Modi’s Charm Offensive May Not Convince US Corporates to Invest

Why is Prime Minister Narendra Modi wooing big American corporations so assiduously? The manner in which he is trying to hard sell India to US multinationals may reflect a deeper anxiety over the lack of investment revival in the domestic economy, partly due to fresh fears of a world recession caused by the ongoing commodities meltdown. There is a realisation that if the world economy moves closer to another recession, a possibility many leading analysts consider very real, India cannot escape the consequences.

It is this worry which prompted Prime Minister Modi and Finance minister Arun Jaitley to have a meeting with leading industrialists in the capital. After the interaction both Modi and Jaitley seemed a bit disappointed that Indian industry in general was not so forthcoming with new investments. The Prime Minister, somewhat exasperated, is believed to have urged them to take some more risk by spending on new investments. Privately, Arun Jaitley has been more blunt in suggesting that the traditional businesses are just complaining all the time and don’t seem to have the will or optimism to embrace an ambitious growth path.

In fact Jaitley has even suggested that the government would rather pin its hopes on Public Sector companies and global multinationals, both of whom have ample cash, to revive investments in India. Though they don’t say it publicly, many leading businessmen, who vocally backed Modi in 2014 general elections, now seem to feel a sense of distance from the government. They feel the government is not listening to them.

Bad digital infrastructure

It is partly in this context that Modi’s assiduous wooing of the US multinationals must be seen. A BJP spokesperson gave me an interesting insight in this regard. He said Modi, by his very nature, cannot take pessimism for long. Leading Indian businesses seem to have put him off with their negative body language. Modi intuitively thinks the new generation of entrepreneurs, especially in the technology sector, have the necessary hunger and optimism which traditional Indian businesses may have lost. This could be the reason why Modi spent so much time in the Silicon Valley trying to woo the biggies like Google, Microsoft, Oracle, Facebook, etc. Modi wants early results and he thinks these cash rich MNCs could probably help in rapidly scaling up India’s digital economy.

However, this is easier said than done. India’s digital infrastructure is woefully inadequate today and this is something the leading CEOs of Silicon Valley told the PM bluntly. Recently, in an interview to this writer, Rahul Khullar, till recently Chairman of TRAI, said, “the digital India vision is fine. But it is not yet accompanied by a clear plan on the ground. There is a need to lay down necessary infrastructure to connect over a billion people”. The 2014-15 target of taking broad band to 70,000 gram panchayats was missed badly with only about 13% of the target achieved. There is a need to connect 250,000 panchayats by 2019.

“Annual fund allocation for this is a minuscule Rs.3,000 crore when the actual requirement is Rs.30,000 crore per year.” Many other critical gaps like innovative software application development for users in semi rural India has not even started,” Khullar says.

Digital India project involves a grand plan to integrate the three initiatives of the UPA government – National Optics Fibre Network, National Knowledge Network and e-governance systems going down to the panchayat administration. In substantive terms, this has not even begun.

The viscous political economy

So the US digital giants are happy to shake hands with Modi and take group photos. But they can start investing in India only when the government keeps its promise of modernising and adequately scaling up the digital infrastructure. Of course, there are other important issues raised by Indian start ups and tech companies who feel the government must, first and foremost, have a digital policy which will help create home grown digital giants like China has done so successfully. Many local tech companies are apprehensive that in the absence of a proper policy and rational regulatory framework, global biggies like Facebook, Google etc will naturally seek dominance of the vast Indian market. After all, the next 800 million smartphone users in India would constitute the most valued customers/assets for e-commerce and other digital companies. So domestic digital companies were naturally somewhat apprehensive about Modi’s excessive bonhomie with the likes of Facebook which is surrounded by controversies related to privacy issues and its approach to net neutrality.

In New York, the Prime Minister met corporate honchos from across various sectors and they all told him India needed to speed up reforms. They are happy with Modi’s intent but unhappy with the “speed of reforms”. Of course, Modi is quite unable to tell the owners of foreign capital that India’s complex political economy accepts reforms only at a certain pace and anything beyond that tends to cause political and social disruption. Modi has experienced this in regard to the land bill and labour legislation.

