Modi Ushers in New Era for India

Narendra Modi’s rise to the office of Indian prime minister represents a decisive break from past politics. A challenge to the Nehru-Gandhi dynasty – which has dominated the Indian political landscape for more than six decades – was long overdue; that it comes from Narendra Modi, an outsider to the entire New Delhi political establishment, makes it even more profound. The Indian political class has failed to match the aspirations of a rapidly changing India, and Narendra Modi has managed to fill that vacuum. Under Modi, India got its first genuinely center-right government.

One of the most talented politicians in the country, Modi has experienced a political rise that is nothing short of extraordinary. He received a resounding mandate from the Indian electorate, based largely on his agenda of good governance and economic development. The implications of that mandate are still being felt, not simply domestically in India where he has managed to change the political discourse considerably, but on the global stage where the Indian story has once again become attractive.

Economic Optimism

Only a few months ago India was described as the “most disappointing” of the BRIC nations. Its economic reform program had lost traction under a weak and inept government and the Indian rupee was one of the worst-performing currencies among emerging markets. Global credit rating agencies were threatening to downgrade India’s sovereign credit rating to junk if it failed to put its fiscal house in order. In early 2011, the Indian economy was expanding at more than 9 percent. The intervening years have been marked by a sharp slowdown, with growth dropping to 4.7 in the fiscal year that ended in March 2014. Today, the Indian stock market is booming, growth has surged and there is widespread optimism about India’s future. India is now the only one of the BRIC states expected to expand at a faster rate this year than last. More than $16 billion has been poured into Indian stocks this year alone. The Indian equity indices have outperformed other emerging markets so far this year as well. The rupee is currently the best-performing currency among major emerging markets. Not all of this is due to Modi’s policies, but a new government with a decisive mandate has altered global perceptions about India’s potential.

Modi has unveiled an ambitious policy agenda that aims to control inflation, build infrastructure, and speed up investments. India’s unpredictable and capricious tax system has been one of the most significant obstacles to investment. The UPA-II government tried to confiscate profits by making new tax regulations retroactive, which had a predictably dire impact on domestic and foreign investment. The Modi government has promised “rationalization and simplification of the tax regime to make it non-adversarial and conducive to investment, enterprise and growth.” In its first budget presented in July 2014, the new government focused on infrastructure development, streamlining of subsidies, and easing restrictions on foreign investment. Though it was seen as lacking in ambition, two aspects in particular – an increase in foreign investment in the insurance and defense sectors – have been widely welcomed.

Modi has begun an overhaul of creaky labor rules, cutting the power of labor inspectors and slashing the red tape which has made India one of the toughest places in the world for small business to operate. The government has agreed to allow private Indian companies to mine and sell coal at an unspecified future date, setting the stage for the biggest liberalization of the industry in more than 40 years. Some of the important reforms that are in the process of being implemented include raising foreign direct investment (FDI) limits in insurance from 26 percent to 49 percent, changing land acquisition laws, amending archaic labor laws, implementing a nation-wide service tax, and cutting wasteful subsidies on fuel, fertilizer and food.

Defying his own party’s old guard, and their belief in swadeshi, or self-sufficiency and distrust of foreign companies, Modi is confidently calling on major powers to enter the full range of Indian industries. The prime minister is rolling out the red carpet for the global corporate sector with his “Make in India” campaign. At the same time, Modi has also been keen to reach out to the wider Indian public with projects related to construction of toilets and a program to help all Indians open bank accounts.

Despite these initiatives, there is still some disappointment that Modi has not done enough to usher in major economic reforms in his first six months in office. Though Modi announced the abolition of the Planning Commission, an anachronism from India’s socialist days, a change welcomed by India’s reformers, no replacement has been announced. It has been reported that the Modi government is looking at China’s National Development and Reform Commission and the U.S. White House Council of Economic Advisers as possible models. The government has also failed to move decisively against the 2012 retroactive tax on mergers, which did great damage to India’s reputation among international investors than any other economic legislation. The government, which Modi had promised to keep lean, is expanding under political pressure. And some members of the Modi cabinet have not been performing well. It remains to be seen how Modi will manage some of these challenges in the coming months.

