India: Home stretch for Modi
WITH NATIONAL elections less than a year away, Prime Minister Narendra Modi is angling for another term in office.
At the helm since 2014, Modi’s term as prime minister has been anything but smooth. People initially had high expectations, given his track record as chief minister of Gujarat. During his 13 years in Gujarat, he presided over an average growth rate of more than 10 per cent y/y.
Modi accomplished this through a programme of privatisation and deregulation. This brought billions of dollars in investment into the state, from national and international sources. One of his major initiatives was the establishment of special economic zones, which had lighter labour laws. Major Indian companies, such as Tata and Reliance, used the new labour framework as an opportunity to set up shop in the state.
As a member of the Bharatiya Janata Party, BJP, and Rashtriya Swayamsevak Sangh, RSS, Modi is strongly identified with Hindu nationalist ideals.
The RSS is a right-wing nationalist organisation. Although it is a volunteer body that promotes Indian cultural values, some people label it a paramilitary organisation. Soon after Modi took office as chief minister, the state of Gujarat experienced an episode of bloody religious riots in 2002, which led to more than a 1,000 dead.
Promises and reforms
A special investigation team ordered by the Supreme Court cleared Modi of complicity in the riots, but his detractors accused him of inciting the unrest and mismanagement in the handling of the affair. Still, his reputation for having transformed one of the poorest states in the country into one of the richest, allowed him to win the 2014 national elections.
Modi had a long list of promises and reforms on his agenda, but his approach was very relaxed and lackadaisical. Moreover, he focused much of his initial efforts on a strange and radical currency reform. In November 2016, the government announced the demonetisation of the highest banknotes in circulation – the 500 and 1,000 rupee. Overnight, these notes would become invalid, forcing households and business to run to turn in the old notes.
The government’s objective was to force counterfeit notes out of circulation and put an end to the shadow economy. Much of India’s economic activity is conducted in cash, skirting the financial system to avoid taxes. The government measure forced countless businesses and households to open bank accounts to deposit their holdings, thus bringing them into the open.
Despite the severe monetary shock produced by the currency reforms, India managed to grow 6.6 per cent y/y in 2016. This seems to be an impressive growth rate by any standards, but most Indians consider it to be too low.
Given India’s high birth rate of 2.4 births per woman, versus China’s 1.57, more than one million Indians join the workforce every month. Local economists
estimate that the country must grow at double digit rates in order to incorporate the tidal wave of new labourers that hit the work force every month.
Demographers calculate that India will have the largest population in the world by 2022, surpassing China. While the Chinese authorities have been successful in implementing the structural reforms needed to create economic growth to accommodate such a huge population, India has been hamstrung by its democracy and legal system.
Usually, a strong democracy and legal system are instrumental in ensuring greater prosperity. The problem is that it often complicates the coordination and implementation of reforms.
Party system hijacked
India’s fragmented party system has been hijacked by special-interest groups that have been adversely affected by many of the reforms. The same goes with the legal system. Although India inherited most of its jurisprudence traditions from its British colonial overlords, it has been used by small minority groups to derail critical reforms.
Small farmers are a good case in point. India’s agricultural system is atomised across an infinite sea of small subsistence agricultural plots. One of the government initiatives was the implementation of land reform to streamline and expedite the acquisition of property. This could lead to huge productivity gains, as the agricultural sector consolidates.
However, many farmers refuse to sell ancestral plots. As a result, they derailed the acquisition process. The same goes with the acquisition of land for infrastructure development and industrialisation.
Although the legal concept of eminent domain exists in India, the legal system provides an almost infinite array of appeal vehicles. As a result, a small plot owner can tie up a major infrastructure or industrial project in court for decades. These are the changes that India must undertake, but its political and legal system makes it very difficult.
In the meantime, the country will continue to grow at a healthy annual rate of seven per cent y/y. This may be enough to get Modi past the post next year, but it is not enough to ensure a high level of prosperity for the country.