A man walk past a photo point installed at the Election Commission of India’s headquarter on the sixth phase polling for the Lok Sabha elections in New Delhi. (Source: PTI)

India Is Running Out of Time to Enact Urgently Needed Reforms

(Bloomberg Businessweek) -- Tough elections are ugly and get uglier the longer they drag on. In India, so massive that the voting process has taken nearly six weeks, Prime Minister Narendra Modi’s ruling Bharatiya Janata Party has dispensed with the relative subtlety of dog whistles. It launched into polls last month blasting Modi’s political rivals as sympathizers of archrival Pakistan and vowing to boot supposed Muslim “infiltrators” out of the country. It continues to mock opposition leader Rahul Gandhi for standing in two constituencies—in one of which, it’s darkly noted, Hindus are a minority. One BJP candidate has been charged in a terror attack that killed six Muslims.

Some Modi defenders will dismiss all this as political theater. They say reforms instituted by his government have benefited Indians regardless of creed: programs to build toilets, open bank accounts, and provide cooking-gas cylinders for the poor. They argue that Modi presents the best chance India has of reaching Chinese-style growth rates, which could lift tens of millions out of poverty. They point out, not unreasonably, that Gandhi has hardly dazzled with the force of his personality or the credibility of his economic plans.

Even so, divisiveness is a deeply unwise course for Modi to steer. Most observers see the prime minister and his party returning to power for another five years. If they don’t swiftly pivot back to the more inclusive message of opportunity and growth that underpinned Modi’s impressive victory in 2014, the world’s biggest democracy could fall prey to nativist furies far more destructive than anything yet seen in Donald Trump’s U.S. or Brexiting Britain.

The tinder is plentiful. India’s huge, young population— 58% are younger than 30—should in theory be an asset, boosting growth to a degree that aging societies such as Japan, Singapore, and even China can only envy. But this demographic dividend won’t last forever: By some estimates its positive effects could begin to wane as early as 2030. If India doesn’t start creating vast numbers of new jobs—8 million are needed annually, according to the World Bank—the nation’s young will quickly become a burden on the state and a threat to social stability.

Some argue this is already happening. “You see the same aspirations and the same frustrations from Kanpur to Coimbatore,” says Snigdha Poonam, who traveled the country to research an acclaimed recent book, Dreamers: How Young Indians Are Changing the World. Many of these youthful citizens expect their nation to be recognized imminently as a superpower and their wildest economic ambitions to be fulfilled as Modi promised in 2014. Poonam recalls meeting young men in three separate rural areas, each of whom confidently informed her that his life goal was to own an Audi, a car none had ever seen in person.

For these young men—and in India, which because of a preference for sons has 36 million more males than females, they are mostly men—reality cannot possibly match such vaulting expectations. Most Indian youth are atrociously educated and underemployed. The government disputes a recent report that pegged unemployment at a 45-year high. Yet India accounts for barely 1.7% of global exports: There’s no evidence that the economy is creating the kind of blue-collar jobs that could offer livable wages, chances for advancement, or incentives for workers to train and improve their skills.

Especially in the poorer and more populous north, many of these young men don’t appear to blame Modi for this failure. The son of a tea seller, he’s successfully cast himself as one of them, battling against Delhi elites whose policies have ostensibly favored minorities and thus blocked their rise. They accuse Muslims and lower-caste Indians of stealing jobs through affirmative-action quotas. They blame women for doing the same by leaving the home for the office. (In fact, rates for female labor participation in India are shockingly low and declining rather than rising.)

The BJP has actively promoted this belligerent majoritarianism, claiming simply to be restoring pride in India’s Hindu heritage. While Modi himself has been more restrained in his language than many feared he might be, at least until the current campaign, he’s promoted Hindu nationalists throughout his administration and beyond. He’s looked the other way as gangs of Hindus have lynched Muslims— at least three dozen and counting, according to Human Rights Watch—and been embraced by BJP luminaries. Since Modi’s election, anti-Muslim bigotry has become normalized to a virtually unprecedented degree in India, an officially secular country with the world’s second-largest Muslim population.

Although certainly a subtext to his 2014 victory, this wasn’t what got Modi elected originally. The prime minister triumphed because he convinced many Indians that he could push the economy into the higher gear that had propelled China and other East Asian economic powerhouses out of poverty. He wanted India to project newfound strength, certainly. But that assertiveness would grow out of the economic vibrancy and an expanding domestic market—not religion—that would attract foreign investment.

