The Economist, May 24th 2014
THE most important change in the world over the past 30 years has been the rise of China. The increase in its average annual GDP per head from around $300 to $6,750 over the period has not just brought previously unimagined prosperity to hundreds of millions of people, but has also remade the world economy and geopolitics.
India’s GDP per head was the same as China’s three decades ago. It is now less than a quarter of the size. Despite a couple of bouts of reform and spurts of growth, India’s economy has never achieved the momentum that has dragged much of East Asia out of poverty. The human cost, in terms of frustrated, underemployed, ill-educated, unhealthy, hungry people, has been immense.
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A very British binge
Now, for the first time ever, India has a strong government whose priority is growth. Narendra Modi, who leads the Bharatiya Janata Party (BJP), has won a tremendous victory on the strength of promising to make India’s economy work. Although we did not endorse him, because we believe that he has not atoned sufficiently for the massacre of Muslims that took place in Gujarat while he was chief minister, we wish him every success: an Indian growth miracle would be a great thing not just for Indians, but also for the world.
From lackey to leader
Government is at the heart of India’s failure. The few strong governments India has had—always dominated by the Congress party, a Nehru-Gandhi family fief—have had rotten economic agendas. Reformist politicians—like the outgoing prime minister, Manmohan Singh—have lacked the clout to implement their policies.
That is partly because India is an extraordinarily hard place to govern. Much power is devolved to the states; the fissiparous nature of its polity means that deals have constantly to be done with a vast array of regional and caste-based parties; and a colonial and socialist past has bequeathed India a bureaucracy whose direction is hard to change.
Mr Singh, who was not much more than a Gandhi family retainer, had little chance of doing so. Mr Modi, by contrast, has huge authority, both within his party and in the country. The BJP’s victory owes something to good organisation but most to its leader’s appeal. Not since Indira Gandhi was assassinated in 1984 has India had such a powerful personality in charge.
Mr Modi has an outright majority—282 of the 543 elected seats in Parliament’s lower house. Only Congress has ever won a majority by itself before, and it has not had one for 30 years. The combination of parliamentary clout and personal power means that Mr Modi has a better chance of getting state governments to go along with him than Mr Singh did. Congress, meanwhile, has been routed, retaining just 44 seats. The joke goes that until last week India had no government; now it has no opposition.
Compare Indian state electorate and voter numbers to entire nations with our interactive map
Mr Modi has a mandate for economic reform. Although his core supporters are religious nationalists, steeped in the glories of a Hindu past, it was the votes of the young, urban and educated that won him the election. They were turned off by Congress’s drift and venality, and its preference for welfare handouts over fostering opportunity. They want the chance of self-advancement that Mr Modi, a tea-seller’s son, both represents and promises.
His first task is to stabilise a fragile economy. He must clean out the banks (bad loans are preventing a recovery), sort out the government’s own finances (chronic deficits are at the root of India’s inflation), cut subsidies, widen the tax base and allow the central bank to pursue a tougher anti-inflation policy.
His second task is to create jobs. Labour laws are rigid, land for factories often impossible to acquire at any price, and electricity patchy. Mr Modi must launch sweeping land reforms, crack heads in the misfiring coal and electricity industries and make India more of a single market not just by improving roads, ports and the like, but also by cutting the red tape that Balkanises the economy. A national sales tax would help here, replacing myriad local levies. Such relatively straightforward steps could make a powerful difference, raising the Indian growth rate by two or even three percentage points from its current 4-5%.
Reaching out to Pakistan would bring economic as well as security benefits. Trade between Pakistan and India is currently negligible, and there is huge scope for growth. As a leader from the nationalist right, Mr Modi is well placed to bring about a rapprochement, rather as Menachem Begin could make peace between Israel and Egypt. The initial signs are good: Mr Modi has invited Pakistan’s prime minister, Nawaz Sharif, to his inauguration.
One rule for all
There are three main dangers. One is that Mr Modi turns out to be more of a Hindu nationalist than an economic reformer. He has spoken of “bringing everyone along”. But while he has already worshipped at the Ganges since his victory, promising to clean up the river sacred to Hindus, he has not brought himself to mention Muslims, who make up 15% of the population.
A second danger is that he is defeated by the country’s complexity. His efforts at reform, like all previous reformers’ efforts, may be overwhelmed by a combination of politics, bureaucracy and corruption. If that happens, India will be condemned to another generation or two of underachievement.
A third is that Mr Modi’s strength will go to his head, and he will rule as an autocrat, not a democrat—as Indira Gandhi did for a while. There are grounds for concern. After years of drift under Congress, some of the country’s institutions have rotted. The main police investigator is politically directed, the media can be bought, the central bank, which does not have statutory independence, has been bullied before, and Mr Modi has authoritarian tendencies.
The risks are there, but this is a time for optimism. With a strong government committed to growth and a population hungry for it, India has its best chance of making a break for prosperity since independence.