Economy Is Top Priority for Narendra Modi

Wednesday, May 28, 2014

Henry Kissinger Senior Fellow for U.S. Foreign Policy, Council on Foreign Relations

Jagdish N. Bhagwati

Senior Fellow for International Economics, Council on Foreign Relations

Senior Fellow for India, Pakistan, and South Asia, Council on Foreign Relations

Charles R. Kaye

Co-Chief Executive Officer, Warburg Pincus LLC

CFR Fellows Alyssa Ayres, Jagdish N. Bhagwati, and Robert D. Blackwill join Charles Kaye of Warburg Pincus to discuss the results of the recent Indian election. A slowdown in economic growth combined with the widespread perception of corruption and mismanagement on the part of the ruling Congress Party set the stage for a resounding victory by Narendra Modi and his BJP Party. The panelists discuss Modi's economic policy track record as chief minister of Gujarat and suggest that the economy will be the primary focus for his new government. They also discuss the 2005 decision by the United States to deny a visa to Modi and its potential impact on U.S.-India relations going forward.

KAYE: Well, welcome everybody. Welcome to the Council of Foreign Relations program on the New Indian Government. Before we get started, I just want to thank everybody, not only for joining us here in the room today, but our members from around the country through our live stream and teleconference. I think Alyssa was telling me that it's one of the largest audiences we've had in some time in the Council on Foreign Relations. So, delighted to have everybody join us. And we will reach out to our members outside of the room during our question and answer session.

Well, remarkable goings on in India these days. We were talking a little bit at lunch about exactly how well covered or not, many of the events have been in popular press versus elsewhere. But the recent Indian election was itself a truly -- I said a remarkable event, both in the context of the election itself, which set so much new ground in the context of Indian electoral politics. And clearly the Narendra Modi led government has re-energized the country and rekindled a real buzz around the prospects for the country.

Today we're going to hope to explore both the election itself. What it means. Why it happened. And at the same time talk a little bit about what the prospects are for both economic policy as well as developments in foreign affairs.

We're joined today by three CFR Fellows, all with quite distinguished backgrounds as noted in their bios in your program, too long in any one case to get into all of them. But each with a quite different perspective to what I think is a fascinating topic to talk about.

Alyssa Ayres, on the far end, has just recently left as Deputy Assistant Secretary of State for South Asia, and a long time watcher of both India and Pakistan. Jagdish Bhagwati, one of the generation's most creative thinkers around free trade, and passionate advocates for it. And Ambassador Bob Blackwill, former Ambassador to India, and one of the insightful foreign policy thinkers of the era.

So, delighted to have all of you with us. Why don't we maybe start the conversation with the election itself. Pretty remarkable outcome in so many ways. I think highest participation rate ever, something over 66 percent, brought out the youth movement, which had been talked about as having been dormant in Indian election politics for a long time.

First majority government in 30 years. First non-Congress majority government ever. Presidential style campaigns, sort of focused on broad-minded topics like leadership and development. Fewest seats, and I think lowest percentage ever for Congress. And I was thinking about it on the way over, it may actually in this history of electoral politics, maybe the most votes ever for a single candidate in the history of the world.

So Alyssa start us off. What -- why did this happen and what do we learn from it as it relates to Indian politics?

AYRES: Right.

KAYE: Or Indian electoral politics?

AYRES: Thank you. And it's great to be back here in New York and to see so many friends here today.

So I definitely agree, Chip, with the way you set this up. And yeah, I think what we just saw happen in India was in many ways was kind of an unthinkable political transformation. Narendra Modi of the BJP, the Bharatiya Janata Party, which means the Indian Peoples party, surmounted domestic challenges of his own once very polarizing past. And as Chip said, has now led his party to a definitive victory in India politically

So in an era in India where coalitions had been the name of the game, the way that governments had worked for the last 30 years, having a single party majority actually is something quite new and different. So it's quite something and it's going to bring changes in India.

Let me just give you a couple of other stats in scale on the Indian election. I wanted to make sure that we covered that. It was part of the charge I was given as our division of labor today.

But as Chip said again, the largest election in world history, 815 million eligible voters. And of that pool of eligible voters, the world, you know -- highest ever voter turn out in India, at 66 percent. Which means, that almost 550 million people cast ballots in this election. It's really quite remarkable to think about.

And as Chip also referred to, a very large youth demographic. India's a very young country, 54 percent of the population over all is under the age 25. And so with this election, there was a rising pool of first time eligible voters, around 120 million first time eligible voters. So, not all 120 million voted, but it was quite something different and we can see the impact.

So the BJP's win, in India, there's a 543 seat parliament in the lower house. You need to get 272 seats to cross that halfway mark and form the government. And as I mentioned, it hasn't been the case that there's been a single party government elected since 1984. The BJP in this election crossed that mark with an additional 10 seats to spare. They got 282 seats on their own, and with their pre-poll allies forming the National Democratic Alliance, they have 336 seats in the lower house of parliament. So that's actually a commanding position in the lower house.

India's very fragmented polity and often difficult and unwieldy coalitions over the course of the last 30 years had, in a span of let's say the 1990's, led to political instability. That phase kind of transferred. But in the course of later governments, particularly the case over the past decade, having difficult coalitions let to policy paralysis.

