India's Lost Opportunity for Reform: Narendra Modi Falters
0 comments | by Doug Bandow on August 27 , 2015
Senior Fellow, the Cato Institute
Last year Narendra Modi won an unusually strong majority in India's parliamentary election. Previously barred from receiving a U.S. visa because of charges that he incited sectarian violence, Modi visited the U.S. last September and was warmly welcomed by both the Obama administration and Indian-Americans. He was treated as the leader of the next great power.
India won independence in 1947 and long was ruled by the dynastic India National Congress Party. Although ethnic Indians circled the globe as entrepreneurs and traders, the Delhi government turned dirigiste economics into a state religion. Mind-numbing bureaucracies, rules, and inefficiencies were legion. Only the well-empowered and well-connected benefited from the socialist illusion that persisted into the 1980s.
Eventually modest reform came, but the Congress Party was never fully committed. Even half-hearted half-steps generated overwhelming political opposition. The Hindu nationalist Bharatiya Janata Party later broke the CP's monopoly on power and made further changes, but that still was not nearly enough. Later CP governments were major disappointments. Last May the BJP, led by Modi, handed Congress its greatest defeat ever. He seemed poised to transform his nation economically. Some Americans called him the Indian Reagan.
As the anniversary of that visit approaches, the Modi dream is fading. An Economist report found him widely described as an "authoritarian" and a "megalomaniac" even by supporters. More important, by all accounts he does not believe in a liberal free market. Rather, like so many Republican politicians who routinely applaud free enterprise, he is more pro-business than pro-market. The Economist noted that "he occasionally praises small government, but the list [of official pledges] contains a striking number of big tasks for the state. Half of the goals involve grand, state-heavy expansion."
The Modi government exults in the fact that economic growth is up; India may finally surpass China's growth rate. Yet there is little evidence on the ground of rapid economic growth. Unfortunately, few reforms of significance have been implemented. The point is not that Delhi has done nothing, but that its failures overshadow its successes and highlight its lost opportunities.
Critics cite continuing outsize budget deficits, driven by subsidies and state infrastructure spending, as one notable shortcoming. So is continued state direction of bank lending. Also counterproductive is the 2013 Companies Act, which discourages creation of family firms. On the election anniversary the Economist called the Modi government's record "underwhelming." Arun Shourie, privatization minister in the last, and more reformist, BJP government, observed last December: "when all is said and done, more is said than done."
Unfortunately, Modi has missed the "honeymoon" period during which his political capital was at its greatest. Observed Sadanand Dhume of the American Enterprise Institute: "a tepid budget, an unseemly tax row with [foreign institutional investors], and few concrete signs of allegedly high growth have dented business confidence." Time is slipping away.
Indeed, Indian politics quickly began shifting back to business as usual. Modi has been forced to fend off charges of corruption and other misbehavior. One minister allegedly lied to the Election Commission; another apparently aided a fugitive from justice. Scandals afflict two major state BJP governments. The opposition will take full advantage of the political cudgel handed to it; the resulting controversy may further sap the government's will to implement controversial reforms.
None of this is unusual by Indian standards, but voters are getting fed up. Disappointed Delhi voters gave a landslide victory to a new anti-corruption party in February. Observed Sanjay Kumar of the Centre for the Study of Developing Societies: "The previous Congress regime was taught a very harsh lesson in the last general elections for not being tough on corruption and for not maintaining a transparent administration."
Religious violence also is on the rise, largely instigated by Hindu extremists. Last year the U.S. Commission on International Religious Freedom observed: "Despite the country's status as a pluralistic, secular democracy, India has struggled to protect minority communities or provide justice when crimes occur due to a lack of political will, political corruption, and religious bias by government officials.
Persecution is a sensitive issue for Modi, who started young with the Hindu nationalist group Rashtriya Swayamsevak Sangh ("National Volunteer Society"). While serving as Gujarat state's chief minister, Modi was implicated in the 2002 riots which killed more than 1200 people, mostly Muslims. His role is murky and evidence has been destroyed, so the truth likely never will be known.
Since his election sectarian attacks are up, on Christians as well as Muslims. Some Hindu extremists imagine that by helping long victimized lower caste Dalits missionaries are buying conversions. The poor are assumed to be incapable of choosing their faith. Modi has not encouraged the rising violence, but his government has catered to Hindu nationalist sentiments. Only after an assault on a Christian school--the vast majority of whose students and teachers are Hindus--did he promise that his government would give "equal respect to all religions."
Sectarian violence obviously harms innocent Indians. It also undermines India's democracy. Moreover, it provides foreign investors another reason to go elsewhere.
Only in foreign affairs has Modi moved decisively. India proclaimed itself to be nonaligned during the Cold War, though it leaned toward the Soviet Union, in part in response to America's close relationship with Pakistan. Modi has further enhanced Delhi's already improving relationship with the U.S. Last year Modi told CNN's Fareed Zakaria that "India and the United States of America are bound together, by history and by culture. These ties will deepen further." Modi even has engaged the Chinese government despite relations tainted by an unresolved border conflict. Indian diplomat Subrahmanyam Jaishankar said Delhi wanted to be a "leading power, not just a balancing power." However, that objective is advanced by a stronger economy, as China demonstrated.
Despite his disappointing economic record so far, Modi still has an opportunity to liberalize India's economy. In upcoming years his party will take control of the appointive upper house, which has impeded some of his initiatives. Argued Dhume, "in Gujarat, too, he started slowly, but ended up presiding over a long boom." However, it is not enough for his government to tinker with nonessential reforms; it must destroy the high barriers to Indian economic growth.
On Dhume's to-do list are tax reform, privatization, subsidy cuts, and electricity restructuring, India also should limit government spending, liberalize its labor rules, simplify the visa process, modernize bankruptcy procedures, streamline legal processes, and strengthen private property rights. Derek Scissors of AEI complained that Delhi's labor rules "essentially guarantee mass underemployment and an India that, unlike its neighbors in East Asia, cannot benefit from global demand for manufactured goods." Approving a serious reform agenda won't be easy, but what is a solid legislative majority for if not to move India forward?
If such reforms are impossible, then "a high-middle-income India that is a true global economic power is off the table, indefinitely," predicted Scissors. The country desperately needs strong growth for years, even decades, to move to the first rank of nations, as China has done.
India has extraordinary potential. Modi recently acknowledged that "there are huge global expectations for India." But for decades the Indian government has squandered its future.
Despite the high hopes generated after the BJP's dramatic victory, nothing has really changed. While growth has picked up in India, that improvement is not sustainable absent far more fundamental and comprehensive reform. And without sustainable growth, India will not follow China's example to build a competitive manufacturing sector, generate broad-based income growth, and create a new great power capable of influencing global affairs.
Such reforms will not be easy, but making tough decisions presumably is why the Indian people handed Modi such an overwhelming victory. Dhume reasonably asked: "What is the point of being the most gifted communicator in Indian politics if you won't use those skills to persuade the public?"
Some people predict the 21st Century will be the Chinese century. It is more likely to be the Asian Century, at least if Narendra Modi takes advantage of his unique opportunity. Leading India into a better, more prosperous future obviously would benefit India and the Indian people. It also would benefit the rest of the world.