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2019.06.30 Penn Wealth Report Vol 7 Issue 03

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30 Jun 2019 penn wealth Report volume 7 issue 03 7 Penn Wealth Report Copyright 2019. All Rights Reserved. tactical Awareness W hen Narendra Modi was swept into power during the 2014 Indian general election, he was considered by many to be the "Ronald Reagan of India." e man who would halt the progressive policies of the Indian National Congress (INC), and clean up a massively corrupt business/ government cabal. Despite having a comparable popula- tion to that of fellow-emerging-market China (both countries have roughly 1.3 billion citizens), the trajectory of the two economies stood in stark contrast to one another. While China was busy build- ing a $12 trillion economy, India was stuck in a byzantine and ancient system which repressed any real economic devel- opment. e Indian people understood full well that both countries had virtually equal-sized economies as recently as the mid-80s, and they were tired of the class warfare lines being pushed by entrenched politicians. ey voted for change. While the Indian economy still sits at only $2.5 trillion (the US has a $21 tril- lion economy), its 25% growth rate since Modi's Bharatiya Janata Party (BJP) took charge five years ago has made it the fast- est-growing large economy in the world over that time-frame. Despite Modi's mul- tiple missteps and the chronic vilification by the INC, a majority of the country's 500 million voters rewarded him with another five-year term. Considering the formidable forces aligned against him, it is fair to say that this was an even more impressive victory than his first. What is holding India back from China- like growth? So why did China take off in the 1990s while India stagnated, especially con- sidering that the latter is a democracy? Ironically, the fact that the Chinese Communist Party (CCP) rules that coun- try has a lot to do with its nascent growth spurt. When a totalitarian government has the ability to control virtually every aspect of life in a country, it can manu- facture growth with virtually no pushback. It can dictate incredibly low wages for workers, and it can wantonly ignore any semblance of environmental responsibil- ity. It can build a dam that floods 1,400 villages and displaces millions. It can even order the creation of entire cities, despite the fact that few wish to move into them (hence, the Chinese "ghost towns"). But this type of draconian rule can only take a country so far, as evidenced by China's rapid slowdown in its rate of growth. An eager American press extrap- olated double-digit annual growth for the country, pinpointing the exact year on the timeline in which China's economy would surpass America's. But anyone with a basic understanding of economics knows that the larger an economy grows, the slower its rate of growth will become. Couple that with a willingness by the US to finally take a stand against intellectual property theft, and the limitations of a communist regime to manufacture growth, and the narrative begins to unravel. As for India, the major roadblock to growth has been its virtually unnaviga- ble government structure. It can take a decade for even a modest project to get off the ground, which explains why the country's infrastructure seems stuck in the colonial days of British rule. Corruption at all levels of govern- ment has also been a cornerstone of India's economic foundation. is has limited foreign direct investment (FDI), as companies quickly realize they must commit acts which put them at odds with anti-corruption laws in their home countries. A number of big US compa- nies have faced the wrath of regulators, greatly reducing their desire to proceed with major projects in the region. Slowly, however, the pro-business Modi has been chipping away at this archaic system. e Indian renaissance. When Modi came to power five years ago, India's economy was the tenth-larg- est in the world, behind Italy, Brazil, and Canada. Today, it is the seventh-largest in the world, within striking distance of the number five spot. By the end of Modi's second term, we expect the global ranking of economies to be: the US, China, Japan, Germany, and India. Surrounded by economic (if not mili- tary) enemies Pakistan and China, India understands that it must build its econ- omy to counter geopolitical threats. e country has been buying more defense systems from the US (it has traditionally relied on Russian arms, but a recent car- rier debacle has made that relationship tenuous), and it has tripled its import of American LNG. With his second elec- tion behind him, Modi has a mandate to push for more pro-business reform and continue his campaign to root out gov- ernment corruption. Pro-Hindu, anti-Muslim sentiment was a major factor in Modi's reelection, but the pragmatic leader knows that eco- nomic prosperity is what his people most desperately need. As the atmosphere of corruption begins to disperse, more American companies will feel comfortable setting up shop in India—and moving out of the line of fire in the trade war with China. And that will set in motion a vir- tuous cycle, lifting millions out of poverty and into the Indian middle class. Zero Sum Game: India's Gains are China's Losses South Asia The best way for America to keep China in check is to encourage the economic growth of India, and Narendra Modi's reelection certainly helps that effort.

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