After historic India win, PM Narendra Modi proves cautious in fixing economy

As Indian finance minister Arun Jaitley prepared his first budget last year, a small group of bureaucrats walked into his office and suggested a big splash: an end to a retrospective tax that’s soured the investment climate for foreign companies.

Normally budget speeches in New Delhi are long monologues, fat with funding for projects pushed by regional parties that hold together unwieldy ruling coalitions. The senior ministry officials argued that two months after winning the biggest electoral mandate in 30 years, Prime Minister Narendra Modi could take a stand.

Jaitley sat behind the long desk in his dark wood-paneled office and read through a proposal to scrap the tax, according to a pair of officials who were present. When finished, Jaitley, who previously worked as a corporate lawyer, said it wouldn’t be feasible: too much, too soon, and there could be complaints that the administration was soft on big business.

Now investors who trumpeted Modi’s rise to power are becoming increasingly disillusioned. Some of the stagnation comes down to India’s politics: Modi doesn’t control parliament’s upper house, and his party faces elections in mostly poor, rural states where pro-business rhetoric could hurt.

A surprise to many—particularly given Modi’s reputation as a decisive leader with authoritarian tendencies—has been his timid approach to revamping the economy.

The retrospective tax remains in place. Modi has backed down on a proposal to make it easier to acquire land for development projects. He’s failed to implement recommendations to trim a bloated food subsidy bill. And he’s been unable to cajole opponents into passing a goods-and-services tax that would create a single market among India’s 1.2 billion people.

“We definitely want to see far more reforms,” Anil Gupta, the billionaire chairman of electronics components maker Havells India Ltd., said in an interview. “Our expectation from this government is much higher. We haven’t lost hope, but if you ask me if we’ve seen a lot of improvement on ground, no.”

Foreign investors are also growing wary. India’s currency and stocks have been among the world’s worst performers since China’s yuan devaluation on 11 August.

When Jaitley, 62, delivered his budget speech in July 2014, he left the retrospective tax untouched as he spent more than two hours reading 253 items on 43 pages.

The reaction was tepid. Deutsche Bank AG economist Taimur Baig called it “a lost opportunity” to detail steps to bolster an economy that is five times smaller than China even though it boasts similar world-beating growth rates.

Jaitley’s office didn’t respond to e-mailed questions about the meeting and concerns about the pace of reform. A spokesman for Modi declined comment. When Jaitley was pressed on the retrospective tax in a televised debate last November, he said tough reforms “can come at a later stage when the country develops a larger appetite.”

The ensuing months saw a mix of successes and setbacks. Modi shifted money toward infrastructure, galvanized the bureaucracy, empowered state governments and generated about $50 billion from auctions for telecom and mining assets. He also scrapped controls on diesel prices, a process that started under his predecessor.

Still, he’s been reluctant to cut back subsidies further as global commodity prices fall to the lowest level in more than a decade—a boon for import-reliant India.

As with the retrospective tax, Modi has preferred reassurances and suggestions to changing laws. Government-funded billboards call on citizens to “give up” a cooking gas subsidy available to both billionaires and paupers.

Modi this week gathered some of India’s most powerful people at his official residence to seek fresh economic proposals. At the meeting, he asked the country’s tycoons to invest for the good of the nation.

“The expectations we built up were legitimate and logical and we live up to those expectations,” Jaitley told a forum on Wednesday. He added: “In a reform path there is never a finishing line, the race never ends.”

Jagdish Bhagwati, an economics professor at Columbia University and an influential figure in debates about India’s economy, cautioned that patience is needed.

“We live in a democracy, and therefore the speed at which you can go is constrained—you can go two steps forward and then you take one step back,” said Bhagwati, who’s met with Modi and agrees with the direction he’s taken.

Even so, Bhagwati said that he expected that Modi “would move faster in scaling-up the opening up of the economy.”

Indian billionaire Rahul Bajaj, chairman of Bajaj Auto Ltd, said that Modi’s administration has done a lot right. It’s avoided the type of high-level corruption scandals that damaged the previous government, allowed for more foreign investment in defense and railways, and stressed the need to promote more manufacturing in India, Bajaj said in an e-mail.

But, he said, the “shine seems to be wearing off.” Among the reasons, he said, are “the retrospective tax and the stalling of land bill and GST,” the goods-and-services tax.

“One can only hope that in the interest of the country and its people, both the government and the opposition, specially in the Upper House of Parliament, will not be opportunistic but will take the correct decisions,” Bajaj said.

Global investor Jim Rogers, who said he recently sold all his India-linked shares, is skeptical about the way forward.

“India has always concerned me—can it actually work in an efficient way? But then along comes this guy with a good record, on paper, says good things. So he’s got experience. Wins a huge mandate,” Rogers, chairman of Rogers Holdings, said by phone. “If he can’t do it, who’s going to do it?” Bloomberg