India needs a new consensus on growth and opportunity
India has so far been spared the kind of populist revolt that’s testing many rich Western democracies. It’s far from immune, however. This country of more than 1.3 billion people is about to begin its long process of going to the polls (the results won’t be known until late next month). The politicians seeking election ought to recognize that many of the conditions for a similar upheaval are in place — and that the best way to avoid it is to promote growth and opportunity through economic reform.
Sadly, the campaigns to date have put their focus elsewhere. Prime Minister Narendra Modi has reminded voters of his tough recent stand against Pakistan, promising to guard India against enemies within and without. The opposition Congress party has pitched itself as the savior of the poor, pledging to provide a minimum basic income for the country’s lowliest citizens. Neither side has had much to say about economic growth, without which most other ambitions are meaningless.
India’s “demographic dividend” — its growing population is one of the youngest in the world — won’t last forever. By one estimate, the support it gives to economic growth could begin to wane as early as 2030. If India fails to generate jobs with livable wages and possibilities for advancement, its poorly educated and disproportionately male youth will be ripe for the kind of authoritarian appeals that have polarized other societies.
Modi triumphed five years ago by promising to shift India’s economy into a higher gear. His record has been mixed. Most laudably, he ushered in two broad, bold reforms: a nationwide goods-and-services tax and a new bankruptcy code. Despite teething problems, these will ultimately help to make the economy more prosperous. New road-and-rail infrastructure, especially in rural areas, will do the same. Other new programs, from building toilets to opening bank accounts and providing cooking-gas cylinders for poor families, have directly improved people’s lives.
Barely a year into his term, however, Modi was accused by Congress leader Rahul Gandhi of running a government for the rich, and gave up on two crucial economic reforms: the effort to revise land-acquisition and labor laws. His most dramatic initiative — the currency reform of 2016 — was an embarrassing flop. Recently, the government has begun to reverse years of liberalization in trade policy, competed with Congress in promising handouts to farmers, and come under suspicion of fudging data to mask its weak record on growth and jobs.
Five years on, India awaits the change Modi promised in 2014. This ought to start with Indian manufacturing, particularly for exports: No other sector can create millions of solid, entry-level jobs. There’s certainly room to grow: India’s share of world goods exports stands at barely 1.7 per cent. But this won’t happen without those land and labor reforms to enable Indian companies to expand. Lower import barriers, better access to power, lighter regulation, upgraded infrastructure, and lower corporate taxes are all essential for encouraging investment, boosting productivity, and enabling producers to participate in global supply chains.
Better access to capital is needed, too. Private investment is low because the state-owned banks, which account for 70 per cent of the banking sector, aren’t lending. Efforts to recapitalize them and improve their management have fallen short. The government needs to encourage growth in privately owned banks and greater reliance on a well-regulated private capital market.
In general, when it comes to the economy, India’s government should try harder to do less. In 2014 Modi promised “maximum governance, minimum government.” He hasn’t followed through. In practice, he’s tried hard to make the state more efficient and less corrupt — a commendable effort, to be sure — but no less powerful.
India’s government is chronically overstretched and needs to prioritize. It shouldn’t be running businesses such as Air India Ltd. or dictating prices in agricultural markets. It shouldn’t preside over thickets of regulations whose main function is to keep officials employed. Resources need to be redirected to basic public services, including health and education, and to improving the judiciary and modernizing the military. Encouraging women’s participation in the labor force, which is low and declining, demands special attention.
In India, a former planning official has said, there’s a “strong consensus for weak reforms.” What India needs is a strong consensus on a few strong reforms. And what it must avoid in building that consensus is divisive rhetoric and partisan rancor. India’s leader for the next five years should concentrate on the country’s real enemies: poverty, joblessness, inequality, and the incapacity of an overreaching state.