Modi: Two Years On

Pande & Haqqani on India's progress and setbacks

Research Fellow
Senior Fellow and Director for South and Central Asia
Indian Prime Minister Narendra Modi addresses industry leaders at Guildhall on November 12, 2015 in London, England. (Rob Stothard - WPA Pool/Getty Images)
Indian Prime Minister Narendra Modi addresses industry leaders at Guildhall on November 12, 2015 in London, England. (Rob Stothard - WPA Pool/Getty Images)

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Narendra Modi was elected Prime Minister of India in May 2014 with the election campaign slogan, “Minimum government, Maximum governance.” The rise to power of a center-right, business-friendly government, whose leader promised transformational change, was welcomed not only in India but also around the world. Modi’s record as chief minister of his home state, Gujarat, reflected his support for private enterprise. Moreover, his no-nonsense style of government was expected to rid India of a burdensome bureaucracy created by India’s socialist legacy. Observers anticipated a new India that would move towards an open, non-paternalistic society that would focus on economics rather than identity politics.

Although the 2014 election provided him with a five-year mandate, Prime Minister Modi and his advisors posit 15 years is needed to transform India. Modi created the National Institute for Transforming India (Niti Aayog) to replace the decades old Planning Commission. Despite its commitment to a market economy, the Modi government still determines targets for the future. Two years after the establishment of the Niti Ayog, the government called for the preparation of a roadmap in July 2016 of India’s economy over the next fifteen years. On the fifteenth anniversary of the July 1991 reforms, which transformed India’s economy and bolstered its growth, Modi stated that India needed “transformational change” driven by “drastic” policy reform.

However, after two years in power the Modi government appears to be mired in domestic social issues, resulting in slow incremental change instead of significant, impactful reforms. Why is it that a government that came to office with one of the most extensive policy agendas in decades, whose campaign focused on economic growth and development, has in the last two years resembled its weaker predecessors?

For the past fifteen years, successive Indian governments have benefitted from the massive economic reforms launched in the late 1980s and early 1990s. Both India’s political class and its politicians, irrespective of their ideological orientation on the Indian political spectrum, recognize that these reforms led to large economic growth. At the same time, Indian political parties seem to believe that economic reforms are not conducive to winning elections. India has attempted to promote economic growth while at the same time champion economic distribution. Suspicion of the market has been the principal reason India’s reforms have either moved too slowly or manifested a ‘two steps forward, one step back’ approach.

Despite expectations for Prime Minister Modi to possess a new and different policy agenda, his government is currently pushing for double-digit growth without implementing deeper policy reforms that would facilitate this growth. Members of Modi’s Bharatiya Janata Party (BJP) and government believe earlier BJP-led coalitions lost party support when the BJP attempted to implement reforms. Today, the prevalent view is that elections in India are still won on the basis of caste or religion, as well as patronage and distribution of government largesse.

The first twenty-six months of the BJP-led government have held back Prime Minister Modi’s economic reform agenda due to its disproportionate focus on issues such as religious conversion, caste conflict, as well as attempts to ban beef consumption and honor the Hindu religion’s sanctity of cows. The urgency of Prime Minister Modi’s economic reform agenda seems to have dwindled since the time of his election.

The one area where the Modi government has not resembled its predecessors is the passion with which Prime Minister Modi has taken to foreign policy. He has visited forty-two countries on six continents, including four trips to the United States. Modi has traveled to countries where Indian prime ministers have not traveled to in decades, including countries in the Middle East, Central Asia and Africa. The objective of these visits has been to boost economic relationships by seeking foreign investment or access to energy sources and markets for Indian products and to improve security relationships.

Like every Indian prime minister, Modi understands the impact South Asia can have on India’s economic and political growth. Modi demonstrated this understanding by inviting leaders from South Asian countries to his inauguration, visiting every neighboring country (except Maldives) and his call for greater regional collaboration and trade. In 2015, India signed an agreement to resolve their geographical and historical dispute with Bangladesh to settle issues tied to India-Bangladesh enclaves created by India’s 1947 partition. Despite issues with Pakistan and Nepal still persisting, the Modi government has also made clear its desire for the South Asian Association of Regional Cooperation (SARRC) to be more effective.

