Tuesday, April 16, 2019

The Modi Mirage

Foreign Affairs | April 11, 2019
Why I Fell Out of Love With India's Reformist Prime Minister
India in 2014 was a troubled and discontented nation. Inflation was in the double digits, growth was declining, and corruption was rampant. Sick of the drift and paralysis in the government of Prime Minister Manmohan Singh, many Indians longed for a leader who would get the nation out of the mess. The situation was not unlike Britain's in the late 1970s. Britain found Margaret Thatcher; India found Narendra Modi.

The sudden ascent of the tough and stocky 63-year-old as a serious contender for the nation's highest office caught everyone by surprise. As chief minister of the state of Gujarat, Modi had built a vibrant economy and reduced corruption. His campaign speeches, with their single-minded focus on vikas (development) were fresh and mesmerizing. But people were also wary. Modi was considered dictatorial and anti-Muslim. Above all, he carried the stain of Hindu-Muslim riots in 2002, when his state government looked the other way as nearly a thousand people, most of them Muslims, were killed over several days.

I, too, worried about electing a politician like Modi. Yet I also believed that the Indian government was not doing enough to capitalize on its extremely young population, about half of which is under the age of 25. If those millions of working-age women and men could be lifted from underemployment in the informal sector to well-paying jobs, the gains in overall prosperity would far outweigh the burden of supporting the old and the very young. Economists call this the "demographic dividend," which is known to spur GDP growth in developing countries. If managed well, India's economy had the potential to lift millions from poverty and send the country on a path to middle-income status. But within a dozen years, the window of opportunity would close as India's youth began to age. Among the candidates in the 2014 elections, Modi seemed to be the only one to grasp this, making him the country's best hope for reaping the demographic dividend. The alternative was Rahul Gandhi—a scion of the political dynasty that had governed the country for the better part of six decades—and he did not even come close.

I contemplated a dilemma. Should India risk its precious commitment to secularism and pluralism for the sake of prosperity, jobs, and fighting corruption? I agonized for months and then did something unusual. I decided, for the first time in my life, to vote for the right-wing, Hindu nationalist Bhartiya Janata Party (BJP)—and I did so because Modi was its leader. I was among the first Indian liberals to endorse him publicly, in my Sunday column in the Times of India and in six other Indian papers.

There was no denying that Modi was a sectarian and authoritarian figure. But I knew that India's democratic institutions were strong enough to prevail over those tendencies. Nothing would absolve Modi of his responsibility for the 2002 riots. But neither would anything lessen the moral imperative to fight widespread poverty with sound economic policy. A vote for the BJP was, in my mind, a calculated risk. Millions of Indians agreed, and Modi swept the polls.

To voters used to being treated like victims, Modi's uplifting image and rhetoric were a welcome change. The Indian National Congress of Rahul Gandhi cast its constituents as defenseless casualties of global capitalism; a slate of caste-based parties promised justice for those harmed by India's rigid social hierarchies. But Modi—the son of a chaiwallah, one of India's ubiquitous tea-sellers—embodied the promise of social mobility across the boundaries of caste and class. That his English was labored at best only burnished his credentials as a man of the people. His landslide victory credited the dignity of shopkeepers and invited India's Anglophile elite to re-examine its Brahmanical prejudices.

Modi extended the BJP's appeal to India's rapidly growing middle class, which had enjoyed the fruits of economic liberalization in the 1990s. But in so doing, he created a divided party, with an economically liberal wing and a culturally conservative wing. Many in the former did not subscribe to the BJP's cultural agenda of Hindutva, the belief that India should be a nation of and for the Hindus. Even if these voters had supported Modi's agenda of economic reform, his party's majoritarian politics left a feeling of discomfort that was hard to shake.

TAKING STOCK

Five years on, I am disillusioned. Modi has delivered only partially on his economic promises, and he has unconscionably polarized the country. With a GDP growth rate of roughly seven percent, India's is the fastest-growing major economy, but this growth has not brought the promised jobs. Nor has Modi leveraged his outright majority in the lower house of parliament (rare in Indian politics) to execute the far-reaching reforms that would have made India more competitive. He could, for example, have reformed the distribution of farm commodities and thus helped prevent the recent collapse in food prices, which has destroyed countless farmers' livelihoods. He could have used India's slow-burning banking crisis to privatize the worst-performing public-sector banks, which are going the way of Air India, the state airline that has been mismanaged into near bankruptcy. No other democracy has 70 percent of its financial assets locked in public-sector banks, where the temptation is high to issue loans based on political ties. Modi could also have focused more on exports. Instead, he has been gradualist like his predecessors, broadly operating within the old consensus of excessive public ownership and state control.

To be sure, Modi has delivered on two major promises: inflation has come down from double digits to between two and three percent. Corruption has not vanished, but it has declined, with the country moving up seven spots in Transparency International's Corruptions Perceptions Index since 2014. Several of Modi's reforms have been game-changers. Although poorly implemented, the landmark Goods and Services Tax has replaced a messy patchwork of state-level taxes, finally turning all of India into a single market. By some estimates, its introduction may increase annual GDP growth by as much as 2 percent in the long term. A new bankruptcy code will ensure that the country's assets are more productively employed, as dying companies can now be taken over by new owners. Because 300 million Indians now have bank accounts, and more than a billion have cell phones and unique biometric identity cards, mobile banking has taken off. The government can therefore gradually switch from leaky subsidies to direct cash transfers. Similarly, transactions between citizens and the state are moving online, leading India to move up over 50 spots in the World Bank's Ease of Doing Business Index since 2014. Modi has begun the job of making India function better.