So the new Indian government is not going to be plagued by fighting with allies, or policy paralysis, due to numbers in the lower house. And as Chip mentioned, just the last bit I would also note, on the Congress Party's very poor showing, they've ended up with just 44 seats. That's such a low showing in the lower house, that it means that under India's parliamentary rules, the leader of the Congress Party actually cannot serve as the leader of the opposition, because they don't have a full 10 percent of the number of seats that would be required to actually earn that designation.

So what are some of the reasons that account for the BJP's victory in this election? And who and what is Mr. Narendra Modi all about?

One of the most important factors in this election really lies with the fact that the Congress Party government lost steam. The party once known as the Party of Reform, the party that opened up India to economic liberalization in 1991, kind of stalled, became a party known for corruption scandals. A series of very high-profile corruption scandals began to unfold over the course of the last four years or so.

But most importantly, they didn't deliver on economic growth. Growth shrank from nearly 10 percent in around 2007 to 2008, down to below 5 percent this year and last. And that matters a lot in a country that is so young demographically and which needs to be generating jobs for these very large population that becomes of work force age every year. So many observers called this election a referendum on the Congress Party government.

The second factor, I'd say, is that Prime Minister Modi ran a very tight ship. His election campaign ran like clockwork and it was very tightly focused on economic growth and good governance. And based on what voters saw, with the Congress Party government, this was clearly a message that resonated for people.

He has a credible authority on economic growth and good governance, given his track record in the state of Gujarat. And he very directly appealed to people's pocket-books, saying "I'm gonna do things that will help generate jobs for our country."

Importantly, the religious and cultural elements of the BJP, really took a backseat in this election to that twin message of growth and governance. There was not a lot focus and attention on the broader Hindu Nationalist platform that the party had campaigned on in previous elections.

Also, the persona of Mr. Modi, again a former Chief Minister of the state of Gujarat, played a really important role in the victory. As Chip mentioned, he did run a presidential style election instead of the parliamentary style focused just on the party who was focused on himself in projecting an image of an authority figure who could get things done, and get them done cleanly.

He's a -- rhetorical skills that are mesmerizing. You know, he would command audiences of, you know, more than a 100,000 would come listen to him speak, but he also campaigned on his reputation for administrative skills, zero tolerance for corruption, you know, knowing how to manage a bureaucracy well, and creating a business friendly environment of Gujarat.

He also does present himself as a strong leader who sets direction and gets results on the campaign trail. For people who were following this closely, you'll recognize that he spoke a lot about his 56 inch chest, and so it takes "someone with a 56 inch chest to get things done in India," and make things work.

But this obviously worked. I mean, I saw some stats the other day. Mr. Modi campaigned in 249 constituencies across the country and 80 percent of those constituencies went for the BJP. So, just by contrast, the Congress Party's Rahul Gandhi campaigned in 109 seats and Congress won just 10 seats out of those 109. So quite a poor track record by comparison

I'll say just a couple more words and then I'll come back. How will this governance style translate to the federal government? That's something that's important to think about the way India is structured.

"Prime Minister Modi ran a very tight ship. His election campaign ran like clockwork and it was very tightly focused on economic growth and good governance. And based on what voters saw, with the Congress Party government, this was clearly a message that resonated for people."
—Alyssa Ayres

Mr. Modi campaigned on a phrase "less government, more governance." You can see already that he's looking to have a smaller central government. His Council of Ministers, so his cabinet and subcabinet appointments, the previous government had 70 people. His new Council of Ministers is just 45 people. So he's shrinking the government and combining some portfolios under one roof. So that may lead to better decision making and faster processes.

So he'll be able to run a more streamlined and tighter ship at the center. He won't be totally unconstrained. India is a complex place. Congress Party, not the BJP, controls the upper house of parliament. So that will matter in legislation. There is some talk -- you've seen in the press some talk about about trying to hold joint sessions of parliament to overcome this hurdle.

But the other issue that will come up is the issue of working with the states. And India is very federal. Mr. Modi is the Chief Minister so he has the experience of being, you know, part of the state, looking to do his own thing. But how will the center interact with other states? Not all states are ruled by BJP leaders, so there may be states that don't agree with policies that may be set at the center. Importantly, the Indian constitution does delineate responsibilities in ways in a lot of things like, for example, law and order, agriculture, retail, labor, education, those policies are set at the state level.

So, I'll sort of wrap there. I know Chip's kind of giving me the signal...

KAYE: Let's keep that conversation. But before we get to some of the economic and foreign policy part so, you know, buried in all of this has also been a pretty colossal defeat for Congress. So what's the -- what's the legacy -- what is -- what are the lessons? What happens to the Congress Party from here?

What does it say about the legacy of the Prime Minister? I know you've known him the longest, Professor Bhagwati. You want to chime in there and maybe -- What does it say about the electoral politics from here, and to what degree...

BHAGWATI: Yeah, no. I think it's a good question. Because I was close to the '91 reforms, and hopefully, you know, what my coauthor and I have been writing is having some interaction with the current one. So it is rare to have two shots at reform of the country's system.

