It is difficult to overstate global investors' enthusiasm for India's Narendra Modi.
"For the first time in 67 years, this country has a prime minister who is pro-business," Canada's Prem Watsa said after meeting Mr. Modi in November. Brian Moynihan, the chief executive of Bank of America Corp., said a short conversation with India's leader earlier this month was all he needed to "see why people see the optimism." Masayoshi Son, founder of Japan's Softbank Corp., met Mr. Modi in Tokyo in September and a month later came to India to announce investments of more than $800-million (U.S.). "He gave us more confidence that India is going to be more transparent and deregulated with a lot of focus and passion to improve India as the environment for investment," Mr. Son told the Economic Times in an interview.
Mr. Modi has accumulated this vast reserve of trust without having to implement any major policy changes. International investors seem encouraged simply by the presence of an Indian leader who openly has embraced the economic orthodoxy of fiscal prudence, low inflation, free trade and investment, and minimal regulation. It will be interesting, therefore, to observe the reaction of Mr. Modi's foreign disciples as he continues to adapt that orthodoxy to fit his purposes.
Earlier this year, he shocked his international admirers by stalling the Bali trade agreement. His finance minister, Arun Jaitley, spent much of November saying publicly that the central bank should cut rates, an affront to the Western economist's notion of the separation between central bank and state. (Reserve Bank of India Governor Raghuram Rajan ignored the advice and left interest rates unchanged earlier this month.) Now come questions about the Indian government's commitment to fiscal prudence.
The finance ministry's mid-year economic review, released last week, makes a strong case for abandoning the government's current target of a budget deficit that is 4.1 per cent of gross domestic product. A year ago, India was a member of the "Fragile Five" emerging markets. Now, India is a "near-solitary spark," according to the authors of the mid-year review. The country is the only major economy whose growth outlook was revised higher by the International Monetary Fund this year; most forecasts were lowered, including that of the United States.
At the start of 2013, imports and inward financial flows exceeded exports and outward financial flows by an amount equal to 4.7 per cent of GDP. The gap has been closed to about 2 per cent. The budget deficit, which was 7.5 per cent of GDP, has been narrowed to less than 5 per cent. Indian inflation has decelerated from 10 per cent to its slowest pace in years. Equity markets were ending the year about 30 per cent higher than they were in March. "Macroeconomic stability has returned," the mid-year review concluded.
But what hasn't returned is the China-like economic growth that Mr. Modi promised voters.
The IMF upgraded India's economic outlook for 2014 to 5.6 per cent, which is okay, but nothing like the 10.3-per-cent expansion the country experienced in 2010. Indian officials talk hopefully of economic growth rates of 7 per cent and 8 per cent. To achieve that, Mr. Modi must generate an investment boom. Foreigners are ready to help, but they can be a picky bunch. Many have been burned by India's capricious regulators and politicians in the past. A thicket of rules that will slow the deployment of international capital remains. The excitement about India is genuine, but it will take at least a couple of years before that enthusiasm turns into job-creating ventures. Mr. Modi may not want to wait that long.
"It seems imperative to consider the case for reviving public investment as one of the key engines of growth going forward, not to replace private investment but to revive and complement it," the finance officials who wrote the mid-year report say.
They admit that India's "weak institutions" are holding back the economy. They also note that India's budget-cutting efforts have exacerbated the effects of a weaker global economy; at a time when India needs faster economic growth and increased investment in infrastructure, the government has been cutting back on its efforts to do both. They argue the fiscal target is hurting budget revenue by constraining growth.
This kind of talk in New Delhi will trouble some analysts.
DBRS Inc., the Toronto-based bond-rating agency, in November raised its outlook on Indian debt to "positive" in part because of the government's commitment to fiscal consolidation. "If the political commitment to reduce the fiscal deficit weakens … the trends could be changed back to stable," the DBRS review said. The editors of Mint, one of India's leading business publications, ran a headline on its front page that asked, "Is fiscal consolidation off the table?" The paper also ran an editorial on the subject, arguing that Mr. Modi was on a slippery slope. "The attitude of this government can be summed up in a single line: growth at any cost," the editorial said. "At any cost usually is a bad idea."
This all could be a trial balloon. But it does suggest that Mr. Modi is interested in seeing what all this international goodwill can buy him. If investors continue to be lured by that "near-solitary spark" in an otherwise gloomy global economy, expect Mr. Modi to continue to put his own spin on economic orthodoxy.
Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.