Modi pushes India even further to the right as economy sputters

Prime Minister Narendra Modi spent much of his first term laying the groundwork to transform India into a nation that is both attractive to global investors and unabashedly Hindu. Now he's doubling down.

Modi has visited nearly a dozen nations since his landslide re-election win in May, seeking investments from the Middle East, sharing a stage with Donald Trump in Texas and hosting Chinese President Xi Jinping at a seaside resort. He's also clashed with Malaysia and Turkey over a shock decision to scrap autonomy in India's lone Muslim-majority state of Jammu and Kashmir.

At home, the Kashmir move is one of several that has worried Muslims, who make up about 15% of the broader population. Modi's Hindu nationalist Bharatiya Janata Party, led by his close associate Amit Shah, has spearheaded changes to Muslim divorce laws and updated a registry that could strip citizenship from nearly 2 million people, including many Muslims.

Next up, Modi and Shah may seek to build a temple in Ayodhya to mark the birthplace of the Hindu god Ram. Their party has championed a decades-long fight to construct the temple on the same site where Hindu groups razed a 16th century mosque in 1992, sparking riots that killed at least 2,000 people -- most of them Muslims.

Modi's assertion of a more muscular foreign policy, combined with moves to placate the Hindu majority, are diverting his base from worries about India's worst economic slowdown in six years. But his ability to maintain support going forward may hinge on passing tough reforms that unleash growth -- and create jobs -- in Asia's third-biggest economy.

"Modi and Shah can argue that they have a mandate for these actions, given the election victory, and they certainly face little effective opposition in parliament," said Ian Hall, professor at Australia's Griffith University and author of the book Modi and the Reinvention of Indian Foreign Policy. "The crux, however, is whether they can also deliver growth and jobs, and the economic reforms needed to support both."

The to-do list is long. The banking system is saddled with bad debt, land is difficult to acquire for public investments and labor laws make it difficult for companies to fire people, pushing the majority of workers into the informal sector. A nationwide goods-and-services tax, or GST, that came into effect in 2017 has failed to deliver expected revenues due to a host of exceptions. And protectionist tendencies have shielded key sectors from foreign competition.

Gopal Krishna Agarwal, the BJP's national spokesman on economic issues, said the party has always been "right of center" and aims to focus on infrastructure, tax compliance and contract enforcement to boost growth. At the same time, he said, it will push for a nationwide citizen registry and uniform civil code -- measures minority groups have resisted in the past.

"We also believe that nationalism and economic growth aren't counter to each other," Agarwal said. "Welfare objectives cannot be met without wealth. Economic growth brings in the cake -- only then can it be distributed."

Modi has seen some bright spots. India jumped 14 places to 63rd in the World Bank's annual rankings for ease of doing business released last week. His government announced a $20 billion corporate tax cut, rolled back a levy on foreign funds, injected $10 billion into sick banks and relaxed foreign direct investment rules in coal mining, contract manufacturing and single-brand retail trading.

Leveraging Power
But those moves could take time to show results. The central bank this month lowered India's full-year growth forecast to 6.1%, which would be a seven-year low. The corporate tax cut may further shrink revenues already reeling from the switch to a GST. Bloating federal debt has narrowed the borrowing space for local governments, and the recent stimulus may widen India's combined fiscal deficit to 7.5% -- the highest in eight years.

In addition, the federal government has upset some state leaders with initiatives in healthcare, water and sanitation, which are traditionally in the domain of local governments across India's 29 states. Modi has sought to monitor garbage collection and construction of infrastructure through mobile apps, and his health care system is independent of existing state frameworks.

"This extraordinary centralization of power has been the hallmark of the new government," said Neelanjan Sircar, assistant professor at Ashoka University who has researched Indian state election results. While Modi's increased power can help speed along economic policymaking in a country as complex as India, it also risks backfiring if the government quashes critical voices," he said.

"This is a trap that governments have fallen into," Sircar said. "And I think we are in this place already."

Strong Image
The government has already take a hard line over criticism of its foreign and trade policy.

Modi canceled a planned visit to Ankara after Turkish President Recep Tayyip Erdogan blasted India's decision to abrogate Jammu and Kashmir's special status during a speech at the United Nations, according to a local news report. Indian buyers of palm oil have turned to Indonesia for supplies over concern Modi will curb purchases from Malaysia after Prime Minister Mahathir Mohamad said India had "invaded and occupied" Kashmir.

Inside Kashmir, residents still aren't able to operate freely. Some 12 weeks after the surprise announcement by Shah, who is also home affairs minister, the internet remains shut and people's movements are restricted. Elected local political leaders remain detained in state custody. And the region's local police force has been brought under Modi's government in New Delhi.

The elevation of Shah has perhaps been the most significant change in Modi's second term. Like the prime minister, Shah is a life-long member of the Hindu nationalist organization Rashtriya Swayamsevak Sangh going back to his college days. His home ministry has control over police forces in Kashmir and six other union territories including the national capital Delhi, and is in the process of implementing a nationwide facial recognition system.

"In the coming years, we expect Modi to play a very different role -- that of a bigger, international statesman -- while Amit Shah would be the domestic pointsman," said Rahul Verma, a researcher at Delhi-based Centre for Policy Research who wrote a book about identity in Indian politics. "It will be Shah who will unapologetically push the ideological projects."

At the top of the list going forward is the temple in Ayodhya, particularly as the mosque's destruction in 1992 turned the BJP into a national political force. India's top court has concluded hearing arguments over who owns the land on which disputed site stands and is expected to deliver a verdict as early as next week.

Modi's cabinet ministers including Shah have made statements about implementing a nationwide citizen registry and uniform civil code, which religious minorities and tribal groups have resisted. His allies have also suggested making job and education quotas based on economic class instead of caste.

While these moves may play well among Modi's base, India's global reach hinges on its ability to drive the global economy over the next decade. And that remains an open question, particularly if domestic strife makes it harder to find consensus for tough reforms.

"The US and others have bet big on India: they want it to grow and flourish and play a bigger role. But it will not be able to do that without big and difficult reforms that unleash its economic potential, and without internal peace and stability," said Hall from Griffith University. "As we saw during his first term -- charm offensives in DC, at the UN, with the diaspora and investors can only take India so far."

Disclaimer: This article first appeared on Bloomberg.com, and is published by special syndication arrangement.