bank Governor Raghuram Rajan will cut the key interest rate by 25 basis points on Tuesday. All but eight of 39 economists in a Bloomberg News survey expect a quarter-point reduction. Seven see a hold and one a 50-point cut to 7 percent.
India’s benchmark stock index has gained 1.5 percent so far this year after it gained 30 percent in 2014 on optimism Modi would jumpstart growth.
Investor sentiment soured after Jaitley told NDTV television station in April that foreign funds owed the government 400 billion rupees ($6.3 billion) in unpaid taxes.
“I can change the face of India’s irrigation with that,” Jaitley said. “If I waive off, we are like a tax haven.”
Finance ministry officials rushed to find out the real number, which turned out to be only about 6 billion rupees. Junior Finance Minister Jayant Sinha held a teleconference to assure foreign investors they would be treated fairly, and the ministry set up a committee to recommend solutions.
The damage, however, was done. Foreign investors sold a net $1.8 billion of Indian stocks and bonds in May, the most in any single month this year. The concerns over tax intensified outflows from the emerging market before an expected increase in U.S. rates later this year.
“Confusion is a regulatory risk for foreign portfolio investors, and you saw the mania,” Ajay Marwaha, director for investments at Sun Global Investments Ltd. in London, said in an e-mail interview. “All other risks can be mitigated; regulatory risk has only one solution: EXIT.”
India’s political dynamics make it hard for any administration to quickly reduce the role of government in the economy. About half of India’s 1.2 billion people are employed in agriculture, according to the CIA’s World Factbook, and Modi needs to win upcoming elections in mostly agrarian states to gain control of both houses of parliament.
“I have repeatedly said this government will expand businesses,” Jaitley told ET Now channel on May 25. “It will use the enriched resources of the government for the poor. Therefore economy growing is going to help the poor, but this government does not believe in crony capitalism.”
Asked about criticism that the government was too pro-business, Sinha told Bloomberg TV India that ensuring the poor have adequate health care, education and other government services is “our most important priority.”
“If industries don’t flourish, then we don’t have the resources to fulfill our most important responsibility,” Sinha said. “So there’s no question here of any trade-off. Both fit together really, really well.”
On several issues, Modi is putting on the brakes. Amit Shah, the head of Modi’s Bharatiya Janata Party, said last month that he’d form a committee to discuss labor reforms with unions, according to Mint newspaper.
Modi said he’s open to changing a bill that makes it easier to buy land -- a key impediment to investment -- to be more favorable to farmers. And his food minister rejected a proposal from a government committee to reduce food grain coverage to 40 percent of the population from two-thirds now.
While the pace of change has been more incremental than anticipated, analysts are still generally positive. Economists at Standard Chartered Plc say Modi has taken small but significant steps in his first year and he’s poised to make progress on the land bill and national sales tax.
“Modi is a charismatic and forceful figure,” Jonathan Schiessl, head of equities at Channel Islands-based Ashburton Investments Ltd., which oversees $12 billion, said in an interview with Bloomberg TV India. “He has to have a cabinet working with him.”