Where’s the Big- Bang?

There was a veritable sense of excitement in the air when Prime Minister Narendra Modi came into power. Wind the clock one year ahead and the hope seems to have evaporated and its status quo as usual. The public is losing patience and it seems so are the investors. In the nine months since coming to power, the Modi-led government made some progress on the reform front, including easing foreign direct investment (FDI) restrictions in some sectors and ending government price caps on diesel. Big-bang measures, however, have not been forthcoming. The decline in rural wages is affecting rural consumption demand and job growth. If this trend is not offset by an increase in investment and faster growth in urban areas, it could lead to a demand for more populist policies and subsidies from the government rather than reforms.

Events on Thursday were perhaps symptomatic of this anger. Overseas funds on Thursday conducted their biggest pump and dump operation on Indian soil. Overseas funds chalked up their biggest single-day sales of Indian shares and bonds in 18 months, fuelling concerns that an emerging market like India is losing its allure over the growing anger over a tax on foreign investors.

 The net sales of around $630 million on Wednesday, preliminary data showed, is the biggest since foreign investors sold around $877 million on January 27 last year, a time of intense worry over higher US interest rates. The rupee fell to its lowest in 20 months on Thursday, weighed down by growing investor concerns over the government’s taxation policies that threaten to reduce the allure of local asset acquisitions for foreign institutions, while the global debt sell-off also hurt.

Perhaps nothing is more symbolical of the investor outrage than the super investor Jim Rogers who has been severely critical of the Modi government’s inability to walk the talk. On deeper analysis his criticisms ring true on every level. So far the new government has not much done except brag and bluster. The current prime minister campaigned for many months, claiming that he knows how to fix India. Actual ground results, however, suggest otherwise.

The solutions are easy to pinpoint but difficult to implement. First, get rid of exchange controls and make it easier for foreigners to invest in India. Currently, it is a proverbial nightmare, and this is happening in 2015, and not 1915. Second, open up the market to foreign investors. Reform momentum can slow either due to an inability to pass key legislation in Parliament, or a demand for greater subsidies if economic activity and jobs do not increase at the desired pace. Modi seems to be stuck between a rock and a hard place.