Despite high expectations, Narendra Modi’s economic policies have not made a decisive break with the past
NARENDRA MODI, India’s prime minister, stormed to power so decisively in 2014 that it is difficult now to imagine any other outcome. But try. Imagine that the United Progressive Alliance (UPA), a tired coalition led (if that is the word) by the Congress party, had limped to victory instead. What economic policies might it have pursued in a third term? This is not an entirely idle question. Any assessment of Mr Modi’s economic record in his first stint as prime minister requires a counterfactual scenario against which to measure it. A third UPA government is one such baseline.
A Congress-led government would no doubt have built on some of its existing pet initiatives, such as a job guarantee, providing employment on public works to rural households, and an identification scheme, giving every Indian a unique identity number based on a fingerprint or an iris scan. It presumably would have allowed the central bank to continue to fight against inflation, aided by a drop in oil prices.
A third UPA government would surely have shied away from reforming India’s onerous labour laws or privatising poorly run public enterprises, like Air India. It probably would also have dallied with resolving the banking system’s bad loans, fearing it might otherwise be condemned for bailing out crony companies.
As the next election approached, the UPA government would no doubt have indulged in giveaways to farmers (as in previous political cycles) and disguised its failure to hit fiscal targets through budgetary tricks. GDP growth and job creation would probably have improved little.
The UPA never, of course, got this third bite of the cherry. It lost instead to Mr Modi, who promised a radical alternative to this steady-as-she-goes approach. But despite these bold pledges, Mr Modi’s first term in charge of the economy has proved to be rather similar to the hypothetical third UPA term described above. Much of what probably would have happened if Mr Modi had somehow lost also happened after he won.
The parallels loom large. GDP growth has averaged about 7%, quicker than any other big economy but little different from the average for the five years before Mr Modi entered office. There have been no big reforms of land or labour markets; no junking of the employment guarantee or the identity scheme; and a costly delay in tackling banks’ bad loans. The government’s proudest economic feat was to implement a nationwide value-added tax that Congress had previously proposed.
This continuity should not be a surprise. Although Mr Modi’s party won a rare majority in parliament, India’s political system still imposes checks on his power through the upper house, the courts, public auditors and the states, which have sole or joint responsibility for many of the reforms India needs. And although the Modi vote was a plea for more jobs and fewer scams, it was not a vote for liberal economics per se. Capitalism in India remains “stigmatised”, notes Arvind Subramanian, a former economic adviser to the government, in his new book, “Of Counsel”.
Mr Modi did manage some departures from the baseline. It is hard to imagine the UPA cutting red tape as zealously (India has risen 65 places in the World Bank’s rankings of the ease of doing business since 2014) or courting foreign-direct investment (FDI) as assiduously. He contributed to the conquest of inflation by removing some fuel subsidies and limiting increases in the minimum prices for crops. His government helped open bank accounts for the poor and passed a welcome new bankruptcy law for firms. Corruption has been reduced.
Sadly, fertiliser subsidies persist, minimum crop prices have jumped again, and the new bankruptcy system will take about six years to clear the backlog of cases at its present pace, reckons Mr Subramanian. Planned changes to e-commerce rules could hobble foreign firms operating in the country, such as Amazon and Walmart.
Mr Modi’s most innovative decision was also his worst: the abrupt cancellation of high-denomination banknotes. The aim was to wipe out “black money”, piles of ill-gotten cash stashed outside the banking system. The government was therefore surprised when most of the notes were returned to the banks, before they expired, by long queues of depositors. It is a miracle the stunt did little lasting harm to the economy, if official data are to be believed.