Contradictions in Modi’s Policies at home and abroad, leave India floundering:

Modi faces a stark choice of critical importance to India's future at home and abroad

Modi took over India’s reins when it was among the fastest growing economies in the world, a more or less a vital part of G10, enjoying a good relationship with US, China, Russia, France, and an undoubted leader of the sub-continent.  He started out triumphantly, inviting every leader from the Sub-continent for his swearing-in ceremony in 2014. Most obliged.  He was the foreign policy PM, hoping from one national capital to the next, touching base occasionally at home.  Every pronouncement he chose to make, banal or profound,  was hailed as the first ever in India’s history. 

And yet seven year later, India finds itself alone in the neighborhood, estranged from friends and foes, alike.  The relationship with China, far from breaking new ground, has turned deeply antagonistic.  Russia, always the reliable friend has slapped us in the face over Afghanistan, and otherwise made its displeasure clear.  We are part of the QUAD, a global strategic partner of the US, who will not even discuss the possibility of an FTA with us, while we are out of the Asian trade block, RCEP.  The possibility of negotiating a FTA with the EU is even more remote.

For such an active foreign policy player, who devoted all his time to traveling abroad, leaving governance at home to Arun Jaitley, how has Modi managed to so rile and estrange so many friends and foes all at once, and paint India into a corner over trade, so vital to our ability to push growth above the 6 to 7% range?


For answers to above strange conundrum, we will have to look to the deep contradictions, and disconnects, between Modi’s political strategies at home, and those necessary to forge strong political and trade relations abroad.  Never has India faced such a deep disconnect before.  

Lets us examine of the disconnects to assess their depth, and why they can’t be reconciled.

1. Treatment of minorities like Muslims and Christians, at home but also the Dalits.  It is no secret that the BJP under Modi has made deep, and often virulent polarization of politics along the communal axis, its key strategy in harvesting votes from Hindus at election time.  The cost of doing so has been profound.  India’s commitment to a secular polity is in tatters at home and abroad.  

Nobody believes the efforts to tone down such polarization being made from time to time are anything more than pro forma.  This has estranged neighbors, lost India its high moral ground in international relations, and bracketed us with China in mistreating its Muslim minorities.  

As the approaching elections to UP show, this strategy is now so intrinsic to the RSS/BJP project of building a Hindu Rashtra, that a restoration of the status quo is impossible.  

Modi meanwhile has no way to paper over his policies at home before international interlocutors.  Any effort to minimize the import of such strategies at home will only damage his, and India’s credibility, further. 

So reconciliation with immediate neighbors, has become nearly impossible.  SAARC is dead.  And most of our neighbors, are being wooed by China with attractive aid packages.  We may still pretend all this is merely neighbors “balancing” India with China.  The fact is the tilt goes far beyond mere balancing.  We have lost our ability to influence outcomes critical to us even in places like Bhutan and Nepal.

2. If there is one single thing that has diminished India under Modi, it is the stalling of India’s growth rate to below 6%.  Given the limitations of saving at 30% of GDP, and ICOR, of 5, India simply cannot grow beyond 6% per annum on its own steam, relying on its own internal demand for goods and services.  For any growth beyond 6%, India needs foreign savings, primarily by way of FDI, that adds say 4% to the growth rate to take it to 10%.  This implies FDI flows should about 20% of our GDP.  The reality is FDI is around 2% of GDP, a pittance compared to our need for growth.  

But even if we managed to get such a volume of FDI, exports would have to grow to service the FDI.  Actual growth in exports from 2014 onwards have been near zero.  Unbelievable but true.  Meanwhile Modi has walked out of almost every multilateral trade block, and failed to clinch a trade deal either the US or the EU.  How will our exports grow?  

And if exports don’t grow, how will we step up growth from 6% to 10% that we need to offer to international investors, in order to attract the required FDI of 20% of FDI?  If all this looks circular, it is because it is circular, and each part linked with the other.  

Without a growth rate of 10%, Modi can neither sell India abroad, nor get a free pass on his dysfunctional domestic politics at home.

3. The question then is: what prevents Modi from pursuing a more aggressive FDI linked export strategy to raise GDP growth to 10% pa?  

The answer is his unwavering commitment to domestic tycoons, who want a market sheltered from foreign competition, so that they can build cosy domestic monopolies in order to grow themselves, as opposed to growth for India.

To enable this, Modi has coined his “Atamnirbharta”, which is Orwellian doublespeak for protectionism.  Such measures include things like raising import duties on consumer electronics, erecting high tariff walls against import of steel, cement, chemicals, textile fibers etc.  

Further since such tycoons import most of the plant and equipment, and certain critical raw materials, Modi is obliged to keep the external value of the INR artificially high, to keep imports cheap for such tycoons.  This in turn hurts exporters, who demand tax and duty draw-backs in addition to export incentives, in order to make exports viable. 

This regulatory snarl had been eliminated in 91 economic reforms, but Modi’s need to protect his tycoons has brought all of them back.  It is a vicious circle, because protectionism means a highly inflated INR, which means FDI will not come to India because value added in INR is inordinately inflated, and the wafer thin margins in value chain manufacture cannot afford inflated costs in INR, if India is the location.  Without FDI, there are no jobs created, no increase in incomes of people, and so no room for growth for local industry.

4. In all this vicious circularity, one thing clearly stands out.  Modi has to choose between two things.  Either he must open India to foreign investment, and allow free competition in Indian markets between foreign owned firms and domestic tycoons, or he can close the Indian economy to protect domestic tycoons, and let India’s growth fall to its intrinsic trend rate of 6%.  

He cannot have protectionism at home and free trade abroad, that also brings in the FDI to raise growth from 6 to 10%.  What should Modi choose?  6% growth and protection for tycoons, or 10% and let FDI in, to give it a level playing field in the domestic market, that will shatter tycoons’ carefully constructed domestic monopolies?  

Modi’s choice is dictated by his need for election funding through Anonymous Electoral Bonds.  If Modi wants 70 to 80% of such funding to come to the BJP, to give him a monopoly on power, then he must likewise let domestic tycoons have their monopolies in the economy, as result of which, India must reconcile itself to a lower growth of 6%, instead of the possible 10% or more it needs to break out of the Chinese containment.

The independent variables in the domestic policy are basically two.  Firstly, communal polarization as way to create a RSS/BJP chokehold on power, as opposed to competing for votes based on performance.  Secondly, protecting domestic tycoons to preserve monopoly on electoral funding, or to open up the economy to external competition, and bet on the higher growth of 10% returning BJP to power.

The choice is stark:  self and BJP first, or national interest first.  

The choice that Modi makes will determine if Indian growth rate falls back to the 5 to 6% range, a closed economy, with vastly diminished international  influence, or a 10% growth based on an open economy, higher exports, more FDI, and a big player in the international arena, because its growth rate drives the global economy.