Indian shares were down almost 10% through September, with a slightly better performance than China on the MSCI Index, as Prime Minister Modi paralleled President Xi’s US state visit with his own East and West Coast trips to more sober audiences a year into office. Silicon Valley investors, while turning out in large crowds, decried administrative and tax confusion while New York fund managers complained about monetary policy and market access.

modi at SAP

The ruling BJP party swept the lower house but lacks an upper chamber majority, and recent state elections suggest a continued divide after proposed land acquisition and national tax legislation were stymied. Finance Minister Jaitley argues that states under their own power can modernize property rules to clarify ownership and promote infrastructure, but poorer states in particular have other basic priorities and are unwilling to alienate rural populations.

Modi intends to reintroduce the bill for a countrywide goods and services levy needed for simplification, and to recover revenue lost from progressive corporate income tax roll-back. However, the IMF warns that the consolidated fiscal deficit will stay at 7% of GDP this year and next, and that even if passed the regime may not be fully operational until end-decade.

Before the Prime Minister’s US voyage, Minister Jaitley also raised investor hackles by urging the central bank to slash rates as consumer price inflation dropped below 4%. He claimed that energy and food costs were “under control,” with the latter hardly affected by the bad monsoon season, but the comments seemed to undermine monetary authority independence at the same time the government may have tried to seal influence with new RBI board composition rules.

Ministry officials have also clashed with securities regulators over a planned $1 billion IPO for the Bombay bourse, which has tried to keep competitive and technological pace with the fully-automated National Stock Exchange which dominates trading. The Deutsche Borse has 5% ownership and the flotation plan was designed to lift foreign access to 15% to improve governance and performance. The market overseer SEBI supports the idea, but delays have persisted since 2012.

Internal Modi Administration battles have also been fought over expanding the $30 billion international quota for local bond purchase. Central bank head Rajan signaled relaxation to spur inflows when India was considered a charter member of the “fragile five” in 2013, and a shift could pave the way for entry into JP Morgan’s benchmark global emerging market index.

Since then, the current account deficit has fallen to minimal proportions, with the rupee stabilizing, and portfolio investment change lost momentum. The government refused to lift the ceiling and attempted to steer buyers to tax-free infrastructure bonds, although comparable equity limits were eliminated a decade ago. It finally relented in late September with a timetable to allow up to 5% control of the amount outstanding by 2018, equivalent to another $20 billion.

On state bank rehabilitation and recapitalization, the formula has been even more tentative, despite widespread recognition that reforms there will help unlock Modi’s broader economic vision. Public control will be maintained although 15% of loans are currently troubled, and a pledged budget infusion of $10 billion over the next four years is less than half the sum needed to meet Basel III global standards, according to the country’s top ratings agency.

The financial sector push thus far has concentrated on “inclusion” for the poor to open savings accounts, but such laudable initiatives have yet to be met with equally commendable core policy and system moves with India’s stubborn split narrative.

Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.

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