NEW DELHI – India’s incoming prime minister, Narendra Modi, has promised to turn his country’s sluggish economy around. When asked recently about his reform plans, Modi responded that his roadmap was simply that “Our GDP should grow.” This seems like an obvious goal, but in recent years India appears to have been losing sight of [...]

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An economic roadmap for Modi’s India


NEW DELHI – India’s incoming prime minister, Narendra Modi, has promised to turn his country’s sluggish economy around. When asked recently about his reform plans, Modi responded that his roadmap was simply that “Our GDP should grow.” This seems like an obvious goal, but in recent years India appears to have been losing sight of it.

What will it take to return the Indian economy to sustainable growth? We believe that the following five simple facts about the Indian economy hold the key.

Indian pedestrians watch as a digital broadcast presents the rolling share price information and national election results news coverage on the facade of the Bombay Stock Exchange (BSE) building in Mumbai on May 16, 2014. India's stock market jumped more than six percent to a record high of 25,000 points as business-friendly opposition leader Narendra Modi looked set for a landslide victory in national elections.AFP/ Punit Paranjpe

First, India is a “young” emerging market. This means that sustaining a high rate of economic growth for the next five years can come about without making dramatic changes to India’s institutions. A country’s output depends on its inputs, namely its labour force and capital stock, and on the efficiency with which it uses them. When the capital stock — including infrastructure — is deficient, investing in it is one of the quickest ways to generate growth (as long as finance is available). This is the “low-hanging fruit” that Modi should go after right away. It is a much more difficult and gradual process to increase the efficiency of resource use and the skill level of the labor force.

Second, the service sector has been the primary driver of economic growth in the last few decades. Industry’s share of value added is stuck at 25 per cent, and the share of micro and small enterprises in manufacturing employment in India is 84 per cent, compared to 25 per cent in China. This is anachronistic for a country at India’s level of development. The fact that India has moved from an agricultural economy to a service-driven economy with almost no growth in industry is not a virtue; it is an outcome of policies that have hampered manufacturing and mining.

With production costs rising in China, international buyers are looking for alternative sourcing destinations for manufactured products. If India, with its large labour force, is to seize this opportunity, it must nurture its industrial sector.

Third, India’s rank in the World Bank’s “Ease of doing business index” fell from 116th out of 189 countries in 2006 to 134th in 2013 — clear evidence of stalled reforms. The new government needs to reverse this trend and improve the environment for doing business. There is a large constituency of domestic and international investors who will respond positively and rapidly to any steady improvement in India’s institutional environment, which should be an ongoing process.

Here, again, it is not as if large, comprehensive reforms are required. Significant improvement could be achieved by rule changes to accelerate approval of business permits and environmental clearances, simplify labour regulations, and fill judicial vacancies. All of this is well known; what is needed now is the will to undertake such reforms and a mechanism for oversight and accountability to ensure that the bureaucracy implements them quickly and effectively.

Fourth, in recent years the lack of fiscal discipline has been costly for the Indian economy, as excessive demand arising from large deficits translated into stubbornly high inflation and was partly responsible for large current-account deficits. Fiscal discipline should be a priority, not an afterthought. An emerging market requires a strong commitment to keeping fiscal deficits in check. New budget legislation, along the lines of the Fiscal Responsibility Act of 2003, but with more teeth, needs to be instituted.

Lastly, improving the quantity and quality of education and healthcare through partnerships with the private and non-profit sector and researchers is essential to sustain growth beyond the next five years. The new government should promote researcher-policymaker partnerships to design and evaluate innovative programmes to solve knotty policy challenges like improving learning outcomes and boosting preventive health care.

India is fortunate to have thought leaders in almost every sector who could help unleash such innovation in partnership with the civil service. Just as there is a chief economic adviser in the finance ministry, why not have a technocratic chief education adviser or a chief health adviser to work with the education and health secretaries?

Will a Modi government be able to deliver on these fronts? Modi has certainly championed economic growth, and he constantly points to his success in building roads and ensuring power supply as Chief Minister in his home state of Gujarat. The BJP manifesto proposes to pursue “minimal government and maximum governance.”

It is refreshing to encounter this acknowledgment that government might sometimes be the problem. But replicating Modi’s success in Gujarat at the national level and confronting other development challenges will require cooperation from state governments, which is uncertain at best. After all, any attempt to change rules and laws (such as labor legislation) that benefit established interest groups invites opposition. What India’s economy needs has been evident for years; the challenge for the new government is to find a way to get it done.

(Gita Gopinath is Professor of Economics at Harvard University. Iqbal Dhaliwal is Deputy Director of the Abdul Latif Jameel Poverty Action Lab (J-PAL) in the Department of Economics at MIT.)

Copyright: Project Syndicate, 2014. Exclusive to the Sunday Times.

Stock market soars

Responding to the news, Indian markets got off to a roaring start, with the rupee breaking below 59 to the US dollar, an 11-month high, and the benchmark stock index jumping 6 percent to a record high before paring its gains.

Betting on a Narendra Modi win, foreign investors have poured more than $16 billion into Indian stocks and bonds in the past six months and now hold over 22 per cent of Mumbai-listed equities — a stake estimated by Morgan Stanley at almost $280 billion.
Unlike his predecessors, Modi will not have to deal with unruly partners as he implements reform. That could usher in profound economic changes, and he will try to replicate his success in attracting investment and building infrastructure in Gujarat, the state he has governed for more than 12 years.

“He can afford to have a smaller but stronger cabinet, that means a far more decisive government. He has been saying less government and more governance, we are really likely to see that,” said Navneet Munot, Chief Investment Officer at SBI Funds Management in Mumbai.
But with India’s economy suffering its worst slowdown since the 1980s and battling high inflation, it will not be an easy task to meet the hopes of millions of Indians who have bought into the idea that Modi will quickly push their country onto the top table of global economic powers.
His party also lacks strength in the upper house of parliament, where backing is needed for legislation to pass.

“It’s important to be realistic about how quickly they can instigate change. It takes time to, number one, get economic reforms through the political machinery and, number two, it also takes a while before economic reforms actually have a positive impact,” said Leif Eskesen, an economist at HSBC in Singapore.

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