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Modi should act more decisively in 2015
From the Financial Times of Tue, 23 Dec 2014 16:06:34 GMT
epa04524255 Indian Prime Minister Narendra Modi (R) shakes hands with Russian President Vladimir Putin (L) before their meeting in New Delhi, India, 11 December 2014. Putin is in the Indian capital on a one-day official visit. EPA/STR©EPA

On balance, Narendra Modi has had a good first six months in office. Domestically, India’s prime minister has struck the right note in electrifying speeches that have illuminated neglected issues including sanitation and violence against women. He has shaken bureaucrats from their sense of entitlement and made it clear they are there to serve the people, not line their pockets. On foreign policy, he has been quick to establish a more pragmatic doctrine based on India’s self-interest. He has forged closer ties with Asian neighbours, including Bangladesh, Japan and Australia, and moved quickly to patch up the vital relationship with the US. He will be rewarded in January with a visit from Barack Obama on Republic Day.

Mr Modi has also been lucky, an essential ingredient for any politician. Low oil prices are a boon, reducing the trade deficit and making it easier to phase out costly and distorting fuel subsidies. Cheaper oil should also take pressure off inflation, making a cut in interest rates more likely. Growth, which sagged badly in the final years of the previous administration, should pick up in 2015, if only marginally. There is an indisputable sense of optimism in the air.

The honeymoon will not last long. Critics rightly complain that Mr Modi is yet to capitalise on his mandate by ushering in big bang economic reforms that would demonstrate India is back in business. With a few exceptions, his choices for cabinet were uninspiring. His administration has made little progress on privatising the huge state-owned sector or on making it easier for foreign investors to enter hard-to-access sectors such as insurance or retail. Nor has he yet managed to push through a general sales tax, which could do much to simplify business conducted across state lines.

Mr Modi has put much emphasis on his “Make in India” campaign. To be sure, the domestic defence industry should benefit from a lifting of the cap on foreign ownership provided they transfer technology to India. It is not yet clear, however, what changes will trigger the hoped-for large-scale investment in other manufacturing sectors. There has, for example, been no overhaul of India’s restrictive labour laws that ensure most people work for tiny, unregulated companies.

As chief minister of Gujarat, Mr Modi gained a reputation for making it easy to do business. He must prove he can do this for the country as a whole. That is easier said than done in a complex federalist system like India, where many policies are implemented at state level. Part of the solution will be encouraging states to compete against each other. Clearing away bureaucratic obstacles should not be an excuse, however, for trampling the environmental and social safeguards that are a fundamental part of Indian democracy. It is a fine balance — and one that Mr Modi should struggle hard to get right.

Technology can also play a big role. About 700m Indians have been issued with a digital identity, making it easier to ensure government payments reach their intended recipients without “leakage” — India’s wonderful euphemism for theft. More should also be done to use technology in government auctions to avoid a repeat of debacles over the allocation of spectrum and coal extraction rights.

Mr Modi’s election has raised expectations to fever pitch. Goldman Sachs has even revived the old shibboleth that India could overtake Chinese growth rates.

That is not impossible but it will not happen on its own. Mr Modi has created a unique opportunity to get India moving again. He should act on it.



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