India under Modi turns a corner, but questions remain

April 14, 2015

Narendra Modi visits Canada this week. It was just about a year ago that this controversial political figure became prime minister of India. In the ensuing period, the “Modi wave” appears to have crested as pushback on his Hindu nationalist agenda and lack of progress on economic reforms led to a disastrous showing in a recent important state election. To stem the slippage, Modi finally came out unambiguously for secularism (though the matter has hardly been laid to rest) while Finance Minister Arun Jaitley’s budget contained initiatives which were well received by the financial community and perhaps set the stage for more fundamental reforms.

A good beginning on foreign policy has also since run into trouble. Modi’s inauguration had been a foreign policy triumph. All of India’s regional partners attended including the prime minister of Pakistan, and there was discussion of resolving longstanding disputes with both Pakistan and Sri Lanka.  But cross-border artillery duels with Pakistan and a change of leadership in Sri Lanka have spoiled any prospect of early progress on these fronts.  More promising for Modi were his meetings with the leaders of Japan, China, Russia and the United States.

Shifting political fortunes

Modi rode to power on a promise to end corruption and restore economic growth, along with a less than subtle appeal to the Hindutva sentiment which has stoked anti-Muslim pogroms in India for decades. But as any leader of a country with a bicameral legislature and federal structure knows, it takes more than controlling the government to effect a transformational agenda. From the outset, Modi struggled with the fact that his India People’s Party (BJP) had a majority (52%) of seats in the lower house of Parliament but needed to rely on its National Democratic Alliance coalition to form a representative government. Nor did the BJP control the upper house or have anything like a majority of the popular vote which would translate into control of key states. The Congress party and its allies, who have a majority in the upper house, have effectively stymied reform measures.

In state elections in October 2014, the Modi wave was still strong enough to secure massive gains in Maharashtra where the BJP now governs in coalition with the neo-fascist Shiv Sena which runs Mumbai, a city in desperate need of infrastructure development. The “shivsainiks” are ethnic Marathi nationalists who support the BJP’s broader Hindu agenda. (In 2010, they forced Mumbai University to withdraw Rohinton Mistry’s Such a Long Journey from its syllabus.) The BJP also steamrollered to victory in Haryana raising their seat total from four to 47.  Two months later, in the state elections in Jammu (Hindu majority) and Kashmir (Muslim majority), both the BJP and the Muslim People’s Democratic Party (PDP) made sufficiently large gains to displace the local National Congress Party and to form a coalition with the BJP as the junior partner. In negotiations, the BJP had to drop its plan to repeal Article 370 of the Constitution which, inter alia, accords the state a special status protecting its Muslim minority; the PDP in turn had to put aside its hope for repeal of the hated Armed Forces Special Protection Act which grants the Indian Army in the state immunity from prosecution for most crimes. It was important politically that Modi publicly embraced the PDP patriarch.

But then the BJP suffered a major blow when it was crushed in the February 2015 Delhi Union Territory elections by the corruption-bashing Aam Aadmi Party (Common Man Party) which took 67 seats to the BJP’s three. All other parties, including the Congress Party, were shut out.

The long-run secular shift to regional and caste-based parties is continuing. This spells real trouble for the three national parties: the BJP, the Congress and the Communists who have also suffered serious electoral defeats in recent national and state votes. Based on the results to date, there is no guarantee Modi will win the next national election and the Congress should not be counted out. But internal ructions and bad judgement are marring Congress’ chances of an early revival. In another sign of his weak leadership, Rahul Gandhi who heads the Congress in parliament was absent for the budget debate, while his mother Sonya Gandhi is under increasing pressure to resign as party leader. The last time Congress was in opposition and a Gandhi was not at the helm, large chunks of the party, especially in West Bengal and Maharashtra, shivered off to local fiefdoms.

The electoral burden of Hindu nationalism

One reason for the ebbing of the Modi tide lay in his diffidence on the issue of Hindutva, Hindu nationalism. Indians voted for him and the BJP in hopes of an economic revival, not to enact the divisive Hindutva agenda. Yet Modi initially failed to denounce or act against the forced conversions of Muslims and Christians by organizations allied to the BJP and the Hindutva umbrella organization, the hard-right RSS. Church burnings, even in New Delhi, passed without any comment from the Prime Minister. Nor did he prevent some of his Cabinet ministers from calling for the enshrining into law of the sacred Hindu scripture the Bhagavad Gita and encouraging Hindu families to have more children as a way of “stemming the Muslim tide”. The government’s agenda still calls for the national history curriculum to be reconfigured along revisionist RSS lines.

