MUMBAI -- The village of Dhenkia sits in a fertile region of the eastern Indian state of Odisha that is known for its cultivation of the betel vine. Chewing betel leaves is popular with Indians, making it a reliable cash crop for Dhenkia and the surrounding villages.
But in recent years, the village of about 1,000 residents has become known for something else: blocking the ambitions of one of the world's largest steelmakers. In the process, Dhenkia became a symbol of some of the Indian economy's most intractable structural problems.
In 2005, the state government of Odisha and South Korean steelmaker Posco, the world's fourth-largest producer, agreed to build a massive 12-million-ton steel mill on 1,620 ha of land near the port of Paradip facing the Bay of Bengal.
At the time, the project was said to be the biggest-ever foreign direct investment in India, with 520 billion rupees ($7.3 billion) set for the mill's construction. It would have created at least 7,000 jobs at the plant itself, and a staggering additional 870,000 jobs would have been created to supply raw materials, logistics and other related businesses, according to estimates by scholars at the Deakin University of Australia.
A large part of the land needed for the project was owned by the state, but those lands included Dhenkia and the betel vineyards. Villagers in the area mounted a vigorous campaign to oppose the project, saying the steel mill would prevent them from making a living from farming the land. Facing the prospect of widespread protests and other regulatory hurdles, Posco finally withdrew from the project in 2017.
"Steel mill jobs require education and skills, which we don't have," Bhramor Das, a community leader in one of the villages, told the Nikkei Asian Review. "We like betel growing, which provides us with at least 30,000 rupees per month for a plot of 400 sq. meters."
"We have been doing this for generations on this land as the soil is very fertile here," another villager added, as others nodded in agreement. "We cannot move anywhere else."
Though the Posco project was launched before he took office, the withdrawal was nonetheless a setback for Prime Minister Narendra Modi's plans to make India a steelmaking powerhouse.
During his election campaign in 2014, Modi sold himself to voters as the man responsible for turning his home state into an economic success, dubbed the "Gujarat miracle." He pledged to bring the same pro-business, market-oriented principles to the rest of the nation.
Now, as Modi seeks a second term in elections expected in May, the question is: has the prime minister delivered the reforms he promised?
Modi's first term as the premier has been marked by a host of regulatory changes and projects aimed at enhancing the economy's growth, such as the "Make in India" program to increase manufacturing, and a nationally unified sales tax to simplify rules for companies.
His ambitious first-term agenda also included strengthening land record data and acquisition procedures -- changes that might have helped the Odisha economy transform itself through the Posco mill if they had been in place earlier. The job of determining who holds the rights to a particular plot of land is one of the biggest obstacles to infrastructure projects and manufacturing investments in India.
A major Modi policy -- the 2016 banknote demonetization, meant to crack down on India's shadow economy -- has been criticized as ineffective and disruptive. Another showcase policy, the Goods and Services Tax, has won plaudits despite a chaotic rollout.
India's economic growth rate has remained above 7% under the Modi government, making it the fastest-growing among major world economies -- though some say growth would have been higher without the demonetization shock and the messy introduction of the GST.
Many business leaders and economists say the Modi government nonetheless deserves credit for putting many of his pledges into action.
"A spate of reforms was pushed through, which are expected to yield economic dividends in the long run. The confidence in the Indian economy has been renewed," Amit Kapoor, a prominent economist and chairman of the Institute for Competitiveness, India, wrote in his recent book "The Age of Awakening."
China vs. India
The judgment of the Dhenkia villagers was perhaps correct, in the sense that promises of new manufacturing job opportunities often end up being an illusion for many low-skilled locals.
But it is also true that India and Odisha missed a once-in-a-generation opportunity to draw a global manufacturing company to an underdeveloped region, creating an ecosystem of large-scale support sector businesses around the steel mill itself.
If the land rights had been sorted out in clear and simple records, and if fair and easy-to-agree-on acquisition procedures had been institutionalized, and if decent education had been available in even the smallest villages, there may have been progress for Odisha and the Indian economy.
These "ifs" represent some of the most crucial structural issues that India needs to tackle if the nation is to meet its goal of achieving a living standard comparable to that of China, India's arch-rival for 2,000 years.
About 49% of India's workforce of 520 million made their living from agriculture -- generating only 15% of GDP -- in 2017, according to the government think tank National Institution for Transforming India. In comparison, less than 20% of China's labor force is engaged in agriculture -- sharply lower than in 1991, when over half the Chinese labor force farmed.
The IMF estimates China's GDP per capita for 2018 at roughly $9,600 compared to India at $2,000. This is a remarkable shift from 1991, when India's GDP per capita was higher than China's. By then, China was in its 14th year of economic opening and reforms initiated by Deng Xiaoping in 1978.
Since 1991, the world's two most populous nations have seen a huge divergence in their per capita GDPs or average living standards, as China has marked double-digit GDP growth 10 times since then, while India's growth rate exceeded 10% only once.
China's "miracle" was largely enabled by massive labor force migration from rural, agricultural villages to manufacturing in urban areas. It also invested in education, which helped increase the supply of skilled workers starting in the 1990s.
Modi's Bharatiya Janata Party government promised to improve education by addressing the "acute shortage" of teachers and to "seriously pursue universalization of secondary schools."
Under Modi's government, the number of teachers in the primary and lower-secondary schools increased at less than 3% annually, keeping the number of vacant teaching posts above 900,000, according to government testimony in parliament. Some critics say that as many as 25% of supposedly working teachers do not show up in the classroom every day.
These two reform fronts -- land and education -- have been among the weakest spots in the Modi government's performance over its past five years in power.