Some people have two shots at actually running the system. And that's -- those people are now out, actually. Because there were several people who were against the reforms in '91, as you remember.

Then they're also they help when they get elected by supporting things which are -- can be summarized in one particular observation, which is that what really cost him, cost the Congress Party, such enormous (inaudible) impact was that the fact that inflation was breaking out. The last five years, largely because bureaucrats would not be taking decisions to pass, you know, to get projects going because of the continuous, you know, talk about how the -- there was so much corruption and so on.

The system had slowed down. Growth had become very slow. So they were not getting the revenues, again, which come with higher growth. At the same time, the people on the other side, the left-wing -- pro-left wing, anti-Modi people, were in fact, in favor of continuing to spend more and more money on social spending.

Now, there's a disconnect here. You can spend more socially if you've earned revenues. But if you don't have revenues, what are you going to get? And you don't have to be a macro-economist.

You just have to have common sense of the type that Modi has, and say, "Look, this is going to lead to inflation." And the system crashed, basically. So I think that's one important reason.

The second thing was I think people were mesmerized by this continuous refrain about Modi being a Hindu Nationalist. Everybody was writing that. Once I wrote that by those -- by that definition, President Obama goes to church every Sunday, probably more often. Maybe he needs to. But, so he's clearly a Christian, right?

And he's also a Nationalist. Just remember what happened to poor Jimmy Carter when he expressed some doubts about the United States being number one and so on. So everybody is, you know, has their religion, and they also have their nationalism. So -- but they got so mesmerized by the 2002 riot, communal riot, which in fact, he was not really -- I mean, he's been cleared of every charge.

So they believed he would lose because the secular issue. So I think the opposition basically shot itself in the foot.

KAYE: So before we get to -- go ahead Ambassador.

BLACKWILL: I was just going to chime in with a couple of things. The Congress Party's in a state of shock, as you would expect. And they -- we don't know how long it will take them to come out of this state of shock, but months and months, surely, as when political parties face this massive defeat.

The other thing I'd add to Alyssa's good summary is Modi is legendary in how hard he works. Legendary. I saw him in Gujarat at the end of last year, and I was talking to one of his guys. And I said, "What's it like to work for him?" He says, "Well, he routinely works until 11 o'clock at night. That means we work until 11 o'clock at night."

Then I go home and the question is, "Is this one of the nights that he calls me at one in the morning or rather is it the other alternative that it's one of those nights, mornings where he calls at six in the morning?" And as Alyssa said, the question of this command style government, which he ran in Gujarat with great success, will it work at the national level?

"You can spend more socially if you've earned revenues. But if you don't have revenues, what are you going to get? And you don't have to be a macro-economist, you just have to have common sense of the type that Modi has, and say, 'Look, this is going to lead to inflation.'"
—Jagdish Bhagwati

And we're going to find out, because we have a laboratory test before our very eyes. But we can expect him to try to apply at the national level all of these techniques, these governing and management techniques, that he applied at the state level.

KAYE: So, let's turn back to the sort of economic issues a little bit. You know, clearly the kind of reform agenda had run out of some steam over the last handful of years of a laundry list of issues that could get addressed. On the other hand, I might argue the most pressing need is what I'd almost think of as simply restoration of competent daily administration of a functional government, i.e. restoring some of the elements of just sort of dated-- daily state capacity, if you will. It almost felt as if they had -- had sort of ceased to function as effectively.

How do you balance -- what do you -- what do we -- what do you expect to see from the new government? What are sort of the early -- early actions you think are most important here?

BHAGWATI: For that, I think you have to go back to the DNA of Gujarat. Because Gujarat is basically a trading, mercantile community for millennia, or at least centuries. Let's not exaggerate.

Now, as a result, nobody in Gujarat wants protection, really. They're eager to compete, because they think the other guy is going to lose. Not they. True, there's no -- nothing that I've ever noticed, which is anti-foreign investment, equity investment. I mean, you don't hear that in a lot of other parts of the country, including Delhi. But in Gujarat, I've never come across that, and I come from Gujarat myself.

And two, he basically had one stock pool of foreign investors. They would all come from different parts of India, go to Gujarat, and get cleared. So the notion that foreigners or investors, when they make game, when they make profits, are somehow cheating and, you know, imposing a terrible price on the people, that's simply foreign to the Gujarati way of thinking. There's mutual gain. Nobody's going to come in just, you know, in order to be good guy, you know.

They gain. You gain. And so I think that attitude is scalable, I think. Partly because Gujarat has profited from it, and nothing succeeds, as you know, Chip, like success. This is something that has worked so well for Gujarat.

And there's one additional element I would say that I think is true of Gujarat, that I think can be put across much like Simon Schama's, you know, the Dutch workers, "The Embarrassment of Riches." Gujarat has this tradition of really combining prosperity and wealth with social spending, with social responsibility -- personal social responsibility. And that -- so when I went, you know...

KAYE: So -- so you talk about the trade and foreign investment side. One of the other elements is sort of the domestic side of the equation, sort of you've had a pretty dormant sort of investment in infrastructure, CAPEX spin cycles sort of is at a bottom.

