Has India's economic savior arrived? Exit polls suggest that Narendra Modi of the opposition Bharatiya Janata Party is poised to become India’s next prime minister when votes are counted Friday. The hope is that Modi can scale his regional economic success story in Gujarat into a national one.
Appeals for divine intervention are commonplace in India, a country where faith is invoked for everything from good weather to good marriage prospects. Yet unless Modi truly possesses supernatural strengths, fulfilling voters' hopes for a dramatic improvement in India's fortunes will be exceedingly difficult.
Yes, signs suggest the struggling Indian economy may be bottoming out. The International Monetary Fund recently announced that it expects India’s growth rate to recover from 4.4 percent in 2013 to 5.4 percent in 2014 and 6.4 percent in 2015. Consumer price inflation has come down from 11 percent in 2013 to 8 percent this March. The rupee, which experienced a free fall last summer after the Federal Reserve’s tapering talk, has since stabilized. Thus, with or without Modi, India may be able to muddle through.
But voter expectations are far greater; surveys suggest that they are flocking toward the BJP in the hopes that Modi can generate millions of new jobs, plug India's infrastructure gap and attract the kinds of foreign money he has lured to Gujarat. Beyond voters, Modi is also moving stock markets: On the basis of pre-election polls projecting a BJP victory, India’s Sensex has risen more than 15 percent over the past six months. In meeting these expectations, Modi faces obstacles ranging from the difficult to the impossible.
One of Modi’s first priorities will be jump-starting India’s investment cycle. Modi’s proponents point to his ability to discipline the bureaucracy as evidence that he will be able to get stalled projects unstuck. Administrative acumen aside, a Prime Minister Modi will encounter several thorny impediments. For starters, a recent JPMorgan analysis of the top 50 stalled investment projects reveals that 80 percent of the stalled project value is due to state -- not central -- government red tape. The prime culprit is land acquisition, a task constitutionally out of Delhi’s reach.
Even if Modi can unclog the existing pipeline, two additional obstacles loom. The balance sheets of India’s overleveraged business houses are in dreadful shape. An August 2013 Credit Suisse report found that the debt racked up by India’s 10 biggest industrial conglomerates has grown sixfold over the past six years. Most of these companies have borrowed heavily from public sector banks, which are saddled with an ominously high (and rising) share of nonperforming loans.
New fiscal stimulus is unlikely given that credit-rating companies still think the fiscal deficit is in the danger zone. During an election year, outgoing Finance Minister P. Chidambaram was only able to go so far to meet the tough reduction targets he set. The deficit numbers have relied excessively on smoke and mirrors: optimistic assumptions, ad hoc sales of public assets and questionable subsidy math.
Investors also hope that Modi will roll back entitlement programs inaugurated by the Congress-led United Progressive Alliance government. Such programs have sparked an intense spat between economists Jagdish Bhagwati, who favors growth over equity, and Amartya Sen, the opposite. Yet although Modi has largely campaigned as Bhagwati, his party has often governed as Sen. On welfare policies, the convergence between India’s two national parties is much greater than is commonly acknowledged.
One of the UPA government’s last acts was to expand a wide-ranging subsidy program for basic food grains. The BJP manifesto speaks not of repealing this legislation, but implementing it more assiduously. BJP President Rajnath Singh pledged that a future BJP government would legislate a “Right to Health,” a move in line with the Congress government’s welfare agenda. At the state level, BJP chief ministers, far from rejecting the Congress’ social programs, have co-opted them. We do social welfare too, they argue, only better.
When it comes to other big economic makeovers, Modi and BJP leaders such as Arun Jaitley, a potential BJP finance minister, have talked of transforming India into a manufacturing powerhouse.
Yet any such push would entail an ambitious legislative agenda to repeal outmoded labor rules, amend land acquisition laws and revise tax policy.
This poses a problem because, even assuming a majority for the BJP-led alliance in the lower house of parliament, it will still not control India’s upper house, posing a threat to its legislative agenda. Exit polls suggest the BJP will need few, if any, new alliance partners, yet Modi will still have to cater to the interests of existing allies. Last time the BJP was in national control, this included the removal of a respected cabinet minister for being too “clean" and not using his ministry to support his party.
India’s political system, like the U.S.'s, is replete with such constraints on centralized authority. Independent institutions such as the Reserve Bank of India, now led by the much-lionized Raghuram Rajan, and the Supreme Court are displaying a new and welcome assertiveness. Absent an exogenous shock, these brakes on federal executive power favor continuity over change. This reality may impose serious costs on growth, but it also happens to be a natural offshoot of robust democracy, India’s truly divine blessing.