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Narendra Modi’s vision of a ‘new India’ is being tested

18/10/2017


Narendra Modi’s vision of a ‘new India’ is being tested

The prime minister wants to ‘purify the country’ but the shock of demonetisation has cast doubt over his methods


On November 8 as the world was mesmerised by the US elections, India’s prime minister, Narendra Modi, took to national television to inform the country of a radical economic decision.

Mr Modi said he was banning the use of high-value banknotes in a crackdown on corruption and black money. The Rs500 ($7.66) and Rs1,000 notes accounted by value for 86 per cent of all currency in circulation in a cash-dependent economy.

As a result of the sudden announcement ordinary people endured long bank queues, acute cash shortages and business shutdowns that persisted for weeks. Mr Modi acknowledged the inconvenience while urging Indians to support what he called a “movement for purifying the country”.

The symbolism was powerful. Demonetisation was seen as evidence of Mr Modi’s determination to wipe clean the slate of history and purge India of a legacy of socialist-era economic policies — and the widespread use of black money to circumvent them.

Supporters say that overhauling the economy is just one part of the sweeping transformation planned by Mr Modi and the ruling Hindu nationalist Bharatiya Janata Party as they seek to build a more muscular state able to assert itself on the global stage.

“He is not merely a reformer, he wants transformation,” says Swapan Dasgupta, a member of parliament with close ties to the BJP. “It’s about making India a more purposeful society. He wants to motivate people so India goes from plodding along to running.”

Although demonetisation does not seem to have purged black money as was expected, it was significant, according to Mr Dasgupta, because it “touched every single citizen. It showed that, if necessary, the government can take a painful decision and the nation will rally [behind it]”.

It has been three and a half years since Mr Modi’s popularity helped the BJP secure its first ever single-party parliamentary majority. The rival Congress party was reduced to a rump opposition, winning only 44 of parliament’s 543 elected seats. Mr Modi was rewarded with a mandate that allowed his government to pursue policies unhindered by the coalition politics that had constrained previous administrations.
For many voters, Mr Modi’s most compelling attraction was his vow to boost economic growth, creating more jobs for India’s youthful population, 65 per cent of whom are under the age of 35. He also won strong support from the business community, which believed he could unleash the country’s economic potential. “It’s the first election where the winner did not appeal to the voter by making the voter a victim,” says Gurcharan Das, an author and former chief executive of Procter & Gamble India. Instead, he “appealed to aspirations”.

In the years after independence in 1947, India’s economic course was charted by Jawaharlal Nehru, the country’s first prime minister, his daughter Indira Gandhi (also a prime minister) and their Congress party, which had led the freedom struggle.

Mr Nehru’s socialist leanings and mistrust of private capital led to stifling state controls on the economy. He believed India’s identity depended on its religious diversity and “composite culture”. With a foreign policy known as “non-alignment”, New Delhi tried to avoid entanglement in international rivalries.

In 1991, in response to a balance-of-payments crisis, India began to shift away from the Nehruvian pillars of state policy, allowing more private and foreign investment and strengthening its ties with the US. This liberalising process was often halfhearted: the country retained a vast informal sector of small-scale enterprises, which are mostly unregulated and outside the tax net.

Under Mr Modi’s BJP government, a second shift seems to be taking place. India is undergoing a “profound and fundamental transition of ideas and ideals,” according to Ram Madhav, the party’s national general secretary, writing in the Indian Express.

He set out the BJP’s conservative vision for India as emphasising “religio-social institutions, like state, family, caste, guru and festival”.

Mr Modi’s tenure was initially marked by a spurt of growth, but, after peaking at 9.1 per cent in the first quarter of last year, India’s GDP growth has slowed for five consecutive quarters, falling to 5.7 per cent in the three months ending June 30.

Meanwhile, the government has moved ahead with important reforms. In July, it adopted a goods and services tax to replace a plethora of state and local taxes and make the country a genuine single market for the first time.

The move to GST, which was intended to boost tax compliance and revenues, has been difficult. Complaints have included the number of different tax brackets, the frequency of filing requirements and difficulties with the website for submitting returns. Despite the problems, most large businesses remain optimistic that the tax will deliver long-term benefits. The government has also decided to privatise the lossmaking state carrier Air India through a strategic sale of the airline.

Last year, India introduced its first-ever bankruptcy law, which is expected to help prevent the accumulation of bad loans on banks’ books. Action has begun in the first 12 large bankruptcy cases.

For the time being, though, India’s banks are burdened with high levels of stressed assets, while the government lacks the fiscal space to undertake substantial recapitalisation of state-owned banks.

The recent faltering growth figures have caused anxiety in New Delhi. But Jayant Sinha, former deputy finance minister and now minister of state for civil aviation, insists the slowdown is a natural consequence of the push for transparency and compliance with law.

“When you go through these fundamental structural reforms, you are going to have disruptions,” he says. “We’ve just pressed the clutch, disengaged the gears, and we are now shifting to fourth. We are in that process of shifting gears.”

https://www.ft.com/content/f4da3168-9482-11e7-83ab-f4624cccbabe

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