In addition to visiting a number of countries, Prime Minister Modi has received major leaders. President Barack Obama visited India twice, as well as President Xi Jinping of China, Prime Minister Shinzo Abe of Japan, President Francois Hollande of France, Chancellor Angela Merkel of Germany, President Vladimir Putin of Russia, and Prime Minister Tony Abbott of Australia.

The goal of these high level interactions was to attract foreign investment and technology development in India to boost economic growth and deepen strategic ties between a number of countries. The appeal of a changing India has led to promises made by foreign corporations in Japan, the United States, China and Europe to invest in India. Bilateral trade with the United States stands at over $100 billion, while Japanese corporations have offered to invest $35 billion and Chinese companies have promised approximately $20 billion in Indian projects. However, these assurances are subject to investors’ perceptions of positive change in government policies and regulations. Had these high-level interactions been accompanied by reform-oriented policy changes, stronger relationships would have been created with India.

India is currently the world’s fastest growing economy and is expected to continue growing at a rate of at least 7 percent per year for the next few years. India has managed to combat inflation while decreases in oil prices have reduced subsidies on petroleum products. India’s government has also facilitated the process of starting a new business by relaxing rules, regulations, permits and licenses required to create an enterprise. According to the World Bank’s 2016 Doing Business Report, India has jumped forward four places in the category “Ease of Doing Business” for foreign companies since last year. This change, coupled with improving energy infrastructure, has helped with the creation of new businesses in India. However, India’s difficult process of acquiring credit and taxation has made domestic and foreign businesses reluctant to base or extend their operations in the country.

Prime Minister Modi would like to transform India’s current economy into a knowledge economy with greater investment made by the public and private sector in Research and Development (R&D). However, India’s Gross Expenditure on Research and Development (GERD) as a percentage of GDP in 2012 stood at 0.88 percent. Similarly, another flagship program of the Modi government, “Make In India,” stands as a promise rather than as an accomplishment. For the program to be successful, domestic and foreign corporations must be convinced to import state of the art technology and skills to India in order to boost manufacturing. Although billions of dollars have been pledged to the program, it remains to be seen what financial investment and technology improvement actually takes place.

Companies make investments and initiate technology development when they know that their intellectual property rights (IPRs) will be protected. For a significant period of time, India has traditionally been viewed as a country that did not respect intellectual property rights, though this has changed in recent years. To demonstrate India’s change in attitude towards this, the Modi government launched a new IPR policy in May 2016 with the overarching slogan of “Creative India, Innovative India.” This policy was described by the Modi government as an attempt to balance India’s desire to incentivize innovation by respecting intellectual property rights and abiding by international treaties and regulations, while still fulfilling obligations to India’s poorer economic classes. Even with the fastest growing economy in the world, India remains a developing country with nearly a quarter of its population (almost 300 million people) living below the poverty line.

This commitment to helping India’s impoverished citizens has been the justification implied by the Modi government when addressing their weak application of IPR policy to healthcare and medicine. This exclusion is based on the assumption that cheaper generic drugs must remain available to citizens even if India is deprived of the latest advances made in pharmaceutical and medical technology. Yet, India’s unwillingness to embrace intellectual property rights within the healthcare industry has had a negative impact on other sectors. As such, Prime Minister Modi will have to find a way to resolve the issues attached to his IPR policies. International investors prefer security and clarity, which in the innovation field is compromised by restrictions on any specific sector of the economy.

The Modi government has also made defense policy a key component of the Make In India initiative. India’s armed forces must be modernized if they are to compete with those of Asia’s other rising power, China, or fulfill the role of guarding the Indian Ocean. In the past, India’s governments have touted domestic defense manufacturing as essential to India’s security. However, India’s defense industry does not reflect the capability or capacity of Chinese defense companies who now export their products. New Delhi is thus caught between India’s desire to manufacture defense equipment domestically and the practicality of importing defense so as to speed up the process of replacing the country’s largely obsolete Soviet-produced arsenal. The Modi government appears to have understood this to some extent: they recently purchased Rafale aircraft from France, as well as Apache and Chinook helicopters, Ultralight Howitzer guns, and P-8I maritime surveillance aircrafts from the United States. However, Prime Minister Modi has not, so far, been able to produce a coherent strategy for India’s military modernization nor has he been able to alter archaic defense purchase procedures. Eventually, India will have to choose between its goal of manufacturing defense equipment domestically with occasional foreign collaboration and its need to maintain 21st century military capabilities.

