Joseph Mariathasan: Has India's Modi delivered on his promises?

The prime minister’s timidity in the face of much-needed reform is astonishing, writes Joseph Mariathasan

India’s growth rate is now comparable with China’s, but it still lags far behind in many respects, most notably in the state of its infrastructure. India’s current prime minister, Narendra Modi, came into power in May 2014 on a wave of optimism and hope that his administration would finally produce the changes required to transform the economy. More than two years later, there has certainly been some changes, accompanied by much hype, but many commentators are disappointed and frustrated by his inability to create the “Big Bang” changes the economy requires.

Economist Mihir Sharma argues there are four key problems the Modi administration has failed to tackle.

First, he says, India should be privatising those businesses that governments should not be in. The most notable example is the national carrier, Air India, which Sharma describes as a national disgrace in terms of service quality. It is seen as a bottomless sink for taxpayer rupees and a constant source of undercutting and instability in the aviation sector. He, along with many others, argue that dozens of Indian public sector units are a drain on public resources and productive capacity, and should be sold off.

Second, the country needs to create a much more flexible labour market. Sharma argues that the Modi government, despite having the first majority in 30 years, still repeats the mantra that labour law reform is subject to the unions’ approval, and that it must not be biased towards the employer. The problem is that, with very inflexible labour markets, employers fear they cannot make staff redundant easily, even if the companies are facing losses that deter investment in industry in large parts of the country.

Modi, it seems, has dismissed ‘hire and fire’ as a “Western concept”, not in keeping with Indian culture. Such an attitude, while great for those already in employment, is not so good for those seeking it. It is also arguably one of the reasons why the UK and US are experiencing more vibrant economies than many European countries such as France, which also has more rigid labour laws.

Third, Sharma argues that the country needs genuine administrative reform. It is the incapacity and inefficiency of the state, he says, that poses the greatest hurdle for the economy – as anyone who has experienced Indian bureaucracy can testify. In particular, ministries need to become policy-making, not rule-making, centres, with independent agencies and regulators empowered to make the rules instead.

Fourth, Sharma argues that India needs to reform its budget and expenditure mechanism. Making the Union Budget use accrual-based accounting instead of a cash-based one, he says, would increase transparency while cutting the Union government out of the process of disbursing monies to the states for schemes they are implementing and evaluating.

What irks Sharma most is the government’s astounding timidity on reform. In principle, any major reform creates losers as well as winners, yet the economy as a whole is better off. What should be a worry is whether Modi’s administration becomes hijacked by vested interests that thwart the promises of change that swept him into power.

Joseph Mariathasan is a contributing editor at IPE