While most world capitals have been waiting for significant economic reforms since Prime Minister Narendra Modi’s election to office in 2014, his government has prioritised social reengineering over economic growth in India.
Putting vote-getting religious sentiments above economic and strategic goals has diminished the enthusiasm with which other countries support Indian foreign policy.
And as a result of lacklustre economic policies, India’s rate of growth has declined to 4.5 per cent. What was once described as the fastest growing economy in the world, is now in its worst phase in 42 years.
Unemployment is at an all-time high, industrial production is not growing and investment is declining. The agriculture sector is in distress, and the fast-moving consumer goods sector is seeing its ‘worst slowdown’ in a decade.
It is clear more than ever that social division and strife do not attract investment and is not conducive to economic growth.
For a nation of more than one billion people, such stagnation does not augur well. Global rating agencies Fitch, Moody’s and S&P have cut their forecasts for India’s growth. The World Bank and the International Monetary Fund have also dampened their past optimism about India, noting that India’s slowdown is diminishing the prospect of global economic expansion.
For many observers, the situation is disappointing because of the hopes they pinned on the rise to power of a conservative government in New Delhi. When he was first elected in May 2014, Modi promised ‘minimum government, maximum governance’. He brought to his office the image of a business-friendly chief executive whose no-nonsense style of functioning had brought prosperity to Gujarat when he was its chief minister.
In 2015-16, India’s GDP stood at US$ 1.99 trillion and it had a labour force of 860 million people. Both the World Bank and the International Monetary Fund predicted that India’s economy would grow between 7.3-7.5 per cent over the next two years. The World Bank even asserted that a “resilient” India would help drive economic growth in South Asia. But now India’s eastern neighbour, Bangladesh, has become the fastest-growing economy in the region.
And the latest Budget offers little hope of reviving India’s stagnant economy.
The lack of focus on economic growth over the last several years can be traced to an over-emphasis on socio-cultural issues and majoritarian politics.
For instance, the Modi government’s launch of a programme to encourage foreign investment in India in February 2016 was overshadowed by the arrest of students from one of India’s top universities, the Jawaharlal Nehru University (JNU), on grounds of sedition. The narrative that emerged was that the Modi government was using a colonial-era law against university students while asking Indian and foreign corporates to bring state of the art technology and skills to India.
It is difficult to convince investors of a government’s promises about capitalist freedom when it is accompanied by visible repression. For years, India’s greatest strength globally was its reputation as a secular, inclusive, and pluralist democracy. India’s socialist economic framework did not attract capital, and the consensus among economists was that the country needed free markets alongside its political and cultural freedoms.
Starting in late 2014, there has been a steady decline in India’s reputation for tolerance. Attacks on religious minorities, especially Muslims, including lynchings tied to the demands of a ban on cow slaughter and beef consumption, do not bring investment. And neither do attempts to ‘re-convert’ Muslims and Christians to Hinduism through ghar wapsi (‘return to the fold’).
Illiberal majoritarianism coupled with an unwillingness to dismantle controls that have limited India’s growth are probably the reasons why India is performing below expectations in the economic realm.
The economic and military rise of China has led many around the world to woo India as a potential rival to China. But New Delhi appears unable or unwilling to take advantage of these opportunities.
Indians often like the comparison that many around the world make between India and China. The two Asian powers have the world’s largest populations and have great potential as global powers. But they forget that China maintained a laser-eyed focus on building its economic and military capability for over two decades before it projected itself as a world power.
India, on the other hand, speaks incessantly about its potential for greatness without implementing economic reforms that can pave the way for that greatness to materialise. India’s last major economic reforms took place in 1991. It badly needs the next generation of economic reforms that will focus on critical areas of land, labour, and capital.
Getting on the right track
For now, India seems embroiled in debates about identity and ideology. And vigilante attacks, campus protests, and news stories about repression of minorities hardly paint a picture of stability.
The Modi government’s decisions on Goods and Services Tax (GST) and the Insolvency and Bankruptcy Code (IBC) are positive steps, but their impact so far is small. A lot needs to be done to improve India’s British-era infrastructure (rail, road, air, and ports), or accessibility to basic amenities like electricity and water.
None of these can be accomplished through culture wars. Businesses seek countries with secure tax regimes and political and social steadiness. But India’s complex and confusing taxation structures, the presence of retroactive taxation, and the government’s punitive approach to businesspeople have created an environment of fear within the business community.
At a time when many US firms are moving out of China, India’s policy should focus on wooing these investors, improving ease of business, and offering incentives.
Instead, xenophobia, hyper-nationalism, and a desire for absolute political control seem to be pushing those who have already invested in India away. And the BJP government has been more protectionist than even its predecessors.
Moreover, India’s friends and rivals will take New Delhi seriously when they see India investing more on defence and security. But instead of spending more on defence, India has been spending less. This year’s defence budget (excluding pensions) stands at only 1.5 per cent of the GDP.
Some apologists have blamed India’s bureaucracy, the ‘babus’, for India’s current economic mess and the lack of reforms. But the same bureaucracy had effectively implemented the 1991 reforms when commanded by the political leadership of the time to do so. The ‘babus’ would have gladly done the same under instructions from their current political masters.
Given its focus on social and cultural issues, the Modi government does not seem to have the desire to significantly change the way India does business. Instead of shifting blame away from the political leadership, honesty demands recognition of the incompatibility of the current leadership’s social agenda and India’s economic and strategic aspirations.
The author is a Research Fellow and Director, India Initiative at the Washington DC-based Hudson Institute. Her books include ‘Escaping India: Explaining Pakistan’s Foreign Policy’ (Routledge, 2011) and ‘From Chanakya to Modi: The Evolution of India’s Foreign Policy’ (Harper Collins, 2017). Views are personal.