What happens in order to restore that? I know you and Arvind have written a fair bit about kind of the Indian manufacturing story and whether it ultimately does need to be a part of the Indian development agenda. How does that get addressed?

BHAGWATI: But I -- well, for that you'll see, first as you open up the economy even more, because there's some ways to go as we all know. That is going to make an enormous difference to the rate of growth of the economy. And the more the economy grows, the more you're going to be able to create jobs.

That's the story which we actually write up. That growth in itself draws people up above the poverty line, by creating opportunity. Sure (ph) it creates the revenues. So he's going to be able to use the revenues, which will start growing again, to do the social spending. He's not against social spending. Nobody can be against social spending.

So I think that combination, I think is really -- he can really put it across. Because if you look at the social indicators in Gujarat, Gujarat is very high on that. If you take the -- what we economists call first difference, meaning the change you made, not the levels you start with. If you start with the levels, of course that can be very bad.

But look at the difference you've made by Modi, that is entirely due to the Gujarati DNA, which is in fact scalable. But also the fact that revenues were coming in, and he was able to spend the money, even if there had been no Gujaratis is doing private social responsibility, he would have been able to do it.

And if you look at his program and his agenda in Gujarat, there is that element, you see. Otherwise the system would not be -- would not be stable in my view. You can't have just growth, prosperity, and not the other leg on which you stand. But he has that other leg.

KAYE: So let's -- I'm going to come back to something you touched on. You sort of used Gujarat as sort of the example. And I think a lot of people are talking about his style of being one that may re-balance the center versus the states and have more of the experimentation and demonstration effect and almost competition among states.

Alyssa, you started to refer to this a little bit in some of your comments as well. What might we expect there, and...

AYRES: On the campaign trail, Mr. Modi talked about this. And this was part of the BJP's election manifesto, the role that states should play in Indian foreign policy in being part of what India can show to the world. So I think we can expect to see a central government that's going to be listening a lot more to it's Chief Ministers, asking them to play roles abroad.

There's another interesting thing that Mr. Modi has done. He has put the person who is the new foreign minister, the Minister of External Affairs, also in charge of the Ministry Overseas Indian Affairs, which deals with the Indian diaspora around the world. Again, another campaign platform element was drawing on the role and talents of the Indian diaspora. Well, that links people back to their home states. So that's another point of connectivity with the states.

Will there be connectivity between the Chief Minister of Tamilnadu and Tamils around the world, or you know, the state of Gujarat, or Maharashtra, or Amnura (ph), or you name it and there's places -- Punjab, for example, Bengal, -- around the world there are people who are from those states. If the Chief Ministers are playing more of a role internationally, it will be interesting to see whether that also generates more trade and investment through the connectivity of the diaspora.

BHAGWATI: Yeah, they're right. I would just say this is what the UPA (ph) government was doing, to the point of harassing us, or whatever (ph), attending these meeting -- regional meetings and so on. Which is fine.

I mean that's a -- but I think where he's going to be really good I think, is he realizes that what Gujarat managed to do, had a big impact on the country, right? So he's going to be for experimentation.

That's another aspect of his personality. I mean, he doesn't have strong settled views about what should be done. He listens, right? And that's the experience of all of us. He's probing, and then he makes up his mind. And then he's results oriented. He gets the bureaucrats together and says, "What do you have? What are you going to do in your portfolio?" And so and so forth.

That is a good way to do it. But having seen his own region took off, contrary to what the rest of the country was doing, he's going to encourage it, in my opinion, more experimentation by the states. That's my prediction.

KAYE: So -- so obviously the election was principally around domestic issues and restoration of growth. But new government, you know, will bring with it some perhaps meaningful changes, less discussed in foreign policy. Maybe we should start to explore those a little bit Ambassador Blackwill and maybe let's start off here, with what -- with what the Prime Minister intends for the U.S. India relationship.

BLACKWILL: Let me, before I get to that, just make one other point supporting my colleagues. It is unusual in my experience to have a charismatic, political figure with commanding authority, who's also a good listener. George Schultz, for whom I worked once, once said that "listening is an underrated way of acquiring knowledge."


BLACKWILL: Modi is really a good listener, and it is a curious, almost asymmetrical combination. But the other thing I would say, before we get to foreign policy issues, is nobody knows how applicable these many techniques he used in Gujarat will be at the national level, including him.

But he does have an experimenting personality. So one, I think what one can expect is that he'll try something, including with the states. Sometimes it will work and some won't work so well. He'll pull back. He'll try something else.

And the question is then, how many times does he have to pull back? And how many times does it work on the first try? And nobody knows.

Now, foreign policy. It didn't figure in the campaign. And as -- I was trying to think of how to help you map, for those of you who don't follow India carefully, Modi and foreign policy. Think of a very successful, talented, American governor, who has done a great job in his state, who runs for the Presidency, and wins, but who does not have any great experience in the grand politics of international relations. Learns on the job, if you will. That is Narendra Modi.

He of course is quite familiar with Pakistan, since it's right across his border. But he hasn't thought, and he doesn't pretend to have thought about the great geopolitical issues of the day. But he's beginning to think of them in the last 96 hours.