Modi did finally address the issue recently in Parliament, denouncing communalism and supporting secularism: “My Government’s only religion is India First. My Government’s only religious book is the Indian Constitution.” But such a pronouncement puts him on a collision course with the BJP’s principal base of support. In the final analysis, the BJP is the political arm of the RSS and the RSS leader Mohan Bhagwat has been explicit in his expectations of the BJP’s pursuit of the Hindutva agenda. Modi will be hard pressed to hold his party together let alone repeat his past electoral success if he loses the support of the many millions of RSS and Sangh Parivar conglomerate members who have made the BJP the political force it is today. This game is far from over.

Modi’s bet: economic reform trumps Hindutva

As many hoped, Modi has chosen to emphasize economic development, both for its own sake and to ensure the BJP’s continued viability and perhaps even its survival. The question is whether economic reform can trump cultural nationalism. Modi is betting that it can.

Congress and its allies still have a majority in the upper chamber, and they have not hesitated to try to derail the BJP’s legislative program. In response, Modi has resorted to issuing Ordinances (something like Executive Orders in the US system) on such matters as reforming arbitration procedures in commercial disputes, raising the permitted level of foreign investment in the insurance industry to 49%, opening the mining sector to 10% participation by foreigners, and easing land acquisition for commercial development. But the Constitution requires Ordinances to be legislated into law within six months or be re-issued – not a form of governance likely to bring comfort to foreign investors looking for stability and predictability.

Finance Minister Arun Jaitley showed the way in his February 28 budget which aims at fiscal consolidation. The fiscal deficit will be reduced to 3.9% of GDP from 4.1%. Subsidies will be cut to 1.7% of GDP from 2.1%. The states’ share of federal tax revenues will be increased to 42%, which is to be paid for by the proceeds of privatisation and spectrum sales. Most observers believe this largesse is intended to pave the way for a national GST that does away with India’s productivity-sapping welter of state taxes. Corporate taxes have been reduced and fungibility between FDI and FII will now be permitted. Much needed infrastructure development and financing the means of social inclusion are budget hallmarks. Growth is targeted for between 8.1% and 8.5%. Outside observers such as Standard & Poor’s have pegged growth projections a bit lower at between 6.2% and 7.9%.  The budget takes full advantage of India’s much improved balance of payments, owing to the collapse in oil and gas prices and the decline in commodity prices. The private banking sector has pronounced itself pleased with the budget as a means of kick-starting foreign and domestic investment and, with that, renewed growth and the prospect of prosperity.

But India is still deep in the woods. The national education system, needed for a productive work force to take advantage of India’s demographic bubble, is broken. Labour markets are still rigid and unresponsive. The state-owned banks need huge injections of cash to cope with what some believe may be 15% of non-performing loans. Electrical power remains expensive and in short supply.  India’s administrative capacity to ensure rapid and effective infrastructure development is still in question. And that’s only the tip of the iceberg.

Foreign policy still waiting to deliver

Nahendra Modi made a strong beginning on foreign policy, notably inviting all the leaders of the South Asian Association for Regional Cooperation (SAARC) to attend his inauguration.  His priorities were widely lauded: to defuse India’s long-running and dangerous dispute with Pakistan over Kashmir, and to resolve the more recent one with Sri Lanka over fishing in the Paik Strait, Sri Lanka’s treatment of the defeated rebel Tamils, and China’s increasing footprint in the island republic.

Prospects for an India/Pakistan deal quickly dissipated, however, following cross-border artillery duels, probably initiated by the Pakistan Army in line with its goal to clip the wings of Prime Minister Nawar Sharif.  And problems still plague the India/Sri Lanka agenda, despite the apparently warm personal relations which existed between Modi and Sri Lankan leader Mahinda Rajapaksa. When Rajapaksa was replaced as president by Maithripala Sirisena in an election in January 2015, the new leader moved to address the complaints of the Tamils who had provided him unstinting electoral support. But the Paik Strait remains a problem, and Chinese investment in Sri Lanka continues apace. Given the history of India’s meddling in Sri Lanka’s affairs, Sirisena will very likely persist in developing relations with China, if only to balance Indian influence.

In September 2014, Modi inaugurated a series of meetings with world leaders which will likely pay dividends for India over the longer term. For the most part, his objectives were to try to put aside disputes disrupting the status quo and to generate the economic support India needs.

