Siddharth Saravat presents the case for a bright future for the Indian economy under the helm of Prime Minister Narendra Modi, but outlines the hurdles that remain.
Narendra Modi, the son of a tea merchant, has quickly become one of the world’s most talked-about leaders.
But does he bring real change, or is his election just another fanciful Bollywood love story for the 1.2 billion Indians living in the world’s third largest economy?
Nearing the end of his first year in office, Modi has cut bureaucratic inefficiency, made steps toward putting India’s fiscal house in order, and advanced India’s quest to become the next manufacturing hub of the world.
While many of the benefits may arrive years down the road, we are optimistic that the reform momentum Modi personifies will thrust India forward and boost the country’s economic growth prospects.
The personification of hope
Modi swept to victory with an election campaign analogous to American President, Barack Obama’s, in 2008.
Modi used Twitter hashtags, 3D hologram appearances and catchy slogans to create the “Modi Wave”, which swept the nation.
Modi’s calls for economic growth through “minimum government and maximum governance” resonated with young Indian voters.
Modi himself embodies the Indian Dream. He rose to fame during his 10 years as the Chief Minister (Premier) of Gujarat, the fourth largest Indian state (India has 29 states) by gross domestic product (GDP).
During his tenure he provided 24-hour electricity access — a rarity in India — that made the state a darling for industrialists. As a result, Gujarat1 grew 10 per cent per year between 2004 and 2012, well above the Indian average of 8.25 per cent.
Can he replicate his success in Gujarat for the rest of India?
Moving the bureaucratic behemoth
For decades, India has been plagued by politicians who made election promises to rein in bureaucracy and increase efficiency, but failed to deliver.
Using his political capital and reputation of CEO-style leadership from his days in Gujarat, Modi quickly inspired India’s notoriously inefficient bureaucrats to work. As old files were thrown out and offices were cleaned, some agencies found files dating as far back as the time of British colonial rule.
Modi personally called ministers on their desk phones to ensure they were at work on time, and instituted a biometric “check-in, check-out” system for government employees that can be accessed by anyone in real time.
The system has led to a morning rush of government employees at the Delhi Metro in a scramble to arrive at work on time2.
Modi also abolished around 30 committees that had been set up by the previous government to resolve disputes between ministries, a symbol of policy paralysis3.
Instead, his office and cabinet, the smallest in 16 years (see figure below), will resolve disputes directly and leave decision-making to the ministries themselves, without the burden of overarching groups and panels.
These small, but meaningful steps in the central government were only given lip service by politicians until now.
“Come, Make in India!”
In 1990, the average Indian citizen had slightly more income than the average Chinese citizen, as measured by GDP per capita. Today, China’s GDP per capita is more than double that of India’s.
Manufacturing and export-led growth, which also made countries like Japan and South Korea prosperous, drove China’s economic miracle.
Instead of reinventing the wheel, Modi has gone back to basics.
Modi’s economic reforms aim to make India the manufacturing hub of the world.
However, half of Indian workers are still employed in low-paying agricultural jobs, and Modi knows that manufacturing jobs offer higher wages.
A worker in manufacturing is 14 times more productive than one in agriculture, and higher productivity brings higher wages4.
In order to bring these jobs to his nation, Modi aims to reform land and labour laws and increase inflow of capital via foreign direct investment to serve as the catalyst for his “Make in India” campaign.
Land acquisition problems have plagued producers and industrialists in India, and are the primary hurdle in setting up new ventures.
After a great decade as Chief Minister of Gujarat, Modi hopes to replicate his efforts in New Delhi. With Modi at the helm, India has a renewed sense of hope for its economic future.
Under Modi, the government passed an executive order (an “ordinance” in India) to ease land acquisition in critical sectors, including power, housing, and defense, reinvigorating some of the $300 billion in projects that had been held up due to the land acquisition laws5.
Furthermore, to signal seriousness in opening up the Indian economy further (see figure below), Modi passed two more ordinances increasing foreign firms’ access to insurance ventures and commercial coal mining, which the country relies upon to provide a majority of their electricity.
By opening up to foreign competition, Modi seeks to provide electricity to the millions of Indians who still live in the dark and to the industries that will need a consistent supply of energy if they are to “Make in India”.
Getting the fiscal house in order
India has balanced a budget at the federal level only once in the past 25 years.
The previous government poured endless rupees into wasteful subsidies, and in one year, 2003, had a primary deficit of 5.5 per cent of GDP.
This fiscal deficit caused Standard & Poor’s to give India a credit rating that is just one notch above “junk” status (India is Baa3/BBB-/BBB-, upgrade watch by S&P).
Modi has the government on track to cut the deficit to 4.1 per cent of GDP in 2015, but a budget surplus remains elusive. India has not posted a budget surplus since 2007.
How will the government control its spending problem? The answer lies in revenues and subsidies.
In order to raise revenues, Modi promised to divest from state-owned enterprises. He started this with a 10 per cent sale of the coal-mining giant, Coal India, raising funds to fill state coffers.
On the side of wasteful subsidies, Modi took advantage of the timing of falling oil prices to remove expansive diesel fuel subsidies, which accounted for a quarter of the government’s total subsidy bill.
In order to be more efficient with the subsidies still being disbursed, the Indian government opened bank accounts for 18 million poor people in a week in order to make sure subsidies reach their destination.
To date, they have opened 115 million bank accounts6.
What next?
We have here presented an optimistic case for India.
But Modi’s popularity and upstart presence alone are not enough to solve all of India’s problems.
For example, inflation, were it not for the decline in crude oil prices, might still be running too high.
Land acquisition problems, though worked on by Modi thus far, stand to face considerable opposition.
And while a four per cent budget deficit might be desirable compared to recent years, the central government still has a long way to go to balance the budget.
Consider that the International Monetary Fund does not forecast a general government primary surplus over the next few years.
The new government last month pushed out the date for a budget surplus to 2017, moving the budgetary goal posts once again.
As is the case with any democratic system, politicians do not win votes on nuance or plausibility.
But ultimately, the history books will determine whether Modi’s promises were substantive or just fanciful.
Does he have the ability needed to execute on thorny issues like subsidies, land acquisition, and bureaucratic reforms? We will see.
After a great decade as Chief Minister of Gujarat, Modi hopes to replicate his efforts in New Delhi. With Modi at the helm, India has a renewed sense of hope for its economic future.
Siddharth Saravat is an associate economist at Payden and Rygel.
FOOTNOTES
1. Sameer Hasmi, “Can India’s Economy Model Itself on Gujarat”, BBC News, May 5, 2014.
2. Shibaji Roychoudhury, “Biometric Babus”, Scroll.in, October 7, 2014.
3. D K Singh, “Prime Minister Narendra Modi to shed UPA baggage”, Indian Express, June 1, 2014.
4. Rajat Gupta et. al., “India’s path from poverty to empowerment”, McKinsey Global Institute, February 2014.
5. Nigam Prusty, “India clears order to ease land acquisitions in reforms push”, Reuters, December 29, 2014
6. “With 11.5 crore accounts, Jan Dhan bags Guinness Record”, Rediff Business, January 20, 2015.