Second, he has made clear, and here I was thinking about how consistent what he said about the way forward for India internationally is, with Richard Haass' latest book "Foreign Policy Begins at Home," it's exactly what Modi has said in India. That a strong India externally depends crucially on a powerful India at home.

And so what he's talked about it economic diplomacy. He probably has given the career diplomats over in the foreign ministry shivers, because what he has said is, in the core of Indian diplomacy should be commercial. That certainly will be a new thought for most of those men and women. So fairly inexperienced in this regard, but very preoccupied, as my colleagues have said, with the reformation of the Indian economy.

Now, one last point about this. So that's his general framework. And I'll say something about the U.S.-India relationship, quickly in a second. But as all of us know, things happen. So he can have these concepts in his mind, but we'll see what the international environment, what surprises it produces for him. Because it will certainly produce surprises. And I'll mention one a little later on that is perhaps most in everybody's mind.

U.S.-India relations. I'll just do this epigrammatically. They've been in a trough for the last couple of years, lack of attention at the highest levels on both sides.

On the Indian side, a worry about the future of Afghanistan. They'll be happy about the front half of the president's decision on Afghanistan, 9,800 troops stay after 2014. They will not be happy about the back half, a total American withdrawal in 2016. But they're anxious about that.

They're anxious about U.S.-China affairs. Indians tend to worry as Europeans used to do about the Soviets, they worry if U.S.-China relations are too good, and they worry if U.S.-China relations are too bad. So that's another preoccupation with them. And then finally, of course, Pakistan.

But the point I want to particularly make here is that there is a special issue, which you all know about, but I'll just mention in passing, which is the refusal of the United States in 2005 to grant him a visa to visit this country. And that refusal persisted until the day he won the Indian election. The question arises, how much of that personal feeling he must have about that particular episode affects state policy?

He has spoken to that, and said none. And has said, "As Prime Minister of India, I represent India, and whatever I might think of this or that is not pertinent." But he certainly would be, perhaps less than a member of our species if he didn't, in private moments, think about this.

And by the way, that decision was absolutely unique. We haven't done that to anybody else. We did it to Modi, and I suppose that the people who did it to Modi thought, well, it's pretty safe, because, you know, he's never going to be Prime Minister.


BLACKWILL: I'll just say a parenthetical here, which is, up until two years ago, Indian journals were filled with articles that there will never be a majority government in India again, showing the limitations of social science.

Last point, which is, the future. I do think that there's something to the proposition that a liberal Democrat and a Hindu Conservative Nationalist aren't necessarily going to get along naturally. But both have -- and I'll stop here, but both have interests that will at least hopefully bring the U.S.-India relationship back to a more prominent place in both capitals.

For the United States, the animating reason that the transformation occurred early part of the last decade was the rise of Chinese power. And without the rise of Chinese power, the nuclear deal would never have been proposed, and never would have been ratified. And for the United States, India remains an important actor in the Asian balance of power, although we have not included it in any of our rhetoric on the pivot to Asia.

But that's one reason that, I think, both countries preoccupied, not with containing China, but with working together to try to shape Chinese external policies. The second is investment. The -- Modi deeply wants a big surge of foreign investment into India. And that wish will, at least to some degree, balance perhaps some other issues in the U.S. India relations.

But we have to get over the visa issue. And we have to get over -- and in this city you're familiar with this, the arrest of a junior Indian diplomat last year. I think it gives -- gives new meaning to the word stupid to have done that, rather than just saying she's got a problem. She's lied on her visa form for with the person the woman was working for. Please get her out -- we arrested her. Both of those have to get pause.

"There is a special issue, which you all know about, but I'll just mention in passing, which is the refusal of the United States in 2005 to grant him a visa to visit this country. And that refusal persisted until the day he won the Indian election. The question arises, how much of that personal feeling he must have about that particular episode affects state policy?"
—Robert Blackwill

So I think the U.S.-India relationship, I think he'll get off to a pretty slow start in it. But there are objective factors which will make him want to have a good relationship with the United States. And then the question is -- and I conclude here, Chip. The question is will there be a new understanding in Washington in the administration of the importance of the U.S.-India relationship? Because without that, Modi will be one hand clapping.

KAYE: I want to come back and mainly open up to questions in one moment. But Alyssa, before we do that, do you want to say something quick about sort of attitude within State Department and U.S. government about this win by Modi? And what are the prospects -- in the context of the Ambassador's comments, what's the U.S. side of the -- of that equation and reaction to what's gone on?

AYRES: Well, I think you've seen since the results were announced on May 16th, the series of statements that have come out first from the White House, and also from the Secretary of State, welcoming the results of India's great democracy, welcoming Prime Minister Modi.

President Obama called Mr. Modi, I believe on the 16th itself. They had a conversation. He invited him to visit the United States at a mutually agreeable time.

There's been further statements welcoming the Indian elections. So I think you see a Washington that's trying to signal at the highest levels that, you know, we really want to work together with the new Indian government, and let's find a path forward.

Strategic dialog should take place at some point this summer. That's the cabinet level bilateral meeting. That will be chaired on the U.S. side by Secretary Kerry. That's an opportunity to sort of get the cabinets of both sides working together.

