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India’s Steady Pace of Change: The NDA Government at