March 13, 2017 4:25 pm JST
James Manor

Modi's challenge does not stop in Uttar Pradesh

Will India's PM use his enhanced authority to push through economic reforms?

Indian Prime Minister Narendra Modi addresses his supporters at the Bharatiya Janata Party headquarters in New Delhi on March 12. © Reuters

Prime Minister Narendra Modi has won a stunning personal election victory in India's largest state, Uttar Pradesh. This is no small triumph in a state with over 200 million people, more than the entire population of Russia or Japan. It sets him up nicely for the next national election, planned for mid-2019.

Modi has already radically centralized power within his government. He makes policy for every ministry in New Delhi. He constantly portrays himself as an audacious leader who has implemented breathtaking innovations. This election result has strengthened him still further, leaving him with something close to a free hand to introduce still more bold new policies.

But will he now move forcefully to open up the economy? He promised to do so ahead of the national election in 2014. In response, major private companies made massive contributions that paid for a lavish campaign that was crucial in carrying him to power. But the private sector and those favoring economic liberalization have been sorely disappointed with the slow progress that he has made so far.

One free market enthusiast has written an "obituary for economic reform." Another bemoaned the "structured procrastination" that he has shown. A third argued that Modi "has turned his face away" from economic liberalization. Market-friendly analysts see "weak-kneed and confused 'incrementalism'" on many fronts.

They have called in vain for reforms to labor laws that would dramatically reduce controls on businesses, large and small, to hire and fire, even though this might lead to desperately needed job creation that would boost his popularity.

Major international oil and gas companies largely steer clear of India. Exploration policies are too restrictive to attract bids from major players. Some companies that have entered India have found that rules and tacit understandings change once they make discoveries.

Ministers have refused to declare clearly that retrospective taxes, which severely undermined confidence among international investors under a previous government, will never again be imposed.

Backlash fears

The Modi government recently began to introduce arrangements to enable mining and manufacturing companies to acquire land for new projects, but then backed off for fear of alienating the small landholders who now occupy them.

The government has done far less than expected in terms of selling substantial shares in large state-owned enterprises or to privatize some of them. Arun Shourie, a former World Bank official who held the disinvestment portfolio under an earlier government led by Modi's Hindu nationalist party, has likened the current government to its timid predecessor led by the Congress Party. He has called it "Congress with a cow," in a reference to the cow's symbolic status in Hinduism. He recently said that despite his bold posturing, the prime minister "is easily frightened."

Three years ago, Modi made two stirring commitments which are now widely viewed as what Indians call "tall promises." They have not been fulfilled because, despite their initial theatrical impact, they are impossible to achieve.

He gained massive popularity by promising to create vast numbers of new jobs, but no prime minister can do that. Job creation has stagnated since he came to power. He is also unable, as promised, to bring back large amounts of illicit funds stashed in foreign banks, and to deposit 150,000 rupees of that money in every Indian bank account. Nor can he fulfil a more recent, widely popular promise to double farmers' income by 2022.

If those tasks are impossible, dramatic actions to liberalize the economy are not. They have always been well within Modi's power, but few have been attempted. Free market enthusiasts who ask why this is so have analyzed the impediments facing the government on this front and found that they are too insubstantial to stand as an excuse. This leaves one other possibility which they see as acutely alarming. The prime minister may not actually understand how little has been done.

In a recent speech to potential international and domestic investors, Modi pledged to continue his bold steps to liberalize the economy. He may not have been lying. He may genuinely believe that aggressive reforms have been enacted.

One market-friendly commentator asked: "Does the prime minister really believe that the reforms introduced so far are ... transformative?" Another analyst argued that Modi "has not used his mandate to bring about systemic change; he seems to think that tinkering with the current system ... is all that is needed."

If that is how Modi sees things, then the heightened political power he has gained after his Uttar Pradesh triumph will make little difference to economic reform.

James Manor is emeritus professor of Commonwealth Studies at the School of Advanced Studies, the University of London

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