Modis’ Election Triumph May Usher In a New Era for India

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Profound implications for Chinese consumers

Op-Ed Commentary: Chris Devonshire-Ellis

New Indian Prime Minister Narendra Modi, whose BJP party has won an outright majority in the Indian Parliament, may yet prove to be the right man in the right place to secure India’s development and provide the platform that the country’s demographics suggest could spark a growth cycle not dissimilar to that of China’s over the past thirty years.

Over this period, Indian politics has been run on the basis of a series of on-going coalition governments, with voters in the world’s largest democracy unable to provide any political party with an absolute mandate to rule. That has led to successive governments, led by the now-trounced Congress Party, needing to partner up with smaller political parties in order to generate an operational government. That has meant plenty of horse trading, and to be fair to Congress, the regrettable watering down of many otherwise worthy reforms as vested interests within other parties interfered with the bigger picture. It is no coincidence that as India has suffered through three decades of government with one hand tied, China has powered ahead with forthright decision making, which has been the envy of Congress politicians. India’s perpetual coalitions have undoubtedly harmed the development of India, and this has been especially apparent given the rise of China.

The Modi government then, unencumbered by having to do deals to get reforms through, has a distinct opportunity to perform and get things done. Being a business friendly government will also have a profound impact – Modis’ previous tenure as Chief Minister of Gujarat State ushered in an era of growth and development for that State under his governance. Having won three terms as Chief Minister, Modi has overseen a GDP growth rate for Gujarat of 9.75 percent from 2005 through to 13.79 percent in 2012. It is noticeable that Gujarat’s GDP performance over the past ten years has essentially been similar to that of Guangdong Province in China – consistent, sustainable GDP growth well into double digits. His mandate now, awarded by the Indian electorate, is to duplicate that on a national basis. He is likely to succeed, not just in part because of any specific political skills, but because he also stands to inherit India’s demographic dividend.

RELATED: India’s Rise to World’s Third Largest Economy Puts More Pressure on China to Perform

The nation, just at a time when China is aging, is one of the youngest in Asia. That young population is also growing, and will have a significant impact on the available workforce. Just as China moves into a period where its workforce numbers will decline, India is set to add 500 million workers to its workforce in the next decade. That is the equivalent of adding the entire population of England to the workforce every single year, for the next ten years. This will have a dramatic impact on the makeup of the global manufacturing industry. “Made in China” labels on mass produced products will become “Made in India.”

India’s rise in the numbers of its workforce will also have a significant impact upon China. With an aging population, and an increasing and demanding middle class population to support and keep satisfied, the pressures on the Chinese Communist Party to deliver are immense. China’s middle class is expected to grow from 250 million today to 600 million by 2020. They expect to be able to purchase inexpensive, reliable, mass produced consumer products. But with an increasingly expensive Chinese workforce, stress lines are appearing. It is little wonder then that the Chinese government have made overtures to Delhi to help fund 30 percent of India’s US$1 trillion infrastructure development needs. Only India has the massive workforce in place to cater to China’s insatiable demands. But along with Chinese consumers purchasing more Indian products will come increasing comparisons between the two societies. India has freedoms that China does not, ranging from unfettered internet access, a free media, an independent judiciary and a dynamic entrepreneurial class where freedom to innovate is encouraged.

In short, as China’s one party state model has been held up as an ideal solution to contemporary politics, India’s coming success will start to diminish this perspective. That may yet cause frictions within China, especially if a visibly successful Indian society starts to be compared favorably to China’s version – within China.

Yet before that happens, Modi has some important reforms to get through. Two of the most pressing are getting India’s tax reform bill through Parliament. Held up by the inter-coalition bickering that became the hallmark of the somewhat unfortunate Congress Party, Modi has a real chance to finally push it through. No-one likes paying more taxes, and while at the heart of the bill is a readjustment of VAT and GST collection, it also contains provisions for the lowering of individual and corporate income taxes. On the corporate side, these would be lowered to about 30 percent, from the current 40 percent rate applicable today. Such reform would have an immediate effect on India’s attractiveness for foreign investors.

Another, perhaps more difficult problem to solve is the matter of land reforms. These are partially responsible for the poverty and slum dwellings that have arisen in cities such as Mumbai, and have hindered and prevented much needed prime areas from being redeveloped as more productive sites. It requires a government with a strong will and a majority to tackle these reforms. If Modi can deliver the platform required to take advantage of India’s demographic dividend, and get the young Indian workforce working and productive, the next twenty years of high growth Asian development could well be India’s. The implications for China, Asia and the global manufacturing industry and supply chain will be profound.

Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy, Germany and the United States. For further information, please email asia@dezshira.com or visit www.dezshira.com.

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