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.