A Modi-fied Foreign Policy

Modi has surprised many in the realm of foreign policy. For a leader viewed initially as provincial, he has shown great diplomatic agility. The sheer audacity with which Modi seems to challenge the foreign policy principles of the past is quite striking. Once denied a visa by the U.S., Modi has brought about a veritable paradigm shift in the Indo-U.S. relationship. Although some advised Modi to shun the U.S., he has boldly reshaped the contours of the relationship. In his very first month, Modi scuttled the World Trade Organization’s Trade Facilitation Agreement (TFA) talks leading to much discussion of India’s impending global isolation. Yet New Delhi held on to its negotiating position and ultimately ended up signing a pact with the U.S. on the sidelines of the East Asia Summit in Naypyidaw that indefinitely extends the so-called “peace clause” in the TFA. India’s food procurement and subsidy program now cannot be challenged in any fora until a conclusive deal on the subject is concluded. U.S. President Barack Obama commended the “personal leadership” of Modi in breaking the impasse.

Modi then went a step further and invited Obama to the 2015 Republic Day celebrations – an invite that is viewed as a celebration of India’s close diplomatic partnerships. This will be the first time a U.S. leader will be attending the celebrations as a chief guest. The Congress Party would never have been able to accomplish such a feat. The non-alignment ayatollahs in India are cringing at Modi’s diplomatic successes. For years, the nation has been told that the only way the Indian foreign policy establishment can secure Indian interests is by working within the rubric of non-alignment. Just two years ago, some of the best and the brightest in the Indian foreign policy establishment came up with a “new” foreign policy strategy for India. And lo and behold, they titled it “Non-Alignment 2.0.”

Now India has a prime minister and a government that is not trapped by the ideological moorings of the past. The Modi government is re-shaping Indian foreign policy in a few fundamental ways. A self-assured and sure-footed Modi and his team have dispensed with the defensiveness of the past, confidently engaging with all major powers to secure the best possible outcomes for India. Where in the name of non-alignment previous governments would not acknowledge convergence with key partners, Modi is explicit about affirming India’s key partnerships. The coyness of the past is giving way to a new openness that is embedded in the pragmatic instincts of the prime minister. The U.S.-India joint statement signed during Modi’s visit to Washington in September 2014 was explicit about U.S.-India convergence in maintaining stability in South China Sea. It didn’t matter if the Chinese got annoyed. After 28 years, India has reached out to Australia at the highest levels to underscore Australia’s importance as a strategic partner. Israel’s keenness to have an open relationship with India is also being reciprocated warmly.

New Delhi is putting renewed emphasis on revitalizing its regional profile, injecting new dynamism into bilateral ties with India’s immediate neighbors. India’s neighbors, with the exception of Pakistan, are looking at the country with a new sense of expectation. New Delhi now has to operationalize those aspirations. Recognizing that the implementation phase has always been a problem for Indian credibility, the Modi government is focusing on completing projects in its neighborhood that are already in the pipeline rather than announcing new ones. Despite strong resistance in some quarters and the danger for the BJP of being termed opportunistic, Modi has declared that he plans to go ahead with the implementation of the Land Boundary Agreement signed between New Delhi and Dhaka in 2011. The agreement, which simplifies the tortuous Indo-Bangladesh border, exchanging more than 100 tiny enclaves left over in each other’s territory from the 1947 partition, has not been ratified by the Parliament.

On its dealings with Pakistan, the Modi government has decided to take a gamble by resetting the terms of engagement. By not backing down in the face of Pakistan’s escalatory tactics, Modi is taking a more hard-nosed approach than his predecessors. Though this move is probably long overdue, it is not clear what India’s options are should this gamble fail. Given Pakistan’s internal turmoil, this perhaps doesn’t matter in the short-term. In the long-term, however, India needs a policy that truly focuses on managing the national security risks emanating from Pakistan. It would do great damage to Modi politically if his government is forced to talk to Pakistan once again as has occurred in the past under global pressure built up over fears of another Indo-Pak crisis.

