DUBAI: Indians are in the process of voting on whether Prime Minister Narendra Modi will be able to continue his ambitious economic reform program of the largest democracy on Earth.
Unlike China’s authoritarian Xi Jinping, whose economy has been expanding at a slower rate than India’s — China is in the throes of a secular growth decline — during Modi’s first term, he helped engineer India to become one of the world’s top three fastest growing economies in 2018. Today, the International Monetary Fund (IMF) forecasts India to exhibit even higher growth in the coming years.
While that achievement might be reason enough for Indians to support Modi’s stay in office, the divisiveness that has been characteristic of the subcontinent’s political fabric, exacerbated by controversies over the government’s calculation of core economic statistics, has been weighing down Modi’s prospects to win a second race. Modern economic history around the world is replete with examples where robust reformers confront intensified political challenges as their programmes begin to take hold. Modi is no exception to that rule. The structural policies he put in place during his first term are now engendering pain — most notably enlarged unemployment — before they’re able to substantially deliver their transformational gains. The result is Modi’s poll numbers are slipping. Populations rarely vote on “present value” terms — the economists’ notion that down payments made today are needed to enable even larger payoffs in the future. Financial markets and investors — both in India and abroad — would not look kindly on Modi if he now shifted far to the left for political expediency. They would be justified in such a change in sentiment.
Why? Because India has experienced a high average annual growth rate in real GDP during the time Modi has been in office. Growth rose from 6.4 per cent in 2013 to 8.2 per cent in 2015; dipped to 7.1 per cent in 2016 and further to 6.7 per cent in 2017, but rebounded to 7.3 per cent in 2018. For 2019, the IMF projects India will grow 7.5 per cent, and in 2020 grow at 7.7 per cent.
In the period immediately prior to Modi — during the Congress Party’s tenure — although there were a few years when GDP was substantially higher, average growth was lower and more volatile; inflation rates were also greater and seesawing.
An important engine of India’s growth is the confidence in the direction of Modi’s reforms. They have inspired domestic and foreign economic players. The data on foreign investment show this to be the case for India.
In absolute terms, India’s foreign direct investment (FDI) inflows rose from $27 billion in 2010 to $40 billion in 2017, a 48 per cent increase. (By contrast, FDI inflows to China fell 31 per cent over the same period: from $244 billion in 2010 to $168 billion in 2017). Taking into account the size of India’s economy, a necessary calculation when doing cross-country comparisons, FDI inflows as a share of GDP in 2017 was 1.54 per cent.
By contrast, China’s FDI inflows as a share of GDP is lower: 1.38 per cent in 2017. The comparable statistic for the US is 1.83 per cent.
The number of reforms implemented by Modi is sizeable. While not all are breathtaking, it would be unreasonable not to be impressed with what has been accomplished to date.
Some of the more important measures are: (i) enacting a revised law on bankruptcy; (ii) introducing a nationwide sales tax to integrate an otherwise disparate system of different state and federal taxes; (iii) eliminating subsidies for diesel fuel to help plug a fiscal hole and more importantly create disincentives for using an energy source that adds to pollution — a severe problem in Indian cities; (iv) removing regulations that forced companies to repetitively renew their business licenses; (v) relaxing rules that reserved specific sectors to SMEs even if large firms could produce the goods or deliver the services at lower cost; and (vi) opening investment in the railway network to majority foreign ownership.
The most widely publicised reform that Modi has implemented — and for which he has been criticised most heavily — is the decision to take out of circulation large bank notes. The measure was announced with little warning, and once executed, caused havoc in local markets around the country. Modi’s team did do a poor job explaining the rationale for the measure in a way that the working- and middle-class might understand. But to be frank, if experience in other countries is any guide — including the US — that can be an elusive goal.
The reform did exact costs. But these costs had to be faced sooner or later. Any way you cut it, there would be a backlash. Modi’s announced rationale for this move was to reduce opportunities for corruption (which largely come about through informal cash exchanges). But the real driver behind Modi’s re-monetisation policy was broader: he is intent on moving the subcontinent to become a market characterised by economic integration and uniformity, and ideally increasingly cashless.
These are exactly the critical planks under which a geographically huge country such as India can not only begin to build economic clusters that have the scale to reduce production costs, but also to foster vibrant internal trade among India’s 29 states and seven union territories and ultimately enhance the country’s competitiveness in the world marketplace. The economic history of the US building its large internal economic space is clearly in Modi’s mind.
Of course, this does not mean that more reforms by Modi could have been implemented. Indeed, by all accounts he is intent on doing much more. Perhaps he will get the chance to do so.
Harry S. Broadman is Managing Director and Chair of the Emerging Markets Practice at Berkeley Research Group and a member of the Johns Hopkins University faculty.
