In the face of an economy with a weak growth rate that has been under 5% for the second year running, the new Indian Prime Minister Narendra Modi has made a pledge to make growth his Government’s priority.
Much is resting on his success.
The Bharatiya Janata Party (BJP) came to power with a huge majority on the strength of the promise that its Government could turn around the economy and produce momentum (Indian Newslink, June 1, 2014).
Its inspiration is the spectacular success seen in much of East Asia, in particular the economies of Singapore, Hong Kong, China, Taiwan, Korea and the Philippines, which has lifted many people out of poverty.
The cost of failure would be immense, in terms of its impact on the frustrated, hungry, underemployed, unhealthy and ill-educated among the population, and on the ballot box next time.
The hope is that Mr Modi’s combination of parliamentary power, with an outright majority in the Lower House (282 out of 543 seats) and huge personal appeal, will give him a better chance than his predecessor of finding willing allies among the State Governments.
Reforms n
eeded
He certainly has a mandate for reform.
Although Hindu nationalists form the core of his support, he won the election with the support of a majority of the educated, urban younger generation, who were disillusioned by the Congress-led Government’s corruption and neglect of the economy, resulting in a chronic deficit and high inflation.
The economy needs to be stabilised. Similar to the situation in many countries around the world, the banks need to stop making bad loans that only act as a brake on recovery and cause misery for people who cannot keep up with their debt repayments.
Subsidies need to be cut, the tax base needs to be increased, and the central bank needs to adopt more stringent anti-inflation measures.
Stimulating growth
In the first quarter of 2014, the Indian manufacturing sector slumped by 1.4%, while the mining sector registered a slump of 0.4%. This contrasted with the agricultural sector, which grew by 6.3%.
However, economists and business leaders in India have high hopes that Mr Modi will introduce measures to help create a growth rate of 10% or more.
Nobody is willing to put a timescale on this, but the mood is positive.
The Government needs to make a concerted effort to create jobs in the industrial sectors by loosening the rigid labour laws and the land laws governing the building of factories, making the electricity supply more reliable and improving the efficiency of the coal industry.
Indo-Pak ties
It also needs to create a more cohesive single market in India by improving transport links and cutting down on the varied state taxes on the movement and sale of goods, which should be replaced with a national tax.
There is also huge potential for growth in trade between India and Pakistan, which is currently just a trickle in comparison with the total trade figures for both countries.
Pakistan still disallows Indian transit rights to Afghanistan, and India disallows Pakistan access to Bangladesh, Bhutan and Nepal via its borders. This reduces significantly the potential for trade between the two countries.
Building reliable trading relationships requires guaranteed payments. In 2005, the Governors of the Reserve Bank of India and the Pakistan State Bank signed a reciprocal agreement to open two of the other state’s banks on home soil.
This is still to be implemented.
Warning signs
Just days before the election result was announced, despite the Congress-led United Progressive Alliance (UPA) being expected to lose the election, the Nayak Committee of the Reserve Bank of India recommended that the Government go ahead with the privatisation of public sector banks..
If these recommendations are accepted by the new BJP government, it will complete a process that had begun under the Narasimha Rao Government in the 1990s, with (Immediate Past Prime Minister) Dr Manmohan Singh as Finance Minister.
Economic liberalisation, which included significant privatisation and abolition of the ‘License Raj,’ reducing red tape and state control, resulted in increased
competition and entrepreneurship that led to a transformation of India’s economy.
Acquisition risks
However, what began as a very necessary change of direction is now seen by some observers as a process that could go too far, with public sector banks in danger of coming under the control of foreign multinational companies or expatriate Indian businesspersons.
The challenge for the new Prime Minister is to make the necessary reforms to stimulate the economy while bringing the whole of the nation along with him.
This is not an easy trick to pull off.
India’s complexity and diversity may well defeat him.
If India is not to be condemned to further decades of underachievement, his efforts at reform must negotiate the hurdles of politics, corruption and bureaucracy, and he must resist the temptation of many powerful leaders before him, of becoming a democratically elected autocratic.
Imogen Reed (nee Crispe) was the first recipient of the Indian Newslink Journalism Scholarship awarded in 2010 to pursue the course at the AUT University.
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