The Paradox that Awaits a Prime Minister Modi
by Arvind Subramanian, Peterson Institute for International Economics
Op-ed in the Financial Times
April 1, 2014
© Financial Times
In India's forthcoming elections, a government led by Narendra Modi of the Bharatiya Janata party is likely to assume power and to do so without being too dependent on the support of regional leaders. A vote for Mr. Modi will be a vote indicting the Congress-led government, which has overseen India's most rapid growth: for presiding over epic corruption, emphasizing handouts over opportunities, and squandering the opportunities created by the government itself and by easy global liquidity. But it will also reflect abhorrence of the power vacuum at the heart of the nation. Indians want the ditherers in Delhi replaced by the go-getter from Gujarat. How can he wield power to revive the economy, which is his priority?
Mr. Modi's early objectives will be restoring macroeconomic stability and reviving investment, especially in infrastructure. On the former, while India has recovered from its near crisis last year, high inflation and large fiscal deficits remain vulnerabilities. The good news is that a Prime Minister Modi would control the policy levers.
He can, through executive action, reform policies in agriculture to put a lid on rapid rural wage and price rises. He can also phase out fertilizer and fuel subsidies to cut the fiscal deficit. Another action to put the fiscal position on a durable medium-term trajectory—implementing the goods and services tax (GST), India's version of the value added tax—will require parliamentary approval and support from Congress. The party has already worked hard to implement the GST; in opposition, it is unlikely to block one of its own most important initiatives.
Prime Minister Modi, the decider and fixer, would relish kick-starting growth by reviving investment because that is his signature achievement in Gujarat, where he has been chief minister for 13 years. On arrival in office, he is expected to identify the 25–50 most important stalled infrastructure projects, and locate the bottlenecks and authorize their removal. Hyperactivity on resuscitating big projects will be the most visible sign of the new regime.
But this hyperactivity will face two challenges. Economic decentralization being well advanced, the levers of economic power affecting infrastructure projects—in power and land, for example—reside with the states. A majority, including the large states, will be controlled by opposition parties.
Less noticed but no less important, power has shifted not just from New Delhi but also from the executive to other institutions. In recent years bodies such as the Supreme Court, the Election Commission, and the office of the comptroller and auditor general have filled the vacuum left both by this shift and by the discredited executive. The Supreme Court, for example, has ruled on telecommunications, taxes, and coal, all of which affect project execution and investment. Mr. Modi, in other words, cannot call all the shots.
The second challenge in reviving the economy will be to manage the tensions between short-term expediency and long-term efficiency, between the perils of ad hocery and the requirements of durable institutional reform. For example, restoring some projects may require decisions on land allocation that are at variance with stringent land laws.
Similarly, getting the large private sector infrastructure companies to invest might require taking some of the debts off their books, which will raise concerns about cronyism, create moral hazard, and weaken further bank balance sheets. As the Financial Times reported recently, stock prices of companies perceived to be close to Mr. Modi have soared, anticipating such actions.
Getting the power sector back on track in the medium term is difficult without reforming pricing policies. Yet in the short term those reforms may be hard to achieve, not least because offering subsidized power retains great political appeal even in states controlled by Mr. Modi's Bharatiya Janata Party (BJP).
A Prime Minister Modi will expose a paradoxical tension between his mandate and mission. His electoral appeal is based on his ability to wield power, ruthlessly if necessary. His success in governing the economy will depend on coming to grips with, and making the best of, highly circumscribed power.