Afghanistan will be a critical challenge with the departure of Western forces next month. India will have to articulate its own role in the region more cogently. It has immense goodwill in Afghanistan that it can use as leverage. But that would mean meaningfully stepping up its security role. The Modi government has declared the immediate neighborhood a top priority and India’s reputation as a regional security provider will be under scrutiny. Modi seems keen to expand its security profile in Afghanistan and is working to provide Kabul with military vehicles, helicopters and automated weapons. India has also finally, after years of dilly-dallying under the previous government, decided to invest $85 million in developing the strategically important Chabahar port in Iran, allowing India to circumvent Pakistan and open up a route to landlocked Afghanistan.

The biggest strategic challenge for India remains managing China’s rise. The Modi government has concluded that the right balance rests between enhancing economic and trade ties with Beijing while also building a deterrent military might. Chinese President Xi Jinping’s visit to India in September 2014 turned out to be less momentous than hoped. China may have lost its opportunity to generate goodwill with New Delhi. The Modi government is trying to increase its scope for diplomatic maneuvering vis-à-vis China by building substantive ties with states like Japan, Vietnam, Australia and the U.S.

Modi has not been hesitant courting China’s neighbors. For example, he invited the political head of the Tibetan government in exile, Lobsang Sangay, to his swearing-in ceremony. Similarly, Bhutan was Modi’s choice for his first trip abroad after being sworn in as Prime Minister, not only because he wants to develop strong economic linkages among Indian’s immediate neighbors, but also to check Thimpu’s gravitation towards Beijing. Modi’s trip to Nepal and his government’s outreach to Myanmar and Sri Lanka are indicative of his desire to seize the initiative back from China on India’s periphery.

Modi’s space for diplomatic maneuvering is considerably greater than that of his predecessor, Manmohan Singh, who was constrained by his lack of political authority and his party’s seeming foreign policy ineptitude. Where the Congress Party has been paralyzed by an almost irrational fear of offending Chinese sensitivities, and in the process ended up jeopardizing New Delhi’s ties with its partners like Japan and the U.S., Modi has taken a more confident position.

While Modi has openly talked of Chinese “expansionism” and has begun taking concrete measures to insulate India from the negative effects of China’s rapid military modernization, he has also made it clear that wooing Chinese investments into India is also a priority. Modi’s energetic diplomacy has put China on notice that New Delhi is not without options in a rapidly evolving global geostrategic context. By increasing India’s strategic space, Modi hopes to gain leverage in his engagement with Beijing.

Modi seems to be redefining the terms on which India engages with the world. Pragmatism coupled with a more confident assertion of Indian interests has been his government’s hallmark so far. He is not shy of reaching out directly to new constituencies, such as the non-resident Indians and business communities in other states. For India’s friends, Modi is extending a hand. For India’s adversaries, he is drawing new red-lines.

Most significantly, Modi is giving every indication that he has no time for meaningless “non-alignment” rhetoric. He will work with anyone and everyone to secure Indian interests, the most important of which is rapid economic growth.

Discarding old ideological baggage, Modi is busy engaging confidently with all major global powers without inhibitions. The foreign policies of nations seldom alter radically with changes in governments. But with the mandate handed to him by the Indian electorate, Modi has an opportunity to bring about a realignment of Indian foreign policy priorities and goals.

Modi’s rise has shaken the foundations of the Indian polity. Even those who dislike his politics cannot deny his impact. He has broken old norms by challenging India’s most powerful political dynasty – the Gandhis – openly, sidelining the old guard within his own party, leading a tech-savvy electoral campaign, reaching out directly to the people, and making a strong pitch for national leadership without inhibitions. Modi wanted to serve as India’s next prime minister, he told his countrymen and women, and he was not ashamed to ask for their support. Modi’s ambition is his greatest asset in leading an increasingly ambitious India. Whether he succeeds in achieving his agenda remains to be seen. But at the moment, Modi is viewed as the best hope for a nation looking for some decisive leadership.