Modi’s $53 billion Xi-Abe windfall hinges on red tape war

Bloomberg

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Narendra Modi, India's prime minister, right, and Xi Jinping, China's president, attend a meeting to sign a series of agreements between the two nations at Hyderabad House in New Delhi, India, on Sept. 18, 2014. Narendra Modi, India's prime minister, right, and Xi Jinping, China's president, attend a meeting to sign a series of agreements between the two nations at Hyderabad House in New Delhi, India, on Sept. 18, 2014.

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A bear hug, a riverfront stroll and a swing-set session helped Prime Minister Narendra Modi win more than $53 billion in loans and investment pledges from China and Japan this month. He’ll need to make progress on cutting India’s red tape to turn those promises into reality.
Chinese President Xi Jinping yesterday in New Delhi pledged $20 billion in investment for Modi over the next five years to narrow India’s largest trade deficit with any single country. That adds to the $33 billion in loans and investment Japanese Prime Minister Shinzo Abe promised on Sept. 1.
Modi’s ability to draw funds from Asia’s two biggest economies is crucial to meeting his $1 trillion investment target by 2017 to revive Indian growth lingering near a decade low. Doing so will require him to streamline a bureaucracy that held up more than $350 billion in projects under former Prime Minister Manmohan Singh, who lost power to Modi in May.
“It’s very difficult to pinpoint a number which these countries can reach because of the economic climate,” Siddhartha Sanyal, chief India economist at Barclays Plc, said by phone from Mumbai. “India needs to prioritize removing of the bottlenecks so that it can compete.”
During a 2010 visit to India, former Chinese premier Wen Jiabao signed pacts valued at $16 billion, including $10 billion in equipment sales from Shanghai Electric Group Co Ltd. for three Reliance Power Ltd. power plants. Since then, units of one plant have been commissioned while the others are stalled due to lack of fuel and land permits.
Red tape
Japanese and Chinese foreign direct investment to India has totaled $17.5 billion since April 2000, with just $410 million of this from China. More than doubling that in the next five years will require a complete overhaul of India’s investment climate, said C. Uday Bhaskar, a distinguished fellow with the Delhi-based Society for Policy Studies.
“India’s capacity for being able to ingest and take in this kind of investment is limited,” Bhaskar said by phone from Delhi. “India needs to acquire that capacity and do so in a speedy manner. They have not demonstrated that ability yet and remain mired in red tape and procedural delays.”
Singh formed a committee in June 2013 to clear 463 blocked investments worth 22 trillion rupees ($362 billion). While 176 proposals worth 6.48 trillion rupees have been approved so far, only 60 have begun construction, said Anil Swarup, who heads the committee, known as the Project Monitoring Group.
Ease of business
“The pace at which things are happening is faster than what we saw in the past,” Swarup said in a Sept. 3 interview. “In the previous government, our job was just to see that the clearances would happen and we would assume that it was translating to work on the ground. The present government has asked us to do the leg-work and make sure that it is.”
India ranked 134 of 189 economies in the World Bank’s Ease of Doing Business 2013 index, with China at 96. Since he came to power, Modi raised foreign investment ownership caps in defense and railways, and pledged to revive India’s manufacturing to reduce its reliance on imports.
During Modi’s visit to Japan he embraced Abe, whom he first met in 2007 while leading the western state of Gujarat. Two days ago, Modi hosted Xi in Gujarat, where the two leaders spent time on a swing, took a walk along the auspicious Sabarmati River and shared a 100-dish dinner.
Modi will have a better chance than his predecessor of overcoming bureaucratic hurdles and realizing the funds, according to Sonal Varma, an economist at Nomura Holdings Inc.
“Modi’s government is trying to improve the ease of doing business, so this time things are different from what it was previously,” Varma said by phone from Mumbai. “However it’s a work in progress, and so the money is unlikely to come in immediately.”
‘Deeper malaise’
Leaders of the world’s two most populous countries yesterday also signed deals to help set up industrial parks in the Indian states of Maharashtra and Gujarat. India posted a $34.4 billion trade deficit in 2013 on imports of Chinese-made heavy machinery, telecom equipment and home appliances, according to data compiled by Bloomberg.
“We agreed that our economic relations do not do justice to our potential,” Modi said at a joint briefing with Xi in New Delhi yesterday, where the leaders also addressed a decades-long border dispute that has flared up this month.
The S&P BSE Sensex index of shares rose 0.1 percent as of 10:18 a.m. in Mumbai, the rupee was little changed at 60.815 per dollar and the yield on the 10-year benchmark sovereign bond was unchanged at 8.45 percent.
The bureaucracy in Delhi may prove a bigger obstacle to boosting ties. India’s bureaucrats have been ranked the worst among 12 Asian countries for almost two decades, according to a survey of about 1,200 investors across the region by Hong Kong-based Political & Economic Risk Consultancy Ltd.
“There is a serious depletion of capacity within the Indian state and a deeper malaise within Indian society to execute and see Modi’s growth model through,” said Jahangir Aziz, Singapore-based chief economist for Asia at JPMorgan Chase & Co. “It isn’t just a matter of making big decisions that will solve the problem.”

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