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HomeOpinionIndia’s growth can’t run on autopilot. Investors aren’t buying Modi's global bright...

India’s growth can’t run on autopilot. Investors aren’t buying Modi’s global bright spot hype

Every time Commerce Minister Piyush Goyal speaks, you would think India is the world’s preeminent export hub. In reality, our share of global merchandise exports is under 3% and shrinking.

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The Narendra Modi government, after peddling the ‘bright spot’ delusion to its supporters, has seemingly started drinking its own Kool-Aid. It genuinely believes that India’s position as the fastest-growing major economy will automatically ensure continued investments and fast growth. No further action is necessary.

Newton’s First Law of Motion says that an object will remain in motion at a constant speed unless acted upon by an external and unbalanced force. The Modi government seems to believe this principle applies to the economy as well.

The problem is that it’s not really acknowledging that multiple forces are coming together to slow growth, unless balanced by government action.

The BIT delusion: Why investors are losing faith

The latest symptom of this refusal to accept reality is Finance Minister Nirmala Sitharaman’s recent statements about India’s Bilateral Investment Treaties (BITs) and the need to revamp them. She argued that BITs should move away from the older model of investor protection, sometimes to the detriment of national interests.

This is fair enough—national interests cannot be compromised. India’s history with the Vodafone and Cairn Energy retrospective tax issues explains why the government is wary of international arbitration. This attitude is also a continuation of the Modi government’s historical approach to BITs. Since 2015, the government has systematically scrapped its existing BITs and has cautiously signed just a handful of new ones.

In her latest Budget, the Finance Minister said that the government would revamp its BIT model to become more “investor friendly”. But unless the government comes to terms with what international businesses have been saying in the aftermath of BIT cancellations, this friendliness will remain elusive.

The older BITs gave foreign companies the assurance that any disputes with the government would be arbitrated in a third country. With those BITs gone, companies have turned wary of investing in India. What guarantee do they have that Indian courts will judge fairly—and, equally important for companies with millions at stake, that cases will be resolved quickly?

If the new model BITs don’t address this key concern, no amount of other tweaks will be perceived as “investor friendly” enough. And given the glacial pace of judicial reforms in India, restoring third-party arbitration may be the only way to restore investor confidence.


Also read: Why FDI in India is lowest in 16 yrs — no real ease of doing business, ill-considered treaty moves


Exports, manufacturing, and the govt’s blind spot

The other area where the government seems completely delusional is India’s export competitiveness—and whether Indian companies even want to export. Every time Commerce Minister Piyush Goyal speaks, you would think India is the world’s preeminent export hub. In reality, our share of global merchandise exports is less than 3 percent and shrinking.

In a recent interview, Niranjan Rajadhyaksha, head of research and strategy at Artha Global and a noted economic columnist, argued that India needs to decide whether to compete in the trade of intermediate goods—a space where Asia already dominates—or focus on catering to ‘geographies of final demand’ such as the US and Europe.

From the looks of it, the government seems to believe India will succeed regardless of whether we make this decision or not. No changes required.

If we want to dominate trade in intermediate products, we will have to compete with the likes of China—and we know how that’s going: in short, horribly. How long can the Centre hide behind the excuse that land and labour reforms—critical for scalability and competitiveness—are being held up at the state level? Where is Modi the ‘statesman’ or consensus builder here? One has to assume there’s simply a lack of will to get it done.

If we want to compete in the trade of finished products, we will need to embrace the import of inputs. That means proactively reducing import tariffs—not doing it reactively because we are getting threatened by Donald Trump.

Either way, something has to change. We are not in a ‘business as usual’ scenario where policymaking can run on autopilot.

Rajadhyaksha made another excellent point the government needs to reckon with. He noted that large Indian companies prefer to invest in non-tradable sectors such as telecom, finance, retail, and infrastructure, rather than in sectors with export potential like manufacturing.

Combine this trend with the fact that none of India’s unicorns have been born out of original business models or grown into global names, and you start to see the malaise in India’s private sector—something the government seems to be ignoring.

The fact that agriculture sector growth has outpaced manufacturing for two consecutive quarters this financial year should be raising alarm bells in the government. Yes, there’s a base effect, but that excuse only goes so far. Something needs to change in manufacturing, and fast.

‘Fastest-growing’ and ‘global bright spot’ are great slogans for an unquestioning fanbase. Investors, however, are not fooled—even if the government is.

TCA Sharad Raghavan is Deputy Editor – Economy at ThePrint. He tweets @SharadRaghavan. Views are personal.

(Edited by Prashant)

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4 COMMENTS

  1. Completely agree with the Author. Indian Industrialists are essentially traders who are only happy to sell their substandard products in India. I hardly ever see any Indian products in The European or American markets. No Indian brand is known in these places. Infact if you go to a typical Indian retailer, it is full of goods imported from Bangladesh, Vietnam China etc. Hardly any Indian stuff there.
    And with regard to FDI, I can’t remember any event done by govt in Germany ( where I live) to engage the local industry to invest in India. Only pronouncements!! No engagement with local journalists. So rocket science that why India is not on top of their mind to go and invest in

  2. Relax Raghavan. Getting very agitated… why did you not say all this when you were part of the economic advisory group to the government?

    Now, no point. Every decision of this government is from a vote bank perspective. Not for the country. And when the fake sound bytes from the biased press are pleasing to the ear, the government has no time for realty check.

    Look at GDP data jumla. Who can say with confidence that the data is reliable? If last year the economy grew by 9% and this year we are straddling with a forecast of 6.7%… has the economy shrunk???

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