‘Modinomics’ stumbles

Indian Prime Minister Narendra Modi was elected to lead his nation three years ago, riding on his reputation as a man of action and reformer who could get the country’s economy moving. For a short while he succeeded: India posted 9 percent growth the year after he took office, making it the world’s fastest-growing economy. But the economy has slowed since then, posting growth of just 5.7 percent in the April-June quarter of 2017, the slowest rate in three years. The slowdown is the product of policy missteps and structural problems, both of which are compounded by Modi’s high-handed governing style. All must be remedied to ensure India gets and stays on a growth track.

Modi made his reputation as the chief minister of Gujarat state. During his tenure, its GDP grew about 10 percent annually, establishing itself as the national pacesetter. Modi pledged to duplicate that success throughout India. Since taking office, he has promoted neoliberal reforms: opening the country to foreign investment, liberalizing labor laws to make it easier to hire and fire workers, cutting the bureaucracy and rationalizing taxes and subsidies.

Initial successes were followed by — and may have encouraged — subsequent missteps. In an attempt to break the illicit, or black, economy, the Modi government last November announced without warning that it would no longer accept 500 and 1,000 rupee bank notes, which account for 86 percent of the cash in circulation. While the move made sense — it would force individuals holding those notes to exchange them for new currency and thus “enter” the legal economy — the financial system was not ready for the massive demand for new bills that was unleashed. At the same time, stringent daily limits on conversion left many businesses unable to operate or complete transactions.

That decision was followed by the imposition of a goods and services tax, India’s first national tax. That move too was applauded by economists who have long argued that business was stifled by a patchwork of state and local taxes that account for as much as 25 percent of the consumer price of locally made goods. But the new tax was complex, and it upended small and medium-size businesses that had to deal with new layers of bureaucracy. Last week, the government announced that it would amend the new regulations to cut some taxes and allow smaller businesses to file returns quarterly rather than monthly.

Critics charge that good ideas have been spoiled by poor implementation, and the fault rests on a government — and a prime minister — unwilling to listen to outside ideas. The tax revision suggests that criticism hit home.

A second charge is that reforms do not address the most powerful drag on the economy, a banking system saddled with as much as $150 billion in bad debt, an estimated 12 percent of all bank assets. As many as 20 percent of large companies cannot service the interest on their loans. A new bankruptcy law will help, but the best solution would be to off-load the bad debt onto a new bank. That, however, is a politically difficult move since it would look like the government was trying to help the rich and well-connected.

Political calculations take on a new weight as the campaign begins for national parliamentary elections to be held in the first half of next year. The overriding consideration is generating the 7 percent growth that is needed to provide jobs for the 12 million people who enter the labor force each year. And 1.5 million Indians lost jobs in the first half of this year.

While conceding that the economy has slowed, Modi insists that fundamentals remain strong and “the government is fully committed to reversing this trend.” The challenge for the government is acknowledging the degree to which it has contributed to or exacerbated the problems it now faces. In addition to the poor rollout of its policies, critics note that the Hindu nationalism — a core component of Modi’s ruling Bharatiya Janata Party (BNP) — has also slowed growth. Last May, the government banned the sale of cows for slaughter, a move that hammered India’s meat industry. The rule was suspended by the Supreme Court in July, but the result has been confusion and another drag on growth.

Challenging that policy, like the labor and land reforms that all economists believe are necessary to unleash consistent and sustained growth, will be politically unpopular. It is not clear if India’s man of action has the stomach for all those fights as an election season approaches.