Why geoeconomics must set Modi’s second-year agenda

The historic nuclear deal between Iran and the United States-led group of six world powers will have far-reaching political and economic consequences. Crude oil prices have already fallen. As sanctions on Iran are gradually lifted under terms of the pact, oil prices will trend even lower. Iran's increased ability to support the Iraqi and Syrian regimes financially and militarily could change the balance of power in the battle against the Islamic State (ISIS).

How will all this impact India, especially Prime Minister Narendra Modi's foreign policy outreach? In the end, global power is still about economics. However dynamic a country's foreign policy, unless it wields a big financial stick the world won't pay attention.

Modi knows this better than anyone else. He rose to prominence as a national leader on the back of his economic performance as Gujarat's chief minister. Though Gujarat has always been a relatively prosperous state, Modi throughout his 12-and-a-half-year-tenure maintained a near ten per cent annual growth rate despite a high GDP base. That got him attention from industry and party leaders.

Back from his six-nation, eight-day sweep through Central Asia and Russia, Modi is cementing India's new forward-looking foreign policy doctrine. He will have more opportunities to do so when he speaks at the United Nations General Assembly (UNGA) in New York in September. The diaspora in Silicon Valley awaits him as does, inevitably, another meeting with Pakistani Prime Minister Nawaz Sharif on the sidelines of the UNGA.

But the prime minister must now focus relentlessly on the economy. Without a strong, job-producing economy, India's foreign policy will carry less weight. Geoeconomics - an amalgam of geopolitics and economics - is the key to India's place in the world.

Contrasting figures on economic recovery have lately emerged. The International Monetary Fund (IMF) last Thursday (July 9) issued its latest forecast. Despite the Greek crisis and a $96-billion bailout by the European Union (EU), the IMF remains sanguine about global growth prospects. It projects India as the world's fastest-growing large economy. According to the IMF, China's GDP growth will decline from 6.8 per cent in 2015 to 6.3 per cent in 2016. India's GDP growth will remain stable at 7.5 per cent in both 2015 and 2016. Economic growth in the United States will meanwhile hover around three per cent. The euro zone will struggle at 1.6 per cent. Average global economic growth, the IMF forecasts, will be 3.8 per cent in 2016.

The theoreticians at the IMF are at odds with the latest Indian figures for the index of industrial production (IIP). After spiking to 4.1 per cent for April 2015 (later revised downwards to 3.4 per cent) the IIP grew at just 2.7 per cent in May 2015, according to official data released last week. The main laggard was manufacturing. It declined by 2.2 per cent, dragging the IIP down with it.

These figures will worry the prime minister. Exports have sagged with several months of negative growth. Some of this is due to the fall in the price of petroleum products which India refines and exports. But private sector investment in projects, which dried up almost completely under the UPA-2 government, has clearly not picked up as quickly as industry had hoped.

Data from indirect tax revenue though is more encouraging. It suggests an uptick in industrial activity. For example, indirect tax revenue rose 37.5 per cent from Rs. 1.12 lakh crore in April-June 2014 to Rs. 1.54 lakh crore in April-June 2015. The Greece-EU pact and the Iran nuclear deal will add impetus to the global economy.

Meanwhile, the retrospective tax remains on the statute books, unsettling foreign investors despite the finance minister's assurance that this government will never use the law. Investors are right to ask: if that is so, why not repeal it? This involves a simple amendment to the Income Tax Act which every party in parliament will back.

Plenty of incremental economic reforms have been implemented since the Modi government took office. But they do not add up to a larger picture of dynamic economic vision. So what are the big-ticket reforms India needs to ensure that the IMF's forecast of 7.5 per cent GDP growth in 2015 and 2016 is not a chimera?

The first clearly is tax. Repeal the retro tax and ensure that the justice AP Shah panel studying the proposal to apply minimum alternate tax (MAT) to foreign institutional investors (FIIs) submits its report quickly. This insidious tax needs immediate burial.

The second urgent step is to nudge the Reserve Bank of India (RBI) to cut interest rates. A 100 basis points (one per cent) reduction will help the corporate sector, labouring under a debt burden, to reduce its interest outgo and return to profitability. Consumer price inflation has been steady at between five and 5.5 per cent. Despite the RBI governor Raghuram Rajan's misgivings, lower interest rates are clearly justified on macro-economic grounds.

Third, recapitalise public rector banks. They simply don't have enough funds to lend to companies. The result: delayed projects. The dip in manufacturing output is directly attributable to the liquidity crisis in private sector companies with stressed balance sheets. Banks have burnt their fingers with rising non-performing assets (NPAs) and are not willing to lend. The finance minister must think out of the box to break this logjam. Lower interest rates can be a beginning. The money saved on oil imports (estimated at between $25-$30 billion) can be used creatively to inject liquidity into the corporate and banking system.

Fourth, labour reforms, currently in limbo, must be taken to their logical conclusion. The prime minister has laid great emphasis on improving India's global ranking in the "ease of doing business" index. That improvement will not take place unless companies are allowed to adopt flexible labour rules. These must be fair to employees but not so rigid that they end up damaging both workers and companies.

Fifth, rejig the land acquisition bill. Introduce a lease option to give farmers a continuing stake in their land. The whole debate on land "acquisition" must be turned on its head to signify land development. Industry and farmers must become partners in development and urbanisation. Few children of farmers want to remain tied to an unremunerative agrarian future. They seek jobs in cities and towns. New e-commerce and tech firms beckon. By giving their land to industrial groups on long lease, farmers will retain a financial stake in their holdings. They will receive both upfront payment and a steady annual income and yet remain free to carve out new careers in urban India.

The economic slowdown in China and its stock market meltdown (and partial recovery) should serve as a lesson. China allowed a real estate and stock market asset bubble to build by infusing too much liquidity in the market. In one month alone, four million brokerage accounts were reportedly opened in China before the market's collapse last week.

In India, the opposite has happened. Bad tax laws have spooked foreign investors. High interest rates have squeezed Indian companies' liquidity. Investment has dried up. Fortunately, the prime minister may again prove lucky. Falling oil prices after the Iran nuclear deal could reduce the current account deficit (CAD) to 1.5 per cent. The fiscal deficit is under control at just below four per cent. The balance of payments remains in surplus.

The prime minister's schemes - Make in India, Digital India, Skill India and Swachh Bharat - are excellent in theory but need the kind of rapid deployment achieved in Jan Dhan Yojana which now has around 150 million new accounts. These will serve as conduits to transfer subsidies directly to beneficiaries without leakages to middlemen.

The UPA government bequeathed an inert economy poisoned with a decade of misgovernance. That, however, can no longer be used as an excuse by the NDA government. It needs to rev up the economy and fast track reforms.

It also needs to overhaul its media management which borders on the abysmal. Faced with a hostile news media, it is crucial the government fields, by rotation, articulate ministers and MPs for regular media briefings. The absence of the daily afternoon briefing by the excellent Syed Akbaruddin, the former spokesman for the ministry of external affairs (MEA), has left a vacuum. His successor, Vikas Swarup, (whose book was made into the film Slumdog Millionaire), prefers a low profile.

While implementing real economic reforms is vital, the messaging is critical as well. Both require the PM's urgent attention.