India’s GDP growth rate has exceeded 7 percent since Modi took office almost two years ago. However, this statistic obscures enduring structural issues that still stifle the Indian economy.
Modi was elected on a wave of optimism. He promised reforms to reduce red tape, increase transparency and reboot India’s manufacturing sector.Whilst the Prime Minister has clearly made some steps in moving India’s economy forward, he has failed to deal with the central structural problems that hamper growth. Primary among these are poor infrastructure, food inflation, and excessive red tape and taxation.Modi’s ministerial track record is hard to continue nationally.
As Chief Minister of Gujarat, Modi received praise for reducing bureaucracy and making it easier for firms to do business and invest in the state. The hope was that he could translate these policies to the national stage.
Jaitley’s presentation of the 2016 budget came after several weeks of political turmoil, during which the worst tendencies of Modi’s nationalist acolytes were on full display. The denouement featured BJP partisans gleefully cheering for sedition charges against students at Jawaharlal Nehru University in New Delhi who had allegedly made “anti-national” statements at a campus rally. Against this backdrop—not to mention this government’s serviceable, if unspectacular, budgets to date—investors were primed for some good news.
And this year’s budget offered some cause for good cheer. The BJP refused to budge from an ambitious road map for fiscal consolidation—adhering to a pledge to further slash the government’s deficit, a necessary and highly anticipated correction to its predecessor’s spending sprees. The news was particularly welcome given that last year’s budget had detoured somewhat from the plan with a pause in deficit cutting in favor of government stimulus.
The Prime Minister did launch a series of programmes to modernise India. One such was the ‘Make in India’ programme for manufacturing, ‘Digital India’ for high-tech services, and other projects for smart cities, sanitation and financial inclusion.However, as immediately praiseworthy as this effort is, the associated impact is negligible. It does not address fundamental problems affecting the economy.Modi has recently batted away suggestions that India’s continued economic growth is caused by low global oil prices. He is right to do so, but he should not rely on GDP growth alone to determine whether his economic reforms are fixing the economy.India is ranked 130th in a World Bank index measuring the regulatory burden on small firms. Indian companies continue to carry high levels of debt, while growth has halved year on year and capital expenditure has declined in the eight infrastructure sectors.The current GDP growth overstates the health of the Indian economy. Modi’s efforts take steps in the right direction, but promotion of India’s image is not where his focus should be. Modi misallocates attention and effort when launching a significant amount of branding initiatives without simultaneously trying to push forward real reform.
At first glance, India appeals as an attractive destination for businesses and investment. However, investors continue to find it difficult to do business in India due to basic restraints. Until the Prime Minister starts to do more in tackling infrastructure and red tape, the fundamental flaws will not be resolved.
The difficulty of political governance in India
Given the diversity of the country, India is a difficult place to govern. For example, opposition control of the upper house of Parliament has blocked the passage of a goods and services tax that would boost GDP and turn India into a single market.Indeed the country can be characterised as having a noisy, diverse democracy that rarely agrees on anything. This political structure negatively impacts Modi’s drive for economic reforms.The diverse range of cultures, languages and religion within India means that the role of central government can be rather limited. Comparing the Indian democratic system with the Chinese authoritarian system, one clearly sees the difference with regard to the vested power of the authorities.China and India are two diverse and geographically large countries, but with very different political systems. One allows the central government to enact policies with relative ease, the other reduces the central government’s ability to get things done.Modi will struggle to fix the Indian economy. The reason is that his economic reforms focus on the wrong area, and their impact overstates the economy’s health. The Prime Minister should concentrate on the structural issues of poor infrastructure and excessive red tape.
However, Modi is not solely to blame, as political constraints hinder any material impact he can have in these areas. His undeniable efforts have run into the same issues that continue to plague any Prime Minister of India.