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Modi’s challenging task of resolving India’s daunting economic problems
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India’s economic problems are enormous. Any expectation that Narendra Modi could resolve them quickly is wishful thinking. Yet the massive political victory and Modi’s economic achievements in Gujarat have led to high expectations. However, a massive political victory is different to achieving economic success. Reviving a state economy is quite different to economic development of a large country of over a billion people with 28 state governments.
Can Modi revive the Indian economy, reduce the country’s endemic poverty and improve its low social conditions significantly? Can he ensure a secular pluralistic state with inter-communal harmony and societal stability that is vital for economic progress?
Overwhelming challenges
The daunting economic and social challenges are that of achieving high economic growth with more equitable distribution of incomes, substantial reduction of poverty and significant improvement in social conditions. These cannot be achieved without fiscal consolidation and high sustained economic growth.
Can Modi’s economic growth strategy be complemented with social interventions that improve the quality of life? Improving literacy, increasing primary school enrolment, providing basic amenities such as safe drinking water, clearing slums and providing better housing are as essential as increasing economic growth. In as much as social interventions are not possible without economic growth, economic growth is no guarantee that India’s poverty and low social indicators would be improved.
Economic backdrop
Although the liberalisation of the economy and Manmohan Singh’s economic reforms resulted in economic growth reaching nearly 9 per cent in 2006 and 2007 and 10 per cent in 2010, since then growth fell to an average of 6.6 per cent in 2011-12 and dipped to 4.5 per cent in 2013, while the rate of inflation increased. While the rich became immensely rich, the condition of the poor remained deplorable. These economic conditions and the Congress Party’s weak leadership, inability to continue with reforms and charges of corruption led to its electoral defeat.
India’s economic growth is 4.5 per cent, half the peak level it had reached a few years ago. Inflation is 9 per cent and rising while industrial production is declining. Public finances are weak with the consolidated fiscal deficit probably over 7 per cent. The control of inflation, reduction of the fiscal and trade deficits, increasing revenue by new taxation measures, cutting down poorly targeted wasteful welfare expenditure and replacing these with effective social interventions and increasing domestic savings are economic policy priorities.
Economic challenges
The overall economic challenge for Modi is to boost economic growth to around a 10 per cent trajectory. This may not be difficult in 2014/2015 owing to the low growth in 2013, the likelihood of an investment boom and improving global demand for manufactured goods. Maintaining the higher growth momentum will be more challenging as it would depend on maintaining foreign investor confidence, economic reforms and societal stability.
Initial developments
The initial reactions to Modi’s election are of economic benefit. Within a few days foreign investors came in with foreign investment to the tune of US$ 60 billion (Sri Lanka obtained only US$ 0.8 billion in 2013). No doubt Modi’s capitalist policies will usher in confidence that will encourage both Indian capitalists and foreign investors to increase investment.
Modi’s rapprochement with Pakistan and the positive response from Pakistan’s Prime Minister Nawaz Sharif augurs well for the economies of both countries. If tensions between the countries could be eased, and the border dispute settled eventually, then the vast military expenditures of both countries could be used for the improvement of social conditions. Besides this, there are immense benefits for the two countries through trade, technology transfers, investment opportunities and involvement in supply chains that could open up economic benefits to both countries.
Obstacles
Economic reforms are difficult to implement as road blocks may be placed by state governments that are not controlled by the BJP. The federal nature of the Indian Constitution with significant devolution of powers requires state governments’ acquiescence in some economic policies. Even on issues such as tariff policies that are central government prerogatives, state governments could impede policies through non-tariff barriers, as has happened to Sri Lankan exports to Tamil Nadu.
The heavy dependence of Modi on the India’s business community could deter some essential reforms, even though reforms that benefit industrialists would have the backing of this class. One of the key areas where this would affect is in taxation. While you cannot make the poor richer by making the rich poorer, taxation of the rich and use of funds for social development is imperative in India. Modi’s Finance Minister, Arun Jaitley has the unenviable task of plucking the feathers without hurting the geese that lay the golden eggs.
Social concerns
Ensuring that the benefits of economic growth would “trickle down” to the poor is essential but difficult. Amartya Sen described India “as islands of California in an ocean of Sub-Saharan Africa”. The reduction of India’s extensive poverty is no easy task. Undoubtedly benefits of high growth would trickle down to the poor if there is a significant increase in employment.
However, the enormity of India’s poverty and unsatisfactory social conditions of a large segment of the population necessitates effective social interventions to make a dent in poverty and social conditions. Will Modi’s capitalist strategy and capitalist political base ensure adequate social interventions?
Communal harmony
Modi faces the huge challenge of ensuring peace and harmony, especially among the Hindus and Muslims, who constitute 15 per cent of India’s population. Modi’s record in Gujarat does evoke anxieties, but as India’s Prime Minister Narendra Modi must ensure communal harmony and India must remain a secular state. Religious and communal violence could nullify economic achievements.
Fiscal consolidation, reducing inflation, economic reforms to usher in higher investments and growth, societal harmony and good relations with India’s neighbours are vital for India’s economic revival. The efficacy of social interventions has been limited owing to poor targeting of benefits, politicisation and corruption. The new government must expend money in areas such as primary education, housing, and provision of clean water and sanitation rather than income support that does not reach the intended beneficiaries.
India’s economic challenges are massive, but the election of a new government with a massive mandate is an opportunity to achieve an economic and social transformation.