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Then-prime ministerial candidate Narendra Modi speaks at a rally in Vadodara, May 16, 2014 (INDRANIL MUKHERJEE/AFP/Getty Images)
Then-prime ministerial candidate Narendra Modi speaks at a rally in Vadodara, May 16, 2014 (INDRANIL MUKHERJEE/AFP/Getty Images)

Modi: Three Years On

Husain Haqqani & Aparna Pande

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Narendra Modi led the Bharatiya Janata Party (BJP) to power during the May 2014 elections, promising radical changes. The party’s electoral manifesto outlined numerous problems that threatened Indian society, while promising to protect social values and enact “urgent changes” in the economy, agriculture, energy, education, and governance. Observers from around the world hailed the BJP’s victory as a success, and believed that a pro-business government assuring fundamental changes would tap into India’s unfulfilled economic potential.

Since the Modi administration entered office, the Indian economy has largely maintained its upward trajectory. Despite recently being eclipsed by China as the world’s fastest growing economy, for the past three years India maintained gross domestic product (GDP) growth rates around seven percent, until sinking to 5.7 percent in April-June 2017. The World Bank projected growth will reach 7.5 percent by 2019.

In May 2017, India’s foreign direct investment (FDI) inflows reached $60.1 billion for 2016-2017, continuing to make India more attractive to investors. Since 2014, India has opened 25 domestic sectors to FDI, including pharmaceuticals, railways, and renewable energy. Such rapid improvements were made possible by the Make in India campaign, which the Modi government unveiled in September 2014 to increase domestic capabilities and enhance Indian self-sufficiency.

In addition to emphasizing economic advancements, the Indian government focused on deepening ties with other states. This policy has achieved great success, with Prime Minister Modi taking almost 70 official state visits to other countries since entering office in 2014. Key among these included four stops in the United States, three stops apiece in France, Germany, and Russia, a trip to Iran, and the first official state visit to Israel by a sitting Indian prime minister. Additionally, India has hosted heads of state from countries like Australia, Bangladesh, Turkey, and even Palestine. This signifies a replacement of India’s historic foreign policy of international ambivalence with a strategy that emphasizes increased trade and closer ties with nations from all around the world.

India’s strong economic performance and increased international engagement are, however, increasingly endangered by the revival of identity politics and communalism. This rise in religious nationalism has corresponded to an increase in violence directed towards minorities. Hindu vigilante groups and individuals have attacked minorities under the guise of protecting the sanctity of cows, an animal deemed sacred by a large number of Hindus. Many observers, both Indian and foreign, believe that the Indian government has not condemned attacks on minorities harshly enough, and that rise of religious vigilantism will have an impact on India’s political stability and economic growth.

The economic arena too witnessed disruption with demonetization. In November 2016, the Indian government announced it would pull all 500 and 1,000 rupee notes out of circulation. While the move ostensibly sought to reduce corruption and remove “black money” from the country, removing 86 percent of all paper currency from the economy created panic especially amongst the workers in India’s large cash-reliant informal sector. While the immediate implications of demonetization were not as severe as anticipated, the policy largely failed to weed out illicit cash and severely impacted the unorganized sector in terms for job losses and business closures as this sector relies heavily on cash transactions. India’s informal sector makes up 80-90 percent of the economy, and makes up half the country’s economic output.

India’s agricultural sector currently employs 47 percent of India’s labor force, it only generates 16.5 percent of its GDP. Demonetization had an adverse impact on this sector which is primarily cash-dependent. In an attempt to ameliorate adverse effects of demonetization the 2017 budget focused attention on rural areas and increased allocation for irrigation and water (~₹300 billion), interest subsidies, and national agricultural markets. The government also sought to encourage a shift from farming to the industrial and service sectors. The government has invested in skill development, infrastructural improvements, and the “smart city” initiative to connect different parts of the country and make industrially oriented policies appealing.

Another initiative rolled out this year whose impact is yet to be fully comprehended is the highly ambitious Goods and Services Tax (GST). Launched July 1, the GST is a massive overhaul of the Indian tax code designed to simplify the system and facilitate the ease of doing business by placing uniform tax rates on goods and services. The GST is a supply-side tax, and only taxes suppliers based on the value they add to the product during the supply chain. However, unlike in other countries with similar tax codes, not every product will be taxed at the same rate. Instead, depending on the specific item, the government will levy a tax of 5, 12, 18, or 28 percent, with regular goods like chocolate, chewing gum and deodorant being taxed at the highest level to maintain government revenue. Seemingly, this contradicts the goal of simplifying the tax code.

While some estimates predict that the GST will help India reach future GDP growth rates of 8 percent, countries that implemented similar reforms experienced temporary decreases in economic growth. Thus, it is important that the Indian government effectively responds to implementation issues, so that all citizens are protected from economic uncertainty.