Modi has also been criticized by many economists for chilling the economy with his decision to suddenly abolish 86% of bank notes in circulation overnight on Nov. 8, 2016, in the name of fighting corruption and "black," tax-evading money. Raghuram Rajan, former governor of the Reserve Bank of India, the central bank, has said there is no evidence that the so-called demonetization measure achieved that objective, pointing to the fact that almost all of the abolished bank notes have returned to the banking system.
Also drawing criticism is persistent protectionism, despite Modi's pledges for freer trade and fewer restrictions on foreign direct investment. On Feb. 1, the Indian government banned foreign e-commerce market platforms from exercising "ownership or control over the inventory of" sellers. This requirement undermines the business models of Amazon and Walmart's Flipkart, where investment in "affiliate" companies helps them tie up exclusive supply agreements.
Even Arvind Panagariya, a Columbia University economist and a member of Modi's brain trust, pointed out that "the government has returned to the discredited policy of import-substitution industrialization and raised import tariffs on a large number of products."
Big reform successes
There are, however, some profound and very difficult structural reforms that the Modi government has succeeded in implementing. Many business leaders and economists agree that the nationwide introduction of a new insolvency and bankruptcy code and the general sales tax, dubbed the "Goods and Services Tax," will cause profound changes in corporate India.
India is in the midst of an unusual spate of insolvency and default issues, some of them involving high-profile companies. For the first time in Indian business history, many founder-owner-managers, which Indians call "promoters," are facing a stark choice between repaying the debt or losing their businesses.
The board of ailing Reliance Communications, led by Anil Ambani, its majority-controlling chairman, announced on Feb. 1 that the company will plead for bankruptcy protection. Naresh Goyal, the majority-controlling chairman of Jet Airways, has been reportedly told by creditors and potential equity investors that he must give up his ownership and board seat. And the Ruia family, which owns Essar Group, is entering the final stage of the bankruptcy of Essar Steel. The family is awaiting a decision by the National Corporate Law Tribunal, or NCLT, on whether they will be allowed to regain their ownership without the consent of creditors, who have been insisting on a change of ownership.
For many Indian business people, these cases symbolize a sea change sweeping through corporate India -- one that was ignited by Modi's Insolvency and Bankruptcy Code in spring 2016.
The IBC gave power to creditors to unilaterally initiate the bankruptcy process. On top of that, the Reserve Bank of India introduced a rule in February 2018 that mandates banks to initiate the NCLT bankruptcy process against debtors who are 180 days overdue on their loan repayments. The combination of those two rules urges debtors to try to repay within that period.
In pre-IBC India, there were few legal tools with which creditors could force debtors to repay their debts or initiate bankruptcy processes. A bankruptcy process meant years of legal battle. In some cases, a promoter would file for bankruptcy, erase the debt and bid for the bankrupt company as a "new" owner.
"Prior to the IBC era, debt payment delay was the norm in India," recalls Arun Soundarajan, India country manager of Atradius, a global credit insurance company. "India's business norm has changed," he said.
By the end of 2018, the NCLT system had allowed roughly 1,500 bankruptcy proceedings to begin, leading to about 300 liquidations and about 80 restarts or "resolutions" under new ownership. Such progress in bankruptcy processes means faster write-offs of nonperforming assets at creditor banks, which frees up bank balance sheets for funding healthy companies and projects.
For years, problems in enforcing contracts and the difficult insolvency process have been major drags for India on the World Bank's "Doing Business" ranking. Modi in 2014 pledged to raise India's ranking to 50 by fall 2017. India did jump to 77 in fall 2018 from 142 in 2014, but rankings in the contract enforcement and the insolvency subcategories remained in the triple digits, dragging the overall rating down. If India's business norms have really changed, those rankings may well improve.
Many business leaders and economists seem to agree that the implementation of the GST in 2017 was an important reform by the Modi government, even if the rollout was messy.
Manish Sabharwal, chairman of TeamLease, India's largest staffing and placement company, says that one of India's biggest problems is its low productivity due to a scarcity of "formal" employers -- incorporated, tax- and law-compliant enterprises with sufficient capital. He thinks the GST "ignited a cycle of formalization of Indian enterprises."
The number of GST-registered businesses was roughly 12 million at the end of 2018, double the number before, according to the government. The GST rule requires every business with annual sales of 2 million rupees or more to register as a GST payer.
"It is just the beginning of a change. But it is a profound change," Sabharwal said.
He also points to the necessity of curtailing "excessive regulatory cholesterol."
One example of this: there are 38 national-level labor laws, many of which have different definitions of an "employee" and a "wage." "In India it is impossible to comply with all the labor laws without violating 10% of them," he said.
The most notorious labor law is Chapter 5-B of the Industrial Disputes Act, which requires government permission for a manufacturer with 100 or more employees to lay off a worker. The World Bank and IMF have repeatedly recommended abolishing the rule.
However, the government succeeded in legalizing fixed-term employment contracts in 2018, mainly in the manufacturing sector. "It may turn out to be effective in providing manufacturers with some flexibility in manpower management, although full reform of the Chapter 5-B would be more desirable," Sabharwal said.
The full effects of the IBC and GST are yet to be seen and many other pieces of the Modi reform agenda -- including labor reform -- have yet to be implemented or are still being formed.
India is still suffering from the legacies of the socialist planning economy regime installed by its first post-independence prime minister Jawaharlal Nehru, including a heavy state presence in many industries. The Modi-led BJP has clearly tried to chip away at this legacy over the past five years, and it will face the verdict of its citizens at the upcoming general elections.
Aurodeep Nandi, an Indian economist at Nomura, says the Modi government has pushed changes "that raised Indian people's aspirations."
"As many of these reforms are a work in progress, they must continue under any government," he said.