His first government did important things, but they were not transformative
Martin Wolf
Narendra Modi’s overwhelming victory in India’s elections is an extraordinary personal achievement. It confirms Mr Modi’s ascendancy over the world’s second most populous country and largest democracy. It confirms the marginalisation of the Congress party, which had dominated Indian politics for most of the years after independence in 1947. It confirms the rise of Hindu nationalism as an increasingly dominant ideology, in place of the secularism promulgated by the founders of independent India.
This is all very important. But what might this election mean for the economy and economic reform? Will we see the reformist Mr Modi unleashed, or more of the same? The answer is likely to be the latter. Alas, that may be a disaster.
It is rare for a leader to be more radical in the second term than in the first. It is normal, too, for the traits of self-confident and charismatic leaders to become more pronounced. Indeed, as we have seen with Vladimir Putin and Recep Tayyip Erdogan, they tend to become more autocratic. Will Mr Modi prove to be another of this kind? He is an autodidact who mistrusts India’s western-educated policy intellectuals. He is a centraliser and has proved to be an interventionist more than a pro-market reformer. But he is also prepared to take gambles. Given his political success, it is hard to believe these traits will not become even stronger in this term.
Mr Modi’s first government did significant things, but they were not transformative. One of his important contributions was to extend public provision of essential goods and services for the poor: cooking gas, toilets, electric power, housing, bank accounts and emergency medical insurance. He also implemented two significant and long-discussed reforms: the insolvency and bankruptcy law and the goods and services tax, or GST, though the implementation of both has brought significant problems. The radical demonetisation of 2016 remains highly controversial. But most informed observers believe it was a big mistake.
Far more radical action is now needed, for India confronts some big challenges. The economy seems to be slowing significantly. In a recent column, Shankar Acharya, former chief economic adviser to the Indian government, notes that growth in the last quarter of 2018-19 was 5.8 per cent, the slowest in 20 quarters. Investment is also markedly weak. The latest “periodic labour force survey” confirmed that “the employment situation in the nation was the worst in several decades, with just under half the working age population actually working or seeking work”. Merchandise exports have stagnated since 2011-12. The combined fiscal deficit of the central and state governments is now about 7 per cent of gross domestic product.
The challenge of resolving the “twin balance sheet” problem of non-performing assets of banks and unserviced debt obligation of companies remains significant, while a big new problem has emerged within nonbank finance companies. In the context of stretched balance sheets, the much-needed monetary policy loosening is having limited effect.
All this is quite worrying. Arvind Subramaniam, chief economic adviser until last year, has now thrown up an even bigger concern, by arguing that “Official estimates place annual average GDP growth between 2011-12 and 2016-17 at about 7 per cent. We estimate that actual growth may have been about 4.5 per cent”. If this is right, past views of the performance of the Indian economy and the reliability of Indian statistics were plainly wrong.
Beyond these concerns, all significant, lies the deteriorating global environment. There is now a real possibility of a war in the Middle East, with possibly large effects on the price of oil. More important still, the outcome of Donald Trump’s trade wars remains highly unpredictable. A breakdown of US trade relations with China seems unlikely to benefit India, since it has never been willing, perhaps able, to make itself a hub for globally-oriented manufacturing. But the disintegration of the global trading system is dangerous, especially for a country that is outside all big regional trading arrangements.
It is clear that India needs reform if it is to thrive. It must fix the financial sector, perhaps by creating a publicly managed “bad bank”, to accelerate the cleaning up of defective balance sheets. As Mr Acharya argues, it must also proceed with the overhaul of labour laws and regulations, easier land acquisitions for non-farm uses, reform of agricultural marketing, and making the bankruptcy process work far better.
Much of the needed effort will also have to focus on institutions of government, including the tax system, competition policy, management of natural resources (especially water and air quality), education, agriculture and relations between the centre and the states. The statistical services are apparently in serious need of repair, too.
Mr Modi has to be an exception to the rule that second-term leaders are no better than their first-term selves. He must use his present prestige and power to transform India. He needs to strengthen institutions — not weaken them and promote markets — not leave them hobbled. He must also seek to ensure basic economic security for all Indians.
If, in the absence of action, India’s economy falters further, perilous things might happen. The big worry is that strong leaders tend to choose the politics of paranoia when the economy fails.
In India, that could be lethal. Embrace of deep reform is now essential if Mr Modi is to bequeath a stable India. He has the freedom to act. Now is the time to do so.
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