KAYE: Okay. So at this time, let's start to take some questions from our members. As a reminder, just for everybody, the meeting is on the record.

Please wait for the microphone. Speak directly into it. If you would sort of state your name and your affiliation. And if you could kind of limit yourself to one question, and keep it rather brief.

I also want to remind those people who are joining us on the web and on the phone, to e-mail their questions to [email protected].

Before I turn (inaudible), let me take the first one from somebody that's already come from online from Kermit Jones in Washington, where he's a 2012 White House Fellow, and he comes back to a question I wanted Ambassador Blackwill to comment, "What is the reasonable best case scenario for concrete steps towards better relations between Pakistan and India with Prime Minister Modi at the helm of the Indian government, and what will it take?"

BLACKWILL: It'll take a decision by the Pakistan military to stop supporting cross-border terrorism against India.

As you know, the Prime Minister -- Prime Minister Modi invited the heads of government in his region to his inauguration, which I think was a very clever, ingenious initiative on his part and Nawaz Sharif came from Pakistan. There was controversy within Pakistan whether he should accept the invitation, and controversy after he went home, because Modi stressed the requirement for Pakistan to stop supporting terrorism against India. And the Pakistan press, after Nawaz Sharif went home, said there should have been more talk about Kashmir.

But that's the big wild card. It is commonly believed in India that Modi in the context of a major terrorist attack would act much more strongly than the previous Indian government did. For example, at the time of the 2008 attack in Mumbai, but that's -- that is the independent variable. And people will be holding their breath to see if Pakistan, the military mounts, or at least facilitates, such an attack -- such a terrorist attack.

And Modi is anxious to use commercial diplomacy with respect to Pakistan. And of course, as I said before, his state is next door to Pakistan. But whether that will be possible if we're just one terrorist attack away from a very strong Indian military response, all of that will go down the drain.

KAYE: Professor Bhagwati, before I ask -- do you want to chime -- is trade sort of a...


BHAGWATI: Yeah, I think...


KAYE: ...restarting that relationship?

BHAGWATI: I only hope that they don't turn like most regions into regional trading agreements. Because what's really at the problem with Pakistan, is that while we've given them MFN treatment, which is required under GATT and now WTO, they've denied it to us. So they can begin by simply doing what, in fact, they should be doing, and that itself because of the proximity and the traditions, you know, if we look at the pre '47 trade figures, they were quite dramatic, because of proximity (ph).

That could itself set into motion at lot of -- doing something like a regional free trade area, I mean, that is as bad as trying to finish Doha frankly.

KAYE: Let's go -- let's start with questions over here to start.

QUESTION: My name is Imran Riffat and I'm with Global Kids. And this question is directed to Dr. Bhagwati, and I'm going to pick up from, you know, the observations and very astute great observations made by Ambassador Blackwill. In terms of the relationship of the United States and India, he's highlighted two important points, which are also sore points. One, the diplomat incident, and the other the denial of visa for -- to the Prime Minister, the present Prime Minister.

Now as far as the feelings about the diplomat's treatment are concerned, these are not confined only to the government circles, no? This is widespread among 1.2 billion people in India. And regardless of party affiliation, political affiliation, religious affiliation, they think that the country has been very badly humiliated by that incident.

And second, you know, as much as all of us would like to believe what Mr. Modi has said, that the denial of his visa -- the denial of a visa to him to visit this country, you know, doesn't bother him. Of course it does, you know?

And what I'm asking is, what is the solution, you know, that should come out? Because surely it's going to take more than a state dinner for Mr. Modi to forget all about this and say, "All right. We're buddy buddy again." So what do you propose America should do to rebuild the bridge to get to the old warmth and strength of the relationship? Thank you.

BHAGWATI: I think my sense is that now that he's Prime Minister, he will be able to assess what really led to the denial of the visa. I know many people are convinced that it was in fact the government of India, the UPA government, which was never in favor of Narendra Modi for a variety of reasons. And I know from many people that when they were trying to visit Gujarat, the central government would, in fact, even refuse to help set up anything for him.

So my sense is that he's triumphed over the skeptics in India (inaudible). He should have no problem picking up with the United States. He was treated worse by the Indians than by the Americans, to be frank.

So I think that -- I would say that is -- the other one, I think, on the diplomatic issue about the Consul General -- Deputy Consul General? I -- my own feeling is that yes, it was a diplomatic issue for sure. There's no question about it. But large numbers of people in India were particularly upset, particularly the untouchables, by the fact that she was an untouchable. The fact that she was Deputy Consul General, the Americans never realized, that if you're going to strip search an untouchable, the first thing the leader (inaudible) wanted was not money, but dignity.

It would be like -- it was like lynching somebody, a black American, in somewhere in India. It would have such resonance that no government -- no group would have ever accepted it. So I think that is going to be -- that also will be understood more as time passes. So we don't need to do anything dramatic.

BLACKWILL: I think you're point about that incident enraging all of India is absolutely right. And we just hope, with the passage of time, with the -- and positive things happening in the relationship, that it will ebb to some degree. But that isn't going to be right away. That is not going to be right away, because those feelings of -- this is a country that has a long history of white people from very far away mistreating them.

