IThe second Business leaders gathered in Gujarat, the home state of Indian Prime Minister Narendra Modi, during the week of 2024. The occasion was the vibrant Gujarat Global Summit, one of the many gabfests where India has appealed to global investors. “At a time when the world is surrounded by so much uncertainty, India has emerged as a new beacon of hope,” Modi boasted at the event.
He’s right. While global growth is expected to slow to 2.4% in 2024 from 2.6% last year, India appears to be growing rapidly. The country’s economy grew by 7.6% in the 12 months to the third quarter of 2023, beating almost all expectations. Most economists expect annual growth to be more than 6% over the next 10 years. Investors are gripped by optimism.
The timing is good for Mr. Modi. In April, around 900 million Indians will be eligible to vote in the largest election in world history. A big reason why Mr. Modi, who has been president since 2014, is likely to win a third term is that many Indians believe that Mr. Modi, more than any other candidate, is the leader of the world’s fifth-largest economy. This is because I think he is a capable manager. are they right?
To evaluate Mr. Modi’s performance economist analyzed India’s economic performance and the success of his biggest reforms. In many respects the situation is murky and not helped by sparse and poorly managed official data. Although growth rates have outpaced most emerging economies, India’s labor market remains weak and private sector investment has been disappointing. But that may be about to change. With the support of Mr. Modi’s reforms, India could be on the cusp of an investment boom that will pay dividends for years.
Key growth figures reveal surprisingly little.indian GDP After adjusting for purchasing power, the country’s per capita population grew at an average annual rate of 4.3% during Mr. Modi’s 10 years in power. This is lower than the 6.2% achieved under his predecessor Manmohan Singh, who also served for 10 years.
But this slowdown is not Mr. Modi’s fault, much of it is due to the bad tactics he inherited. In the 2010s, the infrastructure boom started to die down. India is facing what Arvind Subramanian, later a government adviser, called a “twin balance sheet crisis” that has hit both banks and infrastructure companies. They were left with bad debts that crippled their investments for years to come. Mr. Modi also took office at a time when global economic growth was slowing, scarred by the 2007-2009 financial crisis. Then the coronavirus disease (Covid-19) pandemic occurred. The difficult situation has caused the average growth rate of the other 20 largest low- and middle-income countries to fall from 3.2% under Mr. Singh to 1.6% under Mr. Modi. Compared to this group, India continues to perform well (see Figure 1).
Against this turbulent backdrop, Mr. Modi’s performance is best evaluated in light of his economic goals of formalizing the economy, making it easier to do business, and boosting manufacturing. In his first two, he made progress. Third, his performance has been poor so far.
India’s economy has certainly become more formalized under Mr. Modi, albeit at a high cost. The idea was to draw activity out of the shadow economy, dominated by small, inefficient companies that paid no taxes, into the formal realm of large, highly productive companies.
Mr. Modi’s most controversial policy in this area is demonetization. In 2016, he banned two high-denomination notes that account for 86% of the rupee in circulation, a move that surprised many in the government. The stated purpose was to nullify the ill-gotten gains of corrupt people. However, almost all of the cash ended up in the banking system, suggesting that criminals had already gone cashless or were laundering the money. Instead, the informal economy was destroyed. Household investment and credit plummeted, likely hurting growth. In private, even Mr. Modi’s supporters in business do not mince words. “It was a disaster,” says one boss.
Nevertheless, demonetization may have accelerated India’s digital transformation. The country’s digital public infrastructure currently includes personal data management systems such as a universal ID scheme, national payment systems and tax documents. Although the project was conceived by Mr. Singh’s government, much of it was built under Mr. Modi, who has demonstrated the Indian state’s ability to undertake large-scale projects. Most retail payments in urban areas have become digital and welfare transfers have become seamless, as Mr. Modi has given almost every household a bank account.
These reforms have made it easier for Mr. Modi to alleviate poverty caused by India’s disappointing job creation record. Fearing that stubbornly low employment rates will hinder improvements in the living standards of the poorest people, the government currently provides welfare benefits equivalent to approximately 3% of the population. GDP per year. Hundreds of government programs send money directly into the bank accounts of the poor.