The Modi government has also attempted to develop a much-needed energy strategy. This strategy has proven to be flawed, with 80 percent of oil used by India coming from imported sources. In the last two years, the government has attempted both to increase domestic production of non-renewable (coal and natural gas) and renewable (primarily solar) energy resources. New Delhi has also engaged in energy diplomacy talks with Middle Eastern countries resulting in the UAE offering to help India build its strategic energy reserves, Saudi Arabia boosting its energy supply to India and improved business with Qatar.

Alongside energy security, India also needs to grapple with its growing population. With the median age of the population being 27 years, India possesses demographic potential. However, this potential will be fruitless unless investment is made in education, healthcare and job creation. While the Modi government has focused much of its attention on defense and security, it has not adequately invested in social sectors. According to the Legatum Prosperity Index, which measures a plethora of sectors including entrepreneurship, governance, education, health, safety, personal freedom and social capital, India ranks 99 among 142 countries.

India falls behind many countries in Africa and Latin America that are financially poorer. According to UNESCO’s Educational for All Development Index (EDI), India ranks 105th out of 128 countries. In the Education Index of the United Nations Human Development Report, India ranks 135th out of 187 countries in education. Additionally, India’s literacy rate stands at 74 percent yet the quality of education from primary to post-secondary education remains low. The Modi government will attempt to address their education issues with the “New Education Policy,” a policy which will be implemented in 2016. Unfortunately, the Modi government in the past two years has spent most of its time and energy on incorporating a Hindu dimension to Indian education.

These attempts to “saffronize” India’s educational sector have resulted in curriculum changes that present Hindu mythology as a science, diminish non-Hindu contributions to Indian civilization and misrepresent the history of India’s 800-year period of Muslim rule. Officials have described student protests as anti-national demonstrations and have attacked the use of English as a medium of education. India’s religious and linguistic diversity and its vast English-speaking population are being disparaged instead of valued.

Similar to Indian education, the country’s labor market suffers from negligence and lack of reform. With a population of 502 million people, India has one of the largest labor forces in the world. Yet, approximately 72 percent of this population is employed in the informal sector of India’s economy. The issue of informal employment will only continue to persist given that one million people enter the Indian labor market each month. For manufacturing to grow, a skilled labor force is needed. Only 5 percent of India’s total labor force has gone through any formal training in comparison to 80 percent of the Japanese workforce and half of America’s workforce. The Modi government has attempted to address this issue by launching the National Skill Development Mission in July 2015 with the goal of training 400 million people by 2020.

The Modi government has also struggled to provide accessible universal healthcare, and in fact cut back on health expenditures in its first year. In 2015, the government published a draft health policy document seeking feedback from experts and the public. Prime Minister Modi’s most heavily marketed health initiative is the Swacch Bharat (Clean India) campaign whose aim is to keep public areas clean and provide access to toilets. Ultimately, the government’s goal with the initiative was to end public defecation, thus reducing the potential for diseases. With this campaign, attention has been shifted away from healthcare infrastructure, availability of doctors and nurses, provision of hospital beds and medicines and developing a modern health insurance system.

No one disputes India’s demographic, economic and strategic potential. It is the world’s third largest economy on a purchasing power parity (PPP) basis and is a potential competitor of China in the race for global power. Although India overtook China as the fastest growing economy in the world in February 2016, this takeover is arguably a reflection of China’s problems more than of India’s achievements. With a GDP of $8.7 trillion (PPP basis), a labor force of half a billion and a middle class of over 250 million people, India’s economy is predicted to grow over 7 percent in the next two years. It can grow at a double-digit rate if it can repair and rebuild its British-era rail, road, air transport and sea infrastructure, improve accessibility to basic amenities like electricity and water and relax bureaucratic rules and regulations.

The Modi government in its second year allowed itself to be distracted by ideological and cultural issues, resulting in fewer economic accomplishments. This report will outline the progress and setbacks India has experienced in their economy, defense capabilities, healthcare, and educational development. Prime Minister Modi has earned goodwill around the world with his promises—it is time for him to deliver on these promises.

__The authors would like to thank Hudson South Asia Program research interns Abdullah Farhad Qayomi, Anuja Patel, Shefali Dhar, and Trisha Ray for assisting with the preparation of this report.__