  • First was a visit to Japan for meetings with Prime Minister Shinzo Abe. The Japan Times wrote it off as more showmanship than substance, but Modi came away with Japanese promises of public and private financing and investment over the next five years totalling $34 billion.
  • Two weeks later, the visit of China’s Xi Jinping produced a Chinese commitment of $30 billion worth of investments in a fast train corridor, a strategic road, and industrial parks in Gujarat (Modi’s fiefdom) and Maharashtra. But border issues remain unresolved, and the atmosphere cooled precipitately the day of the official banquet when Chinese and Indian troops confronted each other in Southern Ladakh, one of many disputed regions on the Sino-Indian border. Western and Indian media blamed China. In fact, Chinese nomadic herders, who had wandered into the area claimed by both countries, were repulsed by Indian border guards and Chinese border patrols reacted forcefully. Final agreement on demarcation lines needs to be a high priority if the two sides are to avoid distracting and politically harmful clashes, even another war in an extreme case. Modi and Xi agree, at least rhetorically, and have promised to redouble efforts.
  • Vladimir Putin’s visit in mid-December seems to have served mainly to establish a benchmark against which future improvements in relations could be assessed. Relations were close in the days of Soviet “socialism” when the USSR was India’s principal arms supplier. Russia still sees India as a strategic bulwark, and Putin was happy to trade Modi’s assurances that India would not be a participant in the Western “encirclement” which Moscow fears (Modi did not, for example, join in the condemnation and sanctions which followed Russia’s annexation of Crimea) for a Russian promise to be a reliable supplier of military equipment and parts.
  • Finally, Modi exchanged visits with President Obama in September 2014 and January 2015, just four months separating them. Skilful media management and image control made the most of these events. In addition to meeting with the president at the White House, Modi had star turns at Madison Square Garden and Central Park complete with B-list guests, and delivered a speech to the UN General Assembly with a peroration extolling the virtues of yoga and calling for the adoption of an International Yoga Day. Obama was invited back for Republic Day, a signal honour.  In the policy realm, the parties issued an innocuous Joint Strategic Vision for the Asia-Pacific and Indian Ocean Region which was undoubtedly intended to convey a sense of common purpose without committing either to any specific action. Like most former colonies, India remains too deeply nationalistic to jettison any time soon its long-standing policy of “neutrality and non-alignment”, and the US certainly understands it cannot really count on India as any kind of strategic partner let alone an ally. (India has a US waiver and still buys oil from Iran.) In the final analysis, India’s relations with the United States will be conditioned by and will, in turn, condition its relations with China. Which may be the reason the Joint Strategic Vision was issued: to generate a bit of nail-biting in Beijing. Substantively, the principal accomplishment was agreement on “understandings” to resolve issues which have held up nuclear trade between the two sides. These deal with liability in case of an accident at a foreign-supplied reactor in India and “Administrative Arrangements” to safeguard US nuclear materials exported to India.

Meanwhile, in Canada …

Modi did not add a leg to his itinerary and pass through Ottawa before or after visiting Washington last fall, as appears to have been expected for both political and commercial reasons. The visit this week will determine whether Canada-India relations will proceed on the positive track Prime Minister Harper is hoping for. Anti-Modi demonstrations can be expected and, with Canadian national elections in prospect, the government will be challenged to square electoral and commercial considerations.

The commercial picture is mixed. Bombardier is doing well in India helping to develop much needed metro mass transit systems, CAE is doing well with its flight simulators, and McCains has adjusted its product line to respond to the consumption habits of India’s growing middle class. That community now numbers in the order of 200 million and catering to its needs offers enormous potential for Canadian agriculture which is already becoming a major supplier.  Opportunities in mining look to be emerging, but low commodity prices have made Canadian miners understandably cautious.  The massive infrastructure projects that are in the cards in India might have been tailor-made for SNC Lavelin, but the firm’s senior executives will likely be spending more time in court than drumming up business.

But Canada’s original game plan for trade with India was based on nuclear and East Coast gas sales and both seem to be in trouble. The nuclear Administrative Arrangements worked out between Delhi and Washington were modelled on ones Canada pioneered several years ago, but nuclear sales have not followed – in fact, remain a distant and probably unrealizable prospect. The legacy of Canada’s nuclear embargo of India after its test of a nuclear weapon in 1974 and partnering with China to try to rollback India’s nuclear program after its 1998 tests still overhang the relationship. From the first India perceived Canada to be an unreliable nuclear supplier, from the second an unreliable political partner.  History may not matter much in Ottawa, but it looms large in New Delhi. Australia will probably harvest the neglected contracts and reap the rewards.

In any event, it’s time for the Trade Commissioners in the Diefenbaker Building on Sussex Drive in Ottawa to be thinking about what commercial opportunities are in bud. Modi is changing India economically and that’s a very good thing. And he’s in Canada this week.

Sven Jurschewsky

Retired Canadian Foreign Service officer who has specialized in political-military affairs, international security and intelligence, and nuclear arms control. Held senior positions at Canadian missions in Berlin, Bonn, Vienna, and Zagreb. Negotiator for Canada on the Charter for European Security and the 1995 extension of the Nuclear Non-Proliferation Treaty. Head of political section at the Canadian Embassy in Beijing during which he was responsible for the establishment of Canada’s diplomatic relations with the DPRK. Political counsellor, Canadian High Commission, New Delhi.

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