Modi, India’s $10 Trillion Bet : Re-Visiting our Expectations

Modi, India’s $10 Trillion Bet : Re-Visiting our Expectations

The world's largest exercise in electoral democracy has delivered a clear mandate for faster growth and low inflation. The 800 million plus voters have pinned their hopes on Modi to deliver them real jobs, an end to inflation and efficient and clean delivery of services. They want better governance not bigger government, a hand up not a handout. They want India to become a 10 trillion dollar global powerhouse. The UPA was given such a mandate in 2009 - but misread the message and blew away five years into more handouts, large fiscal deficits, raging inflation and eventually a slumping economy. Instead of creating real jobs it focused on make work through badly run schemes like MGNREGA which have cost the country over Rs 200,000 crore so far. It saw expanded subsidy programs costing almost 4%of GDP, but with not much of it going to the poor.

Needed, Serious Reform

Reversing the damage will not be easy. But the new government must try to restore the economy: double the growth and halve the inflation. Quicker decision making, improved inter-ministerial coordination will reverse some of the damage. India could quickly see 6% plus GDP growth and 6% quarterly inflation by the end of 2014-15. But serious reforms will be needed, even to sustain a 6%plus growth rate over the medium terms. India's first generation reforms in 1991, which freed India's product markets, by removing the license raj and trade liberalization, boosted the economy hugely. This helped India more than quadruple its economy, with very rapid acceleration coming after 2000. But later, many of the benefits of liberalization were eroded by haphazard and unpredictable regulatory structures, bringing back a new license raj which has hurt investment and growth and allowed opportunities for brazen corruption. India's competitiveness dropped, the trade deficit soared and manufacturing suffered. India has in fact prematurely de-industrialized in the last decade and job creation slowed down to a crawl.

Factor Markets Must Work

If India can get back to 8% plus GDP growth, India's $2 trillion economy can grow to $4 trillion by 2020 and $10 trillion around 2030, making it the world's third largest economy ahead of Japan. If India remains at 4-5% growth, it will only be at best a $4-5 trillion economy by 2030 and be stuck in a middle income trap, with low job growth and still large numbers still poor— a sure-fire recipe for social and communal problems. To get the economy back to plus 8%, India desperately needs second generation factor market (land, labor, capital) reforms and better infrastructure. These reforms are also central to restoring India's competitiveness. Reforms in land acquisition, labor laws and transparent competitive allocation of natural resources combined with good infrastructure will attract the investment and technology India needs to be more competitive and create 10 million plus new jobs every year. These reforms cannot be driven by the Centre alone but require the active involvement of state governments. What makes this electoral mandate exciting is that the BJP's victory spreads across many states and its strong mandate should encourage federal cooperation, vital for the next stage of reforms including adoption of the GST.

Fix The Financial Sector

Fixing the recently legislated land acquisition law or reforming arcane labor laws will not be easy. One option here is to allow states to experiment with land and labor reforms, to generate more innovative solutions. On infrastructure, India will necessarily need central level involvement. A national master plan for transport, energy and communications—a Rosenstein Rodan style big push is needed like we saw in the previous BJP government— but on an even bigger scale. We need banking and capital market reforms, too. India has for long prided itself on its safe and conservative largely state-owned banking system. But with rising NPAs and evidence of connected lending, the banking system looks badly troubled and hugely exposed to struggling infrastructure projects, which should have been financed by long term finance not deposit taking banks. Access to finance for employment generating SMEs remains hugely restricted while large corporate with capital intensive projects take up the bulk of bank lending. More innovative approaches to leasing, tribal equity ownership in mining and environmental stewardship with dedicated development trust funds are needed to accelerate use of our natural resources while protecting the interests of tribal and local communities. Any other way is fraught with seeds of conflict and delays that no developing country has been able to avoid. We have seen such problems in our tribal belt with a Maoist insurgency that has persisted despite the government's efforts to contain it. A stable government should now be able to tackle difficult second generation reforms. The 2014 mandate is a bet by an aspiration-al India for a $10 trillion economy by 2030 and India's emergence as an economic powerhouse. India's election called ‘the undocumented wonder’ has given the people of India the chance for better governance with which to shape their destiny. It's a bet India can and must win.

With firm resolve, second generation reforms can transform India.

HAPPY INVESTING