Three years after Prime Minister took over power, it appears that contrary to the election promises of 2014, his administration prefers gradual improvements over big-bang fundamental changes. As a piece in The Economist in June 2017 titled “Narendra Modi is a Fine Administrator, but Not Much of a Reformer” stated, “the prime minister’s approach is not sweeping reform but the unveiling of small-bore government schemes.” Since coming into office, the Modi administration has appeared hesitant to act on earlier promises to privatize state-owned firms, simplify processes for buying land, or consolidate complicated labor laws, among many others. Instead, it has preferred to aim for reforms at the lower end of the scale.

One area in which the Modi administration has experienced great success is in building closer relations with the United States. PM Modi has undertaken official visits to the United States every year since coming to power, participating in a series of discussions with both the Obama and Trump administrations. Energy, defense and trade appear to be key areas discussed in these talks.

In the past three years, bilateral defense relationship has deepened further. Former Indian defense minister Manohar Parrikar and former U.S. Secretary of Defense Ash Carter met a remarkable six times, promoting the Defense Technology and Trade Initiative (DTTI) and paving the way for increasing military cooperation through a landmark 2016 agreement. These meetings also discussed maritime relations as an essential aspect of Indian-U.S. cooperation, as both countries are wary about the rise of Chinese influence in the South China Sea and Indian Ocean.

Economic ties between the United States and India have also strengthened considerably in recent years. Bilateral trade between the two countries reached $115 billion last year, and is expected to grow to $500 billion by 2024.

The Modi administration seeks to support a culture of innovation. Last year, the Modi administration unveiled its “Creative India; Innovative India” campaign, which seeks to bolster IPRs in India by increasing awareness and creating a stronger legal framework. Additionally, Indians living abroad are returning home in large numbers to bring their creative skills back to India. These changes led to significant advancements in India’s rank on indicators like the Global Innovation Index, which improved from 81 in 2015 to 60 in 2017.

Despite these improvements, some significant issues remain regarding fostering innovation in India. Research and development (R&D) remains quite low, consisting just 0.63 percent of India’s gross domestic product (GDP) in 2015. In comparison, in that same year R&D spending in both the United States and China was over three times greater than in India. It is essential for India to improve its R&D practices, because businesses are more eager to operate in countries where the government demonstrates a commitment to fostering a creative environment and protecting innovation.

In the realm of defense, India has focused on three major fronts: procurement, production, and personnel. This year, the Indian government demonstrated its massive commitment to defense by allocating $13 billion from the national budget to procuring military capital. This move intended to update India’s aging military equipment, which is in desperate need of modernization.

Such large arms purchases are meant to compliment India’s burgeoning domestic arms production. The Modi administration hopes to produce 70 percent of India’s total weapons supply domestically by 2020. In order to accomplish this goal, India has opened the defense sector to foreign direct investment (FDI), raising the possible amount of international investment in the industry to 49 percent.

India could make significant cuts to defense spending by cutting personnel, thus freeing up more capital to focus on infrastructural and self-sufficiency concerns. The Indian Army recently announced it would be restructuring its army and would redeploy 57,000 soldiers in combat roles, signaling a focus on personnel reform. Restructuring is expected to continue until December 2019.

In the last fiscal year, India only spent 2.9 percent of its GDP on education, falling well short of its 6 percent target from the 2014 BJP electoral manifesto. This has allowed longstanding problems within the Indian education system to persist, including the “saffronization” of curriculum, lack of quality teachers, and gender inequalities between male and female students.

Similarly, India spent a paltry 1.2 percent of its GDP on healthcare, the lowest recorded portion in its history. Limited spending has exacerbated healthcare issues for rural citizens, who receive less access and lower quality care than their urban counterparts.

An estimated 12 million Indians enter the job market annually. However, since PM Modi entered office in 2014, only 1.51 million new jobs have been created in India, 39 percent less than the previous three-year period. Some of these struggles have been understandable, as India is experiencing growing pains in its shift from an agricultural to an industrial society. Such a shift is necessary, as the agricultural sector, which employs 47 percent of the country, generates just 16.5 percent of India’s GDP.

The Modi administration has invested significant funds and resources into professional development, creating the Ministry of Skill Development and Entrepreneurship and increasing vocational training for teachers. When combined with the $7.5 billion “smart city” initiative to revitalize and redevelop urban areas, the Modi government is taking steps to help India keep up with a rapidly modernizing world.

With consistent projected growth rates of over 7 percent and a workforce of over 500 million people, by 2030 India is set to surpass Japan, Germany, Great Britain, and France to become the world’s third largest economy. While rapid overhauls are necessary, if the Modi administration attacks domestic issues with the same vigor that it has conducted foreign policy, then India will finally realize its massive potential.

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