Overall, Narendra Modi’s meetings with businesses in New York and Silicon Valley merely helped in reiterating India’s promise that it will dramatically ease the process of doing business. Foreign companies will not invest until they see some of these promises translate on the ground. Narendra Modi will be mistaken if he thinks American companies will treat the NDA differently from the previous regime. Hard-nosed businessmen don’t go by emotional appeals, which Modi is so good at making. Global businesses study objective conditions in regard to where they will get returns with minimum red tape. It is not for nothing that the entire ecosystem for manufacturing components of Apple products is around South China, Hong Kong, Taiwan and Japan. Over 300 parts of Apple products are manufactured in China, 150 in Japan and about 50 in Taiwan.

Vulnerable to another recession

Narendra Modi wants Apple to do something similar under the “Make in India” plan. He spoke to the Apple CEO Tim Cook about it. Tim Cook knows it won’t be easy to replicate the Apple value chain that exists in the East Asian region. Especially, when the global economy is facing deflationary headwinds, with excess capacity all around. The current situation of over capacity in most sectors is not a good omen for the “Make in India” project. The global deflationary condition may take at least two years to play itself out before reaching a new equilibrium.

Though our policy makers are trying to build a narrative that India will escape the commodities meltdown because it is a net importer of oil and metals, the fact is India cannot escape a possible global recession because most resource exporting nations in Latin America, Africa and West Asia are substantial importers of goods from India. If they go down, their ability to buy from India also goes down. No wonder we have 9 months of back to back negative export growth. After Narendra Modi’s UAE visit, the government claimed the Arab economies would invest $75-85 billion in India. This cannot happen if oil prices stay at today’s levels. The promise of big Middle East investments abroad are contingent upon the oil price recovering to some moderate levels like $70 to $75 a barrel.

So until commodity prices somewhat recover and global deflationary conditions ease, Prime Minister Narendra Modi will do well to interact more with important domestic constituents like the farmers, small and medium size enterprises who provide employment to about 130 million people in the country. Taking a bottom up view of the economy will be more beneficial.

  • forsanity

    Actually in the 2012-2015 time frame India had a perfect storm of conditions which we should have taken advantage of, but did not. The price of oil started falling precipitously, China began to sputter and US was on revival mode. However, we indulged in quarrels among ourselves not getting a decent land reform bill, a good GST bill or any thing else (during both UPA and BJP regimes) that would have placed us in a position to take advantage of the current world economic funk. This is not to be partisan and say one party or the other opposed reform. Even today, when BJP supporters keep harping on the non-cooperation of the opposition, they forget the effort the government has to put in to make things happen. If the government wants cooperation to get their agenda through they need to meet the opposition half way. There is no other way, whether it is through backroom maneuvering, checkmating or throwing a bone etc etc. That is what governments are expected to do because they have to push their agenda through. The more controversial the agenda, the more opposition there will be. Those who think that once BJP gets a majority in the Rajya Sabha (which is years away, anyway) everything will be fine, are having wishful thinking. The fact of the matter is that the government through its cronies is adopting several controversial measures on the social front that it is impacting the economic agenda. This government was elected to solve the economic malaise and corruption not to cleanse the social fabric. If they forget that, then it is difficult to push any agenda ahead. Even now, if the government does not understand the mandate given by the people and indulge in unnecessary tinkering with the social fabric of India, it will be difficult to get cooperation. And that is not good for the country. Even though we have been missing the train for the past so many years, the hope was that we could do something now. This opportunity should not be squandered.

    • Raja2000

      There is still hope for India – evidence is the comment by “forsanity”. The NDA leader should have recognized that he would not have a majority in the Rajya Sabha for several years when he got elected. Confident in the Lok Sabha majority, he should have “enlisted” the opposition to get what he what “they” wanted. Instead, he wasted the Lok Sabha majority in the foolish pursuit of ‘cleaning’ the social fabric. What a waste.

  • joy

    While the Prime Minister was wooing the tech giants to invest/make in India, his government was taking steps to discontinue the stamp issued to honour late Rajiv Gandhi who was instrumental in heralding the computer revolution in India. I wonder if the irony was not lost on those he tried to woo.

  • ashok759

    The reach and scope of the new small banks licensed recently need to increase, many more should be aproved. Their prime customers are the SMEs, which are not always a good fit with the PSBs. Banks should be urged to prioritise lending to businesses that are employment / export oriented. Economic revival will take time, new age businesses of the Silicon Valley sort can play a modest role at this stage of our development. The red carpet should be unrolled for any businessman who wishes to invest, local or foreign, small or tycoon.