And that's the reason, I think, it hit such resonance from ordinary Indians, because it had a kind of neo-imperial quality to it. And they asked is there any possibility would they have done this with the Chinese?

KAYE: Let's go to the back, sorry. Right here?

QUESTION: Michael Schlein from Accion. Question for anyone. (Inaudible) Moore (ph) shared a commission that -- for the Reserve Bank of India, that laid out a spectacular vision of transforming financial services for the poor in India. A very, very ambitious agenda to achieve, complete financial inclusion in the next two years. Could someone comment on Modi's view of those recommendations?

BHAGWATI: I mean, that too is an ongoing affair. I mean, there's nothing dramatically new as far as I can tell. It will be done. It demands an intensification of some good ideas we've had on micro-finance, for example, and how actually to get monies across without having to go through politicians to collect, what, $0.90 on the dollar or something. So this is the (inaudible) movement and so -- so there are a lot of things that are going on.

One of the things I hope Modi is into, but he doesn't seem to be retribution minded. He's more of a getting along with things. And the fact that (inaudible) was behind the technological change, I mean, he wanted to support Rahul Gandhi, which was bad political judgment But he's a very good technically competent guy.

So I hope that Modi uses people like that to really transform the way you bring social spending to the poor.

KAYE: We should move on, but you mentioned briefly that the Aadhar card, which doesn't get talked about widely, really portends some real transformation in some of the redistribution schemes that go on, in terms of the efficiency that can come from them. And that's now gained sufficient momentum that it seems irreversible, and in fact, may be quite more welcome by this government.

But let's keep going. Behind right here.

QUESTION: Thank you. I'm Ella Goodwin with Americares. I'm just wondering if you can comment on what his approach might be on the social investing side, but really also, economic investment in the slums, and what that might do for job creation, infrastructure, and the like?

BHAGWATI: So the -- what would he do on the slums?

QUESTION: What is the specific approach going to be for the slums?

BHAGWATI: I don't know -- I don't think he's said anything as far as I know. I -- I couldn't really enlighten you. There's going to be lots of questions -- he's going to be addressing a variety of issues. This is clearly one, particularly -- you can't just brush that under the -- I've nothing.


KAYE: Any...

BHAGWATI: I think we should go on to the next one, yeah.

QUESTION: I also have a question for you, Professor Bhagwati. I mean as you sort of mentioned earlier on one of the best things about being a Chief Minister is the land allocation that you control. And even pro-business governments like you had in Arissa (ph) were powerless to welcome foreign investors like POSCO. And you have the most pro-business, you know, regional party in Arissa (ph). What should land allocations be like, and is it possible for Modi to change the current arrangements?

BHAGWATI: No, I think the -- and (inaudible) do mention than the '91 reforms were really about product markets, like increase imports and so on. Removing industrial licensing, et cetera. But now we need factor market reforms which are a bit more difficult to say the least.

Like you say, more labor market flexibility. Well, you've got to worry about the unions. Will he be able to carry them with him? So those are the good questions.

So now, in a way, the garden has been -- is now faced -- you've got to take the worst weeds out as it were. And so all his expertise will be necessary, political expertise, to try and get that done. And land markets are clearly one of those things, as you pointed out...


BHAGWATI: Oh golly. I mean, in five minutes, he would have done it by now.


BHAGWATI: But, actually, I mean, what -- what we need to do -- I think one obvious point -- this is a takings problem, right? I mean what we call takings here, and we have great problems here, with Justice Breyer and others, you know. They're all in conflict about what is, in fact, a socially -- a social way -- a socially desirable necessary way of taking land from someone.

We have really been taking land, and actually giving it low prices, to businessmen, like Kata (ph) and Mani (ph). And I don't think that's kosher, actually. So we need to really -- I mean, we need to look into that and say, under what conditions? What kinds of social objectives do you have? What kinds of compensation you need to provide? And to whom?

So these are the kinds of things which the, you know, Modi government will have to address. And it depends on, you know -- like over here, we have a very different view of what should be taken, you know. What should be defined as a social purpose? It has to be done there, in India itself. And he will do it, I think.

KAYE: Let's go -- Ken, you on?

QUESTION: Thank you. Ken Justure (ph). I wanted to make a comment and ask a question on U.S. Indian relations. First the comment. Bob, you mentioned in 2005, when the U.S. government denied the visa, no one contemplated that Modi might be Prime Minister. However, in 2012, we could contemplate that and I guess I'm disappointed that we didn't reach out much earlier and more aggressively as a government to Modi to try to get ahead of this issue, rather than playing catch up all at this time.

But in terms of trying to take the U.S. Indian relationship out of the trough that it's in, and in light of the desire of the new Prime Minister to focus on the economy, to increase international investment, and even international trade, and the need for an animating idea to sometimes move the U.S. India relationship forward, what's the likelihood that we could really try to see a bilateral investment treaty between our countries, and maybe even down the road, a free trade agreement?

