JAIPUR, INDIA—Nine months into Prime Minister Narendra Modi’s first term, many Indians and outside observers remain optimistic he can usher in pro-market reforms that cut bureaucracy, strengthen rule of law and help boost private sector wages.
“It’s wait and see right now,” said a hair stylist here in Jaipur who voted for Modi and so far admires his national leadership. “We have high hopes for what he can do.”
Swept to power last May under a campaign promising to fight corruption and cut red tape, Modi become a symbol of international hope. Last fall at Madison Square Garden in Manhattan he spoke to an admiring crowd of 20,000 people. Yet he faces tremendous obstacles leading the world’s largest democracy of 1.2 billion people. Poverty remains widespread, with GDP per capita under $1,500, illiteracy common, and public health often compromised. As with its neighbor, China, India’s cities are cloudy with smog at unhealthy levels due to rapid industrialization and manufacturing expansion. Indian consumers are slowly starting to demand cleaner air, and a creaky electric grid needs upgrading.
“He has the potential to do something extraordinary,” said Himanshu Mendiratta, a Jaipur resident and small business owner. “He has already shown himself as an effective leader before becoming prime minister.”
Mendiratta pointed to Modi’s success during nearly 14 years leading Gujarat, a state with some 60 million people in western India. As chief minister of Gujarat, Modi sought to shrink the size of government and enacted pro-consumer policies, including privatization of state-run enterprises, that ushered in high economic growth. He also helped improve irrigation and infrastructure and constructed a central business district to attract intra-national and international investors.
Moody’s Investors Service, a prominent bond analysis firm, released a favorable analysis of the Modi administration’s budget issued February 28th. The proposal would lay the groundwork for narrowing fiscal deficits, improving governance of bankruptcy, and cut subsidies to oil and gas companies.
“The budget is generally credit positive for Indian corporates due to the outlined measures designed to reduce and rationalize taxes, boost economic growth and increase the ease of doing business in India,” Moody’s analysts wrote. “According to the budget, India’s corporate tax rate will fall to 25% from the existing 30% over the next four years; a development which will be credit positive for all Indian corporates as it would reduce their tax expenses and increase their competitiveness globally.”
The Indian government has also sought to reign in inflation through mandating that the Reserve Bank of India bring inflation below 6 percent by January 2016, and 4 percent (plus or minus 2 percent) in the following years, a move that Moody’s praised.
“Quantitative inflation targeting will foster transparency and predictability in monetary policy, as capital market participants, businesses and the public understand the drivers of central bank actions,” Moody’s wrote. “An increase in monetary policy transparency and effectiveness will likely lessen volatility in international capital flows into India. Additionally, inflation targeting will support institutional strengthening via accountability.”
Derek Scissors, a scholar at the American Enterprise Institute think tank in Washington, told Opportunity Lives that thus far Modi has made a large number of small, positive changes, such as opening coal mining more to private firms. Eswar Prasad has written about how recent policies enable Indian states to better compete with each other for attracting businesses.
“These have either taken place because there was widespread recognition that the previous government had chosen poor policies or by unilateral action by the central government,” Scissors said. “Unfortunately, while the Prime Minister has endorsed major positive changes, such as a single goods and services tax, we have not seen any of those come to fruition yet.”
Scissors conceded there are undoubtedly political obstacles that explain some of the difficulty in Modi’s policy-making, though he says “[t]he motivation for reform has not been as strong as many hoped. This is the first problem, before the challenge of winning political support.”
Modi has also put forth a land acquisition plan that would enable development of property for national security, defense, rural infrastructure, industrial corridors and affordable housing. The plan has some detractors who say it is anti-farmer, though supporters say the move is necessary for a developing country. Modi has also proposed vastly simplifying the byzantine tax code by adopting a single Goods and Services Tax (GST).
“The single GST is a great idea which can finally help unify the Indian market and lead to more efficient agriculture, industry, and services,” Scissors said. “But this is only true if the GST is comprehensive and simple. A partial or complex GST would have far less benefit. To know the effects of the GST, we must see all the final details.”
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Carrie Sheffield is the founder of Bold. She is passionate about storytelling to empower and connect others. A founding POLITICO reporter, Carrie contributed on political economy at Forbes and wrote editorials for The Washington Times. After earning a master’s in public policy from Harvard University, she managed credit risk at Goldman Sachs and researched for Edward Conard, Bain Capital founding partner and American Enterprise Institute scholar. She earned a B.A. in communications at Brigham Young University and completed a Fulbright fellowship in Berlin.