What Modi of India Growth?

There was little question that Narendra Modi would win India’s drawn-out election progress. When Modi and his Bharatiya Janata Party replaces the Congress Party in India’s government, changes are expected – by economists and by the Indian people. What is question is what kind of economic changes await India. Modi’s claim to fame is impressive economic development in Gujarat. The question is whether he can replicate that growth across India.

The Indian economy is in need of a jump start as both investment and GDP growth have slowed dramatically, but Derek Scissors, resident scholar at the American Enterprise Institute observed: “There is no point expecting Indian to adopt an ideal economic reform program. The country is still full of quasi-socialist and has not made up its mind what it wants much less how to achieve it.” The problems are daunting. Saritha Rai wrote in Forbes.com: “In recent quarters India, the so-called emerging markets giant, has been caught in a cycle of rising inflation and flagging growth. Trapped up in the worst post-liberalization economic phase, the country slowed from blazing, double-digit GDR growth rates to half that, around 5%, in recent years.

Retail inflation averaged 10 percent last year, as prices of daily essentials such as onions shot up and pinched India’s millions of poor who survive on less than $2 a day. Industrial production has steadily fallen in the past months. The rupee fell steeply against the dollar last year.

In the last years of Congress Party rule, the economy slowed considerably. The Wall Street Journal’s Sean McClain wrote: “Bureaucratic red tape and a slowing economy has derailed 6.2 trillion rupees ($104 billion) of investments in India, according to the Centre for Monitoring the Indian Economy—a number the new government will need to reduce if it wants to jump-start economic growth.

Hundreds of hotels, airports, factories, roads and other projects are on hold or canceled. The manufacturing sector was hardest hit, with projects worth 3.2 trillion rupees put on hold, the highest figure in almost two decades, according to data from the Centre for Monitoring the Indian Economy, an economic data provider.

Modi himself has set an ambitious agenda. As the BBC’s Linda Yueh has written, Modi “has pledged to build manufacturing hubs, cities, hydroelectric power plants, and even bullet trains - essentially an India that is industrialised and urbanised. That has eluded India for some time and is the key to faster economic growth.” Yueh noted: “Manufacturing is only 14% of GDP and industrial production, including utilities, is only a quarter of national output. It is essentially unchanged since 1960 which means that India isn't industrialised unlike the other Asian giant, China. Manufacturing is in line with the levels of post-industrialised economies and lags far behind that of other Asian economies that have grown quickly on the back of moving out of agriculture and into production.

M.G. Arun wrote in India Today: “Manufacturing, which Finance Minister P Chidambaram termed as the Achilles Heel of the Indian economy, suffered a deadly blow under the present government. According to government statistics, manufacturing output is seen declining 0.2 per cent in 2013-14 compared to a 1.1 per cent growth in the previous year, even as promises to take manufacturing's contribution to 25 per cent of the GDP in a decade remains on paper. ‘Implementation will be the key for a new government to get projects in track and restore business confidence,’ says Madan Sabnavis, Chief Economist of CARE Ratings. In February, BJP's prime ministerial candidate Narendra Modi said that the country needs to focus on the manufacturing sector, especially electronics and defence to reduce its high dependence on imports and ensure inclusive growth, spelling out his priorities if voted to power.”

The Congress Party regrettably shied away from tough decisions over the last decade. Writing of the departing Manmohan Singh, the Economist observed: “His economic record is mixed-to-good, though in the current gloom—growth stuck below 5%—that assessment meets with raspberries. On his watch India’s economy more than doubled in size, as growth averaged over 8% until two years ago. The World Bank on April 29th ranked India’s economy as the world’s third-largest, replacing Japan’s (using purchasing-power parities). Elsewhere, a civil-nuclear deal with America brought benefits, notably imported uranium. And he had the grit to reduce huge subsidies on petrol and diesel, angering urban voters and politically well-connected lorry bosses.”