March 23, 2017 10:00 am JST

Editorial: Expectations surge after Indian elections

Despite currency reform, the president's popularity remains high

Truth often lies in the eyes of the beholder. As regards India's recent economic report, this adage couldn't be more apt.

India's gross domestic product grew 7% on the year in the October-December quarter, meaning yet again that India's economy remains the best performer among major countries, according to India's Central Statistics Office.

The news was surprising, as many economists had forecast weaker growth in the lower 6% range due to Prime Minister Narendra Modi's currency reforms in November 2016, which demonetized the 500- and 1,000-rupee notes (worth around $7.5 and $15, respectively). Since India's economy is overwhelmingly cash-based, the abrupt withdrawal of about 86% of cash from circulation was expected to have dire effects.

That GDP growth has remained at about 7% may be indicative of the economy's underlying strengths. Some experts are concerned, however, that economic data published by New Delhi may not reflect the actual state of the economy.

More to the point, the government may be missing something.

The so-called "informal sector" (also known as the black economy, most of which is not subject to government oversight and does not appear in official statistics) is a major part of the economy. Modi's ban on large notes -- part of his efforts to put more of this shadowy, essentially under-regulated sector under government oversight -- is widely believed to have exacted a heavy toll on this sector.

There are limits on India's ability to track data in the informal sector, therefore many observers believe it is premature to assess the real impact that the reforms have had on economic performance.

Seeming to acknowledge the void between the official figures and real-life expectations, the statistics office said it would compile more data and revise readings if necessary, since the latest GDP figures released at the end of February were preliminary. This is an imperative. India must restore trust in its economic data to help modernize the economy and improve the investment environment.

What's important is to finally end the turmoil caused by the currency shake-up so the country can focus on growing the economy. This requires genuine structural reforms designed to increase productivity.

To its credit, the administration seems to be making strides in this area. Its bid to unify sales tax rates, which currently vary by state, surmounted a major hurdle in 2016 when a proposed constitutional amendment (needed to clear the way for unification) passed parliament. Even so, crafting and quickly implementing the new tax policy will require careful oversight and a firm political will.

There are other policy issues that need attention but that cannot be successfully addressed unless Modi exercises decisive leadership. Chief among these are relaxing restrictions on foreign investment and allocating funds for infrastructure, an area in which India lags behind China.

Nearly three years after Modi took office, he still enjoys high popularity. Votes cast in the assembly elections in all five states were counted on March 11. Modi's ruling Bharatiya Janata Party won a landslide victory in the state of Uttar Pradesh, India's most important battleground state.

Quite a number of Indians must have suffered inconvenience from the currency shake-up. But Modi's grand bid to wipe out "black money" and stifle injustice has drawn more public sympathy than grumbling. Modi's bold action apparently testifies to his good political sense.

Now that the election results have swelled his political capital, hopes are high that Modi will steadily push forward with the reforms the country needs.

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