This is a significant improvement from the old system, where most welfare was distributed physically and often did not reach the intended recipients due to corruption. According to the World Bank, the poverty rate (percentage of people living on less than $2.15 a day) fell from 19% in 2015 to 12% in 2021.
Digitalization has likely drawn more economic activity into the formal sector as well. The same goes for the national goods and services tax, another of Mr. Modi’s signature economic policies (consumption tax), passed in 2017, weaving together a patchwork of state taxes across the country. The combination of homogeneous payments and taxation has brought India closer to a national single market than ever before.
This has made doing business easier. This is Mr. Modi’s second goal. consumption tax B. Santhanam, regional director of Saint-Gobain, a major French manufacturer that has invested heavily in the southern state of Tamil Nadu, says this is a “game changer”. “The Prime Minister understands that,” added another veteran manufacturing executive, referring to the need to break through bureaucracy. The government also spends large amounts of money on physical infrastructure such as roads and bridges.Public investment sharply increases from about 3.5% GDP It will be close to 4.5% in 2019 and 4.5% in 2022 and 2023.
The results are now beginning to materialize. Subramanian recently wrote: GDP, In 2023, the net revenue from the new tax system exceeded the net revenue from the old system. This happened despite lower tax rates on many items. More money flowing in, even as interest rates have fallen, suggests the economy is really formalizing.
But Mr. Modi is not satisfied with simply formalizing the economy. His third goal is to industrialize it. In 2020, the government launched a subsidy scheme worth $26 billion (1% of the population) GDP) Products made in India. In 2021, semiconductor companies have pledged $10 billion to build factories in the country. One boss said Mr. Modi personally has a hard time convincing executives to invest, often in industries with little competition that they otherwise wouldn’t be able to invest in. become.
Some incentives could help new industries gain a foothold and show foreign bosses that India is open for business. In September, Foxconn, a major Apple supplier, announced it would double its investment in India over the next year. The company currently makes about 10% of its iPhones there. Additionally, in 2023, chipmaker Micron will begin construction of a $2.75 billion factory in Gujarat, which is expected to create approximately 5,000 direct and 15,000 indirect jobs. .
But so far, these projects are too small to be economically significant.Manufactured goods export value GDP Economic growth has stagnated at 5% over the past decade, and the share of manufacturing in the economy has fallen to 16% from about 18% under the previous government. And industrial policy costs money. The government will pay 70% of the cost of the Micron factory, meaning it will pay nearly $100,000 per job. Tariffs are rising on average, increasing the cost of foreign inputs.
So which is more important, Modi’s failures or his successes? In addition to economic growth, it is also worth focusing on private sector investment. It was stagnant during Mr. Modi’s tenure (see Exhibit 2). But there may be a boom. A recent report by Axis Bank, one of India’s largest financial institutions, argues that the private investment cycle is likely to turn around thanks to strong bank and corporate balance sheets. Announcements of new investment projects by private companies surged to more than $200 billion in 2023, according to the Center for Monitoring the Indian Economy, a think tank. This is the highest in a decade and has increased by 150% in nominal terms since 2019.
Although foreign direct investment has declined due to rising interest rates over the past year, companies looking to “de-risk” their exposure to China are reportedly still keen to invest in India. Therefore, it is possible that Mr. Modi’s reforms will accelerate growth. If so, he would have earned a reputation as a successful economic manager.
It will be years before the full impact of Mr. Modi’s policies is felt. Just as an investment boom may justify his approach, his strategy of substituting welfare benefits for job creation may prove unsustainable. Growth can be hampered if local governments fail to build capacity to provide basic public services such as education. Subhash Chandra Garg, who served as finance secretary in Modi’s government, said the government was too keen on “subsidies” and “freebies” and that “the commitment to real reform is no longer that strong.” Are concerned. Nevertheless, many Indians will go to vote feeling cautiously optimistic about the economic changes their prime minister has brought about. ■