THE BLOG

Modi's Capital Ambition

09/11/2015 11:40 GMT | Updated 08/11/2016 10:12 GMT

Narendra Modi is coming to the UK for the first time as Indian Prime Minister, just two weeks after President Xi Jinping of China's state visit. He will not be able to match Xi on pageantry, but his 'Olympic-style' reception by 70,000 Indian diaspora at Wembley Stadium will still send a clear signal to both an Indian and an international audience about his and India's place in the world. Modi has a very Indian form of under-stated charisma and his ability to pull a crowd is second to none among international leaders. His country is also the brightest spot in an otherwise darkening global growth picture. But eighteen months on from his landslide election, does the Modi substance match the hype and what does he hope to get out of his visit to the UK?

Modi took office in May last year with the avowed intention of creating a clean break from the previous administration by sweeping away the political and bureaucratic barriers that have long blocked serious economic reform. His headline policy initiatives - the goal of 100 smart cities, improving sanitation and a mass rollout of clean energy - have been praised for their vision. His 'Make in India' campaign typifies this, with its aim of increasing the manufacturing share of GDP from 16 to 25 percent by 2022 while creating 100 million new jobs. But the results have been mixed. The government has struggled to implement politically difficult land and labour reforms which are necessary if India is to build more and increase manufacturing. The government has also so far failed to implement the Goods and Services Tax reform, which is needed to create a single market in India.

Part of the problem is that the central government needs to work with the states - many of which Modi's BJP does not control - and a second chamber in parliament where it lacks a majority. It shows how Modi is far from being all-powerful, despite his landslide win in last year's election.

This is most likely why the surge in business confidence following that election has now subsided, as expectations have adjusted to a more complex political reality. Over the past year the economy has benefited from lower commodity prices which have reduced the import bill. Investment has increased, but it remains below potential. Private investment is central to many of the government's priorities, including Make in India. While there are signs of improvement, many private investors still appear reluctant to put large amounts of new money on the line.

In this context, what does Modi want from his visit to the UK, beyond favourable publicity at home and abroad? Two things stand out, both of which are related to his domestic challenges. The first is about exploiting the publicity. This is now something like the 20th leg of the Modi world tour since he took office. One of his objectives in the UK, as it has been elsewhere, is to build India's self-confidence at home and the economic patriotism of the diaspora abroad, which remains an under-used source of investment. The Wembley gig and his meetings with Indian business leaders and investors in the UK are partly aimed at doing just that.

The second objective is finance. If India is to mobilise private investment at home it will require finance as well as business confidence. The problem for India is not a lack of cash, as Indians already save about 30% of what they earn. Instead it is ensuring that finance flows to the most productive investments. That requires deep domestic capital markets to reduce risks for savers and costs for corporate borrowers. And that depth means removing the many barriers to participation by international investors in important parts of the financial system, like the under-developed market for corporate bonds. If Modi is to do this there is no more important audience to reach out to than in the City of London.

Modi will, however, be met with a mix of enthusiasm and scepticism. Enthusiasm because the bankers and pension fund managers he will speak to appreciate fully the potential of India as a financial market; scepticism because many of them have also become frustrated over many years by the failure of successive Indian administrations to take actions to match their rhetoric on financial market opening. The reality is that his world tour will only produce the results he wants if he is finally able overcome the political and bureaucratic barriers to reform at home.