His accomplishments on that front haven’t been negligible. Most laudably, during his first term, Modi ushered in two broad reforms—a nationwide goods-and-services tax and a new bankruptcy code—which, despite teething problems, should ultimately make the economy much more efficient. Thousands of kilometers of new roads and improved rail lines, especially in rural areas, will do the same. While it’s easy to dismiss those toilets and bank accounts, they have directly improved the lives of some of India’s most vulnerable citizens.

Yet there’s no sign Modi is prepared to take the steps that would be required to shift India onto an accelerated development trajectory. Barely a year into his term, after being accused by Gandhi and the opposition Indian National Congress party of running a “suit-boot” government for the rich, he essentially abandoned any effort to rework the politically sacrosanct laws that discourage Indian companies from expanding: in particular, rules that make it difficult to acquire land for factories or to fire workers.

Worse, Modi’s most dramatic initiative—abruptly withdrawing almost 90% of the currency in circulation in late 2016, supposedly to combat corruption and money laundering—was a massively disruptive failure whose costs are still being felt. More recently, the government has reversed years of steady liberalization in trade policy. It’s competed with the Congress party in issuing promises of wasteful handouts to ailing farmers, rather than addressing the bottlenecks that are cutting into their incomes. It appears to have fudged or withheld data to mask a weak record on growth and jobs, and it has undermined the independence of institutions such as the Reserve Bank of India.

That helps explain why Modi has focused on an almost purely nationalistic message throughout the campaign, one that borders on Trump-scale hubris. The prime minister and his supporters have added the title chowkidar (watchman) to their Twitter handles and boasted that only he can keep India safe. Modi repeated that line more recently after the Sri Lanka church bombings, warning of similar attacks in India should Gandhi’s Congress come to power. BJP partisans go one step further, baldly arguing that critics are not just deluded but also deliberately treasonous.

Tactically, Modi may be right that voters, including those young men who thrill to his message that India can no longer be pushed around, will respond. But what Indians really need isn’t for their resentments to be nursed: They need jobs. And, even with the advent of automation, all evidence suggests that those jobs can come in sufficient numbers only from a thriving manufacturing sector.

This shouldn’t be a partisan issue. As a former Indian planning official once put it, across the political spectrum there’s a “strong consensus on weak reform.” What India needs from its next leader is the drive and ability to build a consensus in New Delhi for stronger, more difficult reforms.

These will have to include changes to land and labor laws, a much more open trading regime, and a host of other reforms that would encourage foreign multinationals to integrate India into their global supply chains. Businesses need better access to power and improved infrastructure. They need to be freed from unnecessary and arbitrarily enforced regulations. Corporate tax rates need to be brought down much closer to Southeast Asian standards.

Equally vital is improving access to capital. Private investment remains subdued, in large part because the state-owned banks that account for 70% of India’s banking sector aren’t lending. Efforts to recapitalize those banks and improve their management are welcome but insufficient; as long as state banks remain beholden to politicians, they’ll never be as efficient at allocating credit as the economy needs. Smaller ones will have to be shut down, sold, or merged into better-run peers. The government also has to increase the scope for private banks to grow in number as well as in size, while taking steps to develop the corporate bond market.

This points to a larger issue: The Indian government has to get out of the business of business. It shouldn’t be running failing companies such as Air India Ltd. or dictating prices in agricultural markets. It needs to prune the thickets of regulations that exist largely so bureaucrats can extort bribes.

Instead, more staff and resources need to be dedicated to areas where the government has traditionally shirked its responsibilities—delivering basic services, including health and education, improving the judiciary, and modernizing the military, among others. Leaders must dedicate special attention to increasing women’s participation in the labor force.

What India doesn’t need should be equally clear. A country this diverse and politically volatile cannot afford the kind of incitement, minority-bashing, and demonizing of legitimate dissent that’s become far too prevalent under the BJP. India’s enemies aren’t Muslims or multinationals or Pakistanis or leftist academics. They are, and have been for far too long, poverty and joblessness and inequality and state neglect. Indians deserve a leader who’ll remember that.

To contact the editor responsible for this story: Howard Chua-Eoan at hchuaeoan@bloomberg.net

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