India is an important country. It will soon be the world’s most populous. It has the world’s fastest growing large economy. Not least, it remains a vibrant democracy. What happens in India is going to affect everybody on the planet. What, then, are its economic prospects? Has Narendra Modi, its prime minister, made a big difference? How important are the general elections due in the next few months?
The decisive change in India’s economic trajectory came in 1991, when a foreign currency crisis caused a fundamental shift away from the “license Raj” towards a market-led economy, but one with a strong role for public ownership, and constant government interference. This is today’s broad Indian consensus. Mr Modi has operated largely within it, albeit introducing significant further reforms, most of them uncontroversial — at least in principle, if less so in practice. The exception has been demonetisation — a shocking decision, taken on Mr Modi’s whim.
A recent paper from the World Bank offers an overview of the record. Over the past five decades, it notes, growth slowly accelerated and became less volatile. The post-1991 era, in particular, can be divided into three periods. First, between 1991 and 2003, the economy grew at an average annual rate of 5.4 per cent. Second, between 2004 and 2008, growth reached an unsustainable rate of 8.8 per cent, partly driven by excessive credit growth. Finally, an extended slowdown followed the global financial crisis. This period was marked by weak growth of investment, credit, industrial output and exports. The disruption caused by demonetisation in 2016 and poor implementation of the Goods and Services Tax (GST) by Mr Modi’s government extended this slowdown.
Recently, however, the economy has returned to its potential growth rate of about 7 per cent. Growing faster than that would require big improvements in performance — at the least, a revival in investment and manufacturing, together with better external competitiveness. Nevertheless, annual growth of India’s real gross domestic product per head has averaged 5.5 per cent since 2000. Now it is growing faster than China’s, mainly because of the latter’s slowdown. If recent growth were sustained, India’s real GDP per head would reach China’s current levels in the early- to mid- 2030s. India would still be a relatively poor country, as China is now. But it would be a superpower. The potential for such growth exists: India’s real GDP per head is only 12 per cent of US levels and 40 per cent of China’s.
What has Mr Modi’s government achieved in economic policy? The World Bank paper lists its new inflation targeting framework, reform of energy subsidies, containing the fiscal deficit, improving the business environment, introducing and strengthening a new insolvency and bankruptcy framework, and, not least, introducing the GST.
Nevertheless, some of what it has done is merely clean up messes it inherited, notably in banking and finance, and even there only partially. The problem of inefficient and politicised public-sector banking remains. This is one example of the absence of deep reform. The government is also accused of distorting or suppressing statistics, notably on GDP and unemployment.
Yet failings in the economy itself must not be exaggerated. India has a debt problem in the private sector, but overall leverage is still low. India’s ratio of trade to GDP has fallen recently, but is still far higher than it was three decades ago. The investment rate has fallen, but it is still within the Asian range. It does need to rise, but China’s exaggerated rates are not a good model.
As in any vibrant democracy, debate between politicians and their supporters is heated out of proportion to the real differences. This is particularly the case as an election approaches. In economic policy, however, a reasonable conclusion is that this government has followed the line of policy since 1991, bringing in useful improvements in some areas, yet being quite conservative in others, notably on privatisation, market liberalisation and promotion of competition.
In an excellent recent collection of his essays, Arvind Subramanian, former chief economic adviser, describes the evolution from “crony socialism to stigmatised capitalism”. India has chosen a market-oriented economy, but it does not much like it. That shows in the failure to liberalise labour markets and exploit opportunities in trade. Even so, we should be modestly optimistic about India’s economic prospects over the next decade.
Does the forthcoming election matter for economic policy? One reason why it could is the recent “interim budget”. It offers an understated fiscal loosening, yet not one of great significance. It offers some important giveaways, notably a reduction in income tax for middle-class taxpayers. But it also offers direct income support to small and vulnerable farmers and a pension scheme for workers in the informal sector. Some of these ideas are good ones, others less so. If the government is not re-elected, they will not happen. Yet if they do happen, the world will not end. In some ways, it might be rather better.
The big issues in this election are not economic, but political. On the one side lies a centralised and disciplined party led by a strongman with a ruthless streak. On the other lies a chaotic coalition. The risk of the former is to democratic norms, institutional independence and communal relations. The risk of the latter is to basic probity and effective policymaking. Recent state elections suggest the contest could be tight. Its outcome might not alter economic policies all that much. But it might alter India. Whatever happens, remember this: India is an important country.