There is nothing like hubris for tripping up Indian leaders. Just ask Atal Bihari Vajpayee, who let a little success go to his head in 2004 when he led Narendra Modi's Bharatiya Janata Party to disaster.
Vajpayee fought that election with a splashy "India Shining" campaign highlighting the wave of optimism supposedly sweeping the nation. Hundreds of millions of Indians who were not feeling Vajpayee's economic magic retorted: "We will not be ignored!" and showed the BJP the door.
Fast-forward 13 years, and it is easy to suspect Modi's party is treading a similar path. Granted, we are 18 months away from elections, but Modi's team is veering dangerously toward "India Shining" territory, hyping modest successes and resting on its laurels when it should be accelerating the epochal reforms voters in 2014 chose Modi to enact.
Modi has pulled off some vital wins, of course. Steps to cut red tape, and to open the aviation, defense and insurance sectors bolstered New Delhi's reform credentials. Even with the botched implementation, introducing a national goods and services tax was a big deal. Missing, though, are the truly audacious moves Modi promised: revising labor, land and tax laws to raise competitiveness. Nor has Modi's "Make in India" push created millions of high-paying jobs in export industries. Moves to upgrade infrastructure and reduce power costs are a work in progress. Until Modi shakes up pivotal areas like retail, it is hard to gush about the outlook.
Instead of the "Gujarat model," voters are getting Gujarat light. The reference here is to the western state that populist Modi ran from 2001 to 2014. He is widely credited with transforming the place into a free-market exemplar with faster growth, fewer regulations, less corruption and strong entrepreneurship. Modi's mandate was to apply those successes nationally and drain the swamp in New Delhi. Unfortunately, Indians may have to wait for a second Modi term.
This reform vacuum threatens India's long-term prospects. In a sense, Modi has fallen into the same hubris trap as Vajpayee: the cult of GDP. Asia is awash in tales of leaders shelving structural upgrades once headline gross domestic product growth approaches China-like levels. Recent excitement over Indian GDP growth topping Beijing's predictably lulled New Delhi back into complacency. But Modinomics faces four challenges that will grow exponentially between now and 2019.
First, a mounting bad debt crisis. Nonperforming loans at state-run lenders recently hit a 15-year high. When New Delhi admits to about $200 billion of zombie loans, the odds are that the true figure is markedly higher. That weakens India's foundations by increasing incentives to misallocate credit, warping financial priorities and blurring lines between private sector efficiency and public sector bloat. Modi has relied on the central bank to sort out a problem his finance ministry should be tackling.
Second, demographic pressures. India came out on top in a recent Deloitte look at so-called demographic dividends. By 2030, Asia will be home to 60% of the global share of the 65-and-over cohort. But youthful India, Deloitte says, will drive Asia's next economic tailwind. Roughly 25% of India's 1.3 billion people are under 15 and its labor pool will jump to 1.08 billion people from 885 million over the next 20 years. What is more, India will enjoy this swelling-workforce magic for roughly 50 years. Demographic dividends, though, become political nightmares if job growth does not keep pace. Hundreds of millions of young Indians taking to the streets in anger would be bad for business for Asia's No. 3 economy.
Third, regional competition. As Chinese production costs rise, India's chances of wooing those jobs are not assured. While Indonesia, the Philippines, Thailand and Vietnam lack India's scale, each is making a play for factories looking for cheaper and more pro-business locales. These upstarts are building better roads, bridges, ports and power grids at least as fast as New Delhi. Also, China's push to recreate the Silk Road trade links may benefit East Asia more than South Asia.
Fourth, disappointing the world -- again. Investors took Vajpayee's comeuppance in 2004 hard. It also was a blow that the next prime minister, Manmohan Singh, dragged his feet on attacking graft and inefficiency. Expectations were high for Singh, who, as finance minister in the early 1990s, brought free-market reforms to India. Around that time, Singh quoted Victor Hugo: "No power on Earth can stop an idea whose time has come." Singh declared "The emergence of India as a major economic power in the world happens to be one such idea." Years later, such overconfidence would visit Singh's Congress party, too, and stymie India's emergence.
Enter Modi, who in 40 months has done more than any Indian government in modern memory to change the economic narrative. And credit where it is due: In the business year ended in March, India pulled in a healthy $60 billion of foreign direct investment. But Modi should be accelerating market-opening efforts, not throttling back. The risk, warns Maitreesh Ghatak of the London School of Economics, is that "Modinomics has turned into muddlenomics."
Growth slowed to 5.7% between April and June, the lowest in three years (it was 7.9% 12 months earlier). That has Modi asking a panel of experts to suggest ways to speed up GDP growth. But Modi knows exactly what to do from his Gujarat days. He needs to put bigger reform wins on the scoreboard -- and mind the hubris.
William Pesek is a Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He has written for Bloomberg and Barron's.