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Modi's neoliberalism may come as a shock to India

Modi's neoliberalism may come as a shock to India Ian Fraser

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Following his stunning election victory last week, India’s new prime minister, Narendra Modi, is determined to inject some dynamism into the country’s economy. Seen as a neoliberal, Modi has set his sights on removing inefficiencies, tackling corruption and rolling out free-market policies along Thatcherite lines.

The flip side will be a curbing welfare programs, which Modi has called “dole politics”. Like Thatcher, he sees excessive welfare and food subsidies for the poor as a brake on economic progress. In his eyes, at least, they promote slothfulness at the same time as making it harder for the government to balance its books.

India’s economy is widely seen as having stagnated throughout the final years of Modi's predecessor, Manmohan Singh. With a nominal GDP of $1.85 trillion in 2013, according to the IMF, India is only the world’s tenth-largest economy, despite being the world's second most populous. India's growth in the noughties was such that it looked like it was almost keeping pace with China, with GDP surging at an average annual rate of 7.7% in 2002-11 and peaking at 9.4% in 2010-11. But India's GDP growth has since stalled, falling to just 4.4% in 2013.

The country has also been blighted by rising levels of corruption, unemployment and inflation in recent times, with the rupee weakening against the US dollar (it has rebounded to 59 to the dollar since Modi and his Bharatiya Janata Party (BJP) party won the election).  In August 2013, Singh’s administration was forced to introduce limited capital controls to prevent the collapse of the rupee and avert a balance of payments crisis. Generally, his government had come to be seen as one that seemed to have run out of ideas.

It was therefore no surprise that the weakness of the Indian economy and poor governance were the key themes of the election campaign. Modi, having transformed the BJP into what commentator Varghese K. George calls a “middle class, neoliberal machine”, promised that he could banish unemployment and instill some dynamism back into the economy. He said his government will take decisive action to unblock investments in stalled power, road and rail projects. He promised to reform taxation and labor markets, and to dismantle barriers to foreign investment. Goals include creating the 10 million new jobs that India needs every year just to absorb young people entering the workforce. It was a positive economic vision which captured the imagination of what the New York Times’ correspondent Ellen Barry called “aspirational India”, much of which had grown sick and tired of the failed paternalism of the Congress party.

Throughout the campaign, Modi played up his modest origins as the son of a tea vendor and heaped disdain on the aristocratic Nehru-Gandhi family and the elites with which it is intertwined. In particular, he hyped up his own achievements in Gujarat, the state he has led since 2001, where growth and foreign direct investment outpaced that of India as a whole. In the campaign, Modi made it sound as if he had transformed the state into an economic utopia whose streets were paved with gold. Subrata Mukherjee, retired professor of political science at Delhi University, told Bloomberg:

“He provided Gujarat with India’s first real free-market economy that led to new infrastructure and job creation [...] That’s what India has to look forward to. Everything else is interference.” 

BBC’s Linda Yueh said what Modi achieved in Gujarat is “reminiscent of a Chinese Special Economic Zone –a place that is more market-driven than the rest of the country.”

While the Congress party was busily promising poorer Indians safety nets and food subsidies, Modi was pledging them a springboard. His method will be to apply the neoliberal vision that he argues has delivered an economic Nirvana in Gujarat to the whole of India.

There will, of course, be many obstacles, not least his BJP party’s relative impotence in the upper house of parliament, whose backing is required before legislation can pass, as well as resistance from state governments and India's sometimes Kafka-esque bureaucracies. Writing in The Hindu, Seshadri Chari, National Convener of the foreign affairs policy cell of the BJP, highlighted other challenges. He said:

“The PM and his cabinet [also] have to tackle precipitous price rises, mounting food subsidy, clear the rotting food stock yet feed the drought-stricken, prepare for an uncertain monsoon, rein in the fiscal deficit, spur industrial growth – and much more.”

However most Western economic commentators are very positive about Modi’s election victory. Jim O’Neill, former chairman of Goldman Sachs Asset Management, believes that, if Modi pursues the policies he has promised, India’s economy would grow by about 10% annually for the next 20 years. Speaking at the SkyBridge Alternatives Conference in Las Vegas, Jim O’Neill said that “this is the most positive development in India in 30 years.” O’Neill, responsible for coining the term BRIC, referring to Brazil, India, Russia and China, when he was at Goldman Sachs in 2001, added that Modi’s victory is a “massive, massive positive” for India.

The trouble is that, thanks to Modi's brilliant campaign rhetoric, a great many Indians have been persuaded that the country will join the economic top table in the not too distant future. However successful his reforms, it will be a longer haul than that.  Writing in Business Standard, Mihir S Sharma wrote

“If he does not deliver in a few years, he will not just disappoint a few voters. He will enrage an already frustrated generation.”

There are also concerns that Modi, who downplayed his Hindu nationalism during the campaign, may end up fanning the flames of religious hatred in India.  In 2002, soon after he became Gujarat's chief minister, he condoned the massacre of 1,000 Muslims in the anti-Muslim riots of that year. Modi denied complicity and was cleared of wrongdoing by several inquiries but was banned from entering the US (a ban that the administration of President Barack Obama’s lifted when Modi won the election). However, there is a risk that India’s relations with Muslim countries including Pakistan could become more strained, especially if there are any repeats of the 2002 episode.

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Tags: Asia , asia economics , asia economies , Barack Obama , BJP , BRICs , bureaucracy , Business Standard , capital flows , Congress party , corruption , economic governance , Economic Reform , FDI , Foreign Direct Investment , government corruption , Gujarat , India , Indian economy , Indian investments , Jim O'Neill , labor market , labour market , Linda Yueh , Manmohan Singh , Margaret Thatcher , Mihir S Sharma , Narendra Modi , neoliberal , neoliberalism , New Delhi , reform , restructuring , rupee , Seshadri Chari , South Asia , structural reforms , Subrata Mukherjee , tax law , The Hindu , Varghese K. George , welfare
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