BLACKWILL: Well, you know both of these have been under discussion now for several years. I think an FTA is very, very far away. But, the bilateral investment treaty closer, but you lead me -- and I support it. But you lead me to make the point that follows on from the previous comments which is there's so much to do in India, in so many domains, that is so urgent, whether it's the slums or social equity building.

What will be this Prime Minister's five most important priorities? And we don't yet know that, as he governs, and he can't – even he with his magisterial work load can't do everything. And so, what's he going to choose to do first?

And I think the first five are all about the domestic Indian economy. And maybe the first 10 and 15 are all about the domestic Indian economy. But even there, what parts of the domestic Indian economy?

Because, just to conclude, so much of this depends on the states and so much of this then depends on his relationship with the states. And so much depends on his political skill, his political skill in managing those relationships. And that's all now to be tested.

But one of the things I'm -- and I'm going to go to India next week again, I'm going to be looking for, and we can all be looking for is what is it that he's going to concentrate at the outset? Because he will -- listen, he will want to demonstrate very early that the aspirations of the Indian people as reflected in this massive victory of his, were not misplaced.

He can't do it over night with 1.25 billion people. But he will want to demonstrate that he's making progress in meeting many of the fundamental problems of the country. And so it will be very interesting for all of us to see what is it that he chooses, and which sectors does he choose? And what political will and energy does he put behind him?

KAYE: One more question.

AYRES: Chip, could...

KAYE: Sure, go ahead.

AYRES: ...I just quickly. You know, since so much of Mr. Modi's campaign was really focused on delivering India as a kind of brand India of quality, India restoring it's role as one of the world's great trading partners, and since there was so much focus in the campaign about trying to make India an easier place to do business, even if Prime Minister Modi focuses all of his attentions on making changes that will affect the Indian economy for India's own domestic national interest, I would think that would likely help a lot of the U.S. India economic issues that have been more challenging in the last years.

BHAGWATI: I think -- I would just add one point, which is that as he opens up, he's bound to open up. There's scope for it. The U.S. is bound to be interested because ultimately the commercial relations drive a whole lot of people to be interested in India.

But the other part of it is that there is scope for give and take here. Because one of the striking things about the United States, including our current leadership, right from the president to the secretary of state and Congress, is they continuously talk about outsourcing is a big problem. And outsourcing is just a code word for India. I mean, you don't talk about outsourcing to New Zealand, or to Japan, or even China and so on.

So here, if they agree to close their mouths, I don't know what action they can take. But they should stop talking about outsourcing. That itself would be a major gain for India. Right? And so I think we have a possibility of mutual accommodation and improvement of the relations. Because every Indian I've talked to hates anytime the president talks about outsourcing. They feel like lining him up and shooting him. Metaphorically.

KAYE: Okay, last question.

QUESTION: The international chess pieces are moving around, and we've just seen in the last week China, India's traditional adversary, has now signed a deal with Russia, India's traditional friend. What happens to India?

BLACKWILL: Well, we haven't have the time. So I'll just do this quickly now. We've added India's 1.25 billion to China's 1.2 billion, so now we have whatever that turns out to be, 3 billion people here in 25 seconds. Plenty of time.

India is very preoccupied with the rise of Chinese power, and wishes to be part of the balance of power in Asia. But it's relations, and I'll tie a few things together quickly, with Russia in particular, but also to a degree with China, knit together around the issue of the future of Afghanistan.

India is very worried about Afghanistan, again, as it was before the end of 2001 for being a launch pad for terrorism against India. And it's therefore very worried about the future of Afghanistan. Well, as America withdraws, where will India look for like-minded states to help manage the problems of Afghanistan in a way that prevents Pakistan from reestablishing it's dominance there, and prevents the Taliban and Al-Qaeda from returning.

And the answer is Russia, a like-minded state in that regard. The answer is China, a like-minded state in that regard. And the answer, most difficult for us, is Iran, a like-minded nation in that regard.

And so, one of the challenges to our relationship, which we don't have time to discuss here, but is worthy of deliberation elsewhere is, as we head through this negotiation with Iranians on nuclear weapons issues, the Indian government has enormous equities here. Because the consequences for India with it's 35 -- 30 to 35 million Shia, of an American attack on Iran are enormous. And it will rupture the relationship.

At least for a while. We're worried about that. That's -- so, it is -- we wished it to condemn -- the United States wished India to condemn Putin's actions in Ukraine. It did not do so. Why? Afghanistan.

We wished it to apply sanctions against Iran outside the U.N. It's refused. Why? Afghanistan, and some other -- the Shias and so forth.

So there is no shortage, and I think you characterized it well, there's no shortage of issues in which this international tumult is going to intrude on Modi's priorities. We don't know exactly how. But it's a terrific question because the question will the international situation give him the space and time to concentrate on his domestic economy as he wishes? Or will other events occur, and we can all think of examples of that, that will constrain his capacity and change his policy direction?

KAYE: Thank you. Thank you for all members joining us here as well as online. A special thanks to Ambassador Blackwill...


KAYE: ... Professor Bhagwati, Doctor Ayres. Fascinating -- fascinating conversation, not only about what the current state of affairs is in India, but a little bit of an insight into Narendra Modi, the man. Thank you all for joining.

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