When Narendra Modi became prime minister of India in 2014, opinion was divided as to whether he was a Hindu zealot disguised as an economic reformer, or the other way around. The past three years appear to have settled the matter.
Yes, Modi has pandered to religious sentiment at times, most notably by appointing a rabble-rousing Hindu prelate as chief minister of India’s most-populous state, Uttar Pradesh. However, he also has presided over an acceleration in economic growth, from 6.4% in 2013 to a high of 7.9% in 2015, which made India the fastest-growing big economy in the world. He has pushed through reforms that had been stalled for years, including an overhaul of bankruptcy law and the adoption of a nationwide sales tax—the Goods and Services Tax—to replace a confusing array of local and national levies. Foreign investment has soared, albeit from a low base. India, cabinet ministers insist, is at last becoming the tiger Modi promised.
Alas, these appearances are deceiving. The GST, although welcome, is unnecessarily complicated and bureaucratic, greatly reducing its efficiency. The new bankruptcy law is a step in the right direction, but it will take much more to revive the financial system, which is dominated by state-owned banks weighed down by dud loans.
The central government’s response to a host of pressing economic problems, from the difficulty of buying land to the reform of rigid labor laws, has been to pass them to the states. At least one of the big reforms it has undertaken—the overnight cancellation of most of India’s banknotes in an effort to curb the black economy—was counterproductive, hamstringing legitimate businesses without doing much harm to illicit ones.
No wonder the economy is starting to drag. In the first three months of 2017, it grew at an annualized rate of 6.1%, more slowly than when Modi came to power.
India’s prime minister, in short, is not the radical reformer he is cracked up to be. His reputation as a friend to business rests on his vigorous efforts to help companies out of fixes—finding land for a particular factory, say, or expediting the construction of a power station. He is not so good, however, at working systematically to sort out the underlying problems holding back the economy.
Power stations and parcels of land for development are not all that India needs for development. It needs functioning markets for electricity and land—and capital and labor, for that matter. Lending to industry is contracting, for the first time in 20 years. Modi should recapitalize state-owned banks and sell them off, to get loans flowing again. He should be working to simplify the over-exacting labor law, which perversely harms workers by deterring companies from hiring them formally. Real-estate purchases are a forbidding quagmire, and the government, at a minimum, should try to improve the quality of registers to reduce the scope for disputes.
Political conditions are about as propitious for reform as they are ever likely to be. Modi’s government is the strongest in decades. It has a big majority in the lower house of parliament and is edging closer to control of the upper house as well. It runs most big states. The opposition is hopeless.
There are economic tailwinds, too. India is a big importer of oil, and the recent low prices have been boosting growth by perhaps two percentage points a year. Aging long has weighed on Western economies and is starting to sap China’s, but India, by contrast, is still young. More than a quarter of the people joining the world’s work force between now and 2025 will be Indian. There also is enormous scope for catch-up growth: India is the poorest of the world’s 20 biggest economies. By rights it should be surpassing others’ growth rates for years.
Modi, in short, is squandering a golden opportunity. Some apologists claim that he is waiting until he wins a majority in the upper house before taking on bigger reforms. If so, he has given no inkling of what he is planning. In fact, he has not even made clear that economic reform is his priority.
© 2017 Economist Newspaper Ltd., London (June 24). All rights reserved. Reprinted with permission.
Image credits: Doug Mills/The New York Times