Modi's 'strongman' economics not paying off

Prime Minister Narendra Modi has strong views on economics. Speaking to a big crowd of tycoons, investors and journalists in New Delhi, Modi once admitted that he is “not a big economist.” Yet he promptly set out an economic vision for India to be a global manufacturing power. Investors should rush to “make in India,” he said. He claimed that his strong leadership would usher in economic revival and 100 million new manufacturing jobs by 2022.

During the prime ministerial campaign in the 2014 national elections, Modi mocked then prime minister Manmohan Singh, for supposedly presiding over economic failure. He jeered that Singh — who has a doctorate in economics from Oxford University and was the architect of the liberalisation of the Indian economy in the early 1990s — could not stop onion prices from rising and that economic growth was jobless, both popular concerns.

Later, as prime minister, Modi told me that India’s economic performance had been embarrassing under Singh (in fact, Singh’s record was pretty good: in his full decade as prime minister, economic growth was on average 7.8% a year.) The world, Modi told me, saw that “the ‘I’ in the Brics had become a burden,” meaning India had fallen behind Brazil, Russia, China and South Africa. He bragged he was restoring India’s image.

Parts of India’s $2.3 trillion-strong economy are in better shape today than they were three years ago. Onion prices are down. Deficits are lower. Businesses face somewhat less red tape. Foreign investment has come — over $160 billion in the first three years, compared with just $38 billion in the first three years of Singh — even if Indian firms are reluctant to spend.

Local business leaders quietly grumble that there is no dynamism on the ground, little consumer demand. Much infrastructure, such as wobbly roads and slow freight trains, needs improving. Indebted banks — state-run and vulnerable to political meddling — won’t lend without reform.

Almost no new jobs have been created under Modi. In the late Singh years, economists say, at least 4,00,000 extra jobs were added yearly. In the last three years of Singh’s government, from 2011 to 2014, on average 5,79,000 extra jobs were added yearly in India.

That was far too few, considering roughly one million people join the labour force every month. But under Modi the job-creation rate has fallen, in effect, to zero. The data for 2015, the latest year for which they are available, suggest that little more than 1,00,000 jobs were added to India’s economy.

In public, some business leaders have gushed that the “almighty” sent Modi, blessing his “wisdom.” That encourages Modi to think his personal role is immensely important. He recalls his 13 years of running Gujarat where he corral­led investors, offering land and attractive terms to set up factories. He is tempted to think a cou­ntry of 1.3 billion might be run in the same way.

Modi’s approach could be called “strongman economics” — the idea that a dominant leader’s sweeping promise is more powerful than deep-set, complicated, economic problems.

Experts who dare to disagree are dismissed as out of touch. When Modi chose to withdraw most bank notes from the economy last November to fight corruption, economists gave plenty of warning that a nasty shock would follow. “Demonetisation” was a big reason growth slowed this year, as many workers went unpaid and consumers delayed spending.

Official gross domestic product statistics show first-quarter growth in the economy, at an annual rate, was just 6.1% — unimpressive for a big, poor country with much catching up to do. It is also slower than when Singh, supposedly such an embarrassment, left office.

Global economic conditions are remarkably benign right now. Oil prices are less than half what they were in 2014, when Modi came to power. They are crucial for India, which is a huge oil importer. Monsoon rains have been relatively kind. Else, India’s recent story would be much harsher.

Modi remains popular, partly because India’s opposition is hopeless and because many Indians like his bombast. Nationalists talk of their country — which will soon be more populous than China — as an emerging superpower. Just as railway officials call dawdling trains “superfast,” or as fawning broadcasters call Modi the “first 24x7 prime time prime minister,” such claims are overdone.

Modi’s economic promises are so extraordinary they must be taken with a deep slurp of salty lime juice. He vowed India would train apprentices by the hundreds of millions to service that manufacturing boom. He said internet networks would get to all of the country’s 6,00,000 villages shortly.

He promised to clean the polluted Ganga and build 100 million extra toilets by 2019. And, he said, India will have 100 new “smart cities” and a network of high-speed trains, and the World Bank will rank it as one of the 50 countries friendliest to businesses — up from 130th now.

Complicated GST
Such promises are bold, but a few are plausible, given the strongman economist’s limited efforts to deliver. It is good to see, at long last, the start of a national Goods and Service Tax. It is supposed to create a single market, replacing lots of local taxes with national ones.

But the system, with six tax rates for different goods, looks overly complicated and some in business complain it has been implemented poorly. A welcome new law on bankruptcy should help the financial system. It has grown a bit easier for foreigners to invest in some sectors.

Much else is no nearer to happening under Modi than under Singh. Few formal jobs have been created as labour laws remain painfully restrictive. Nobody dares talk about creating freer markets in agriculture, lest that upset villagers. It is still hard, without political help, to buy land to build a factory.

And in too many sectors — such as makers of steel, fighter jets and even sex toys — state-owned firms crowd out private ones. Modi has not done much to fix such problems, beyond telling state governments to try.

Especially worrying are the consequences of Modi’s political character. For all his strongman economist posturing, he never repudiates his longstanding Hindu nationalist views. Members of religious minorities fear growing intolerance. Mob violence has increased. Modi, a lively Twitter commentator, remains quiet for too long and does little to stop the violence.

Sectarian strife and instability, a worry in itself, also matters for the economy. Who wants to invest if arbitrary political decisions can threaten whole industries? Crackdowns on alcohol sales in much of India badly hurt the tourism industry. Attacks on the trade in cow and buffalo meat threaten an industry that creates jobs for many and that last year earned India much-needed exports worth $4 billion.

India’s tolerant, secular character forms the bedrock on which a strong economy can be built. You need not be a big economist to grasp that it would be crazy to weaken that foundation.

(The writer is European Business and Finance correspondent and former South Asia correspondent for The Economist)