Modi has broadly operated within the old consensus of excessive public ownership and state control.
Other moves were smaller but important nonetheless. India began auctioning natural resources online in a transparent manner, liberalized rules for foreign investment, deregulated energy prices, and allowed the self-attestation of legal documents (which freed citizens from running around to get their documents attested by government officials or corrupt notaries). Much-needed legislation for labour reform and land acquisition got stuck, however, because the BJP did not have a majority in the upper house.

And Modi's boldest move turned out to be a blunder. On November 8, 2016, he proclaimed that 500-rupee and 1,000-rupee notes would no longer be legal tender—a sudden announcement that rendered worthless almost 87 percent of the currency in circulation. The measure, an attempt to rein in corruption and the informal economy, touched the life of every Indian with crushing effect. For months, people stood in line outside banks to change their notes. The liquidity crisis destroyed the livelihoods of millions of people. Two years later, most economists believe that demonetization is one of the worst ways to tackle corruption and the untaxed economy. Reducing institutional opportunities for bribery and embezzlement is far more productive.

Some of the most robust government institutions have weakened: official data on jobs, for example, can no longer be trusted. Meanwhile, fears about Modi's majoritarian politics have come partially true. Although bloody riots like those in Gujarat in 2002 have not recurred, diverse India's prized social cohesion is under threat, and religious minorities feel insecure. The BJP's obsession with Hindu nationalism has legitimated bans on beef production in the populous Hindi-speaking northern states and emboldened vigilantes who attack anyone suspected of mistreating cows.

MISSED OPPORTUNITIES

At the heart of Modi's failure is the weak capacity of the Indian state. Modi relied excessively on the civil service to formulate complex reforms, rather than bringing in outside experts. Civil servants are often inclined to protect the status quo instead of executing new initiatives—especially in a country where seniority, not results, still gets people promoted.

Consider Modi's Make in India program, a push to make the country more competitive in global markets. Indian civil servants lacked the competence to oversee such an effort. Moreover, since Jawaharlal Nehru was prime minister in the 1950s, Indian civil servants have looked upon exports with skepticism. Yet if India could grow its abysmal 1.7 percent share of global trade to 2.5 percent, the jobs now leaving China could come to India, rather than to Vietnam, Bangladesh, and Indonesia.

Moreover, Modi announced too many programs at once and tried to execute them all himself. He centralized decision-making in the prime minister's office—something he had done successfully as chief minister of Gujarat. But India, with its federal structure, is not Gujarat. A chief minister may be all-powerful in a given state, but a prime minister has to learn to implement programs by motivating and cajoling regional leaders across the country. To make matters worse, Modi seems to have been continuously in an election mode for the past five years. Constant campaigning diverts the executive's attention from executing reforms that often bring short-term pain for long-term gain. To be fair, Modi was aware of this problem— he championed introducing simultaneous state elections across the country, but the idea lacked support among other parties.

Modi is ultimately not a liberal reformer. He is a pragmatic modernizer, like Singapore's Lee Kwan Yew. His stance owes in part to external constraints: to this day, capitalism has not found a comfortable home in India. Many citizens believe that market-oriented reforms make the rich richer and the poor poorer. Despite the huge benefits of increased competition since 1991, many Indians cannot distinguish between being pro-market and pro-business. India has not had a leader like China's Deng Xiaoping or the United Kingdom's Margaret Thatcher, capable of selling the competitive market to the people. As a result, every Indian government has reformed by stealth, and Modi has been no different.

THE UNHAPPY CENTER

Over the next five weeks, 900 million voters will be eligible to vote and election fever will once again seize the country. Probably because Modi has failed to create jobs, the BJP's rhetoric has turned from economics to identity politics and security issues. When a Pakistan-based terrorist group killed some 40 Indian paramilitary troops in Kashmir on February 14, the government took the unprecedented step of retaliating with an air strike inside Pakistan, purportedly against a terrorist camp. The incident, and the subsequent battle of Indian and Pakistani jet fighter planes, burnished Modi's military credentials. The whole episode fits in well with his nationalist rhetoric, which brands as unpatriotic anyone who criticizes the government, especially on its military counterterrorism operations in Kashmir.

My own dreams for Modi have faded. Had he reformed vigorously and begun to deliver the promised jobs, I would have applauded him for giving India a shot at the demographic dividend. I might even have forgiven his distasteful ethno-nationalist politics. But Modi remains the most popular leader on the Indian political scene. It seems unlikely that the Congress Party under Rahul Gandhi, with its chaotic coalition of regional allies, will unite behind a positive vision and create an effective vehicle for reform. Instead, the country is polarized between those who love Modi and those who hate him. A middle-of-the-road person such as myself finds that he has no one to vote for. Many Indians are here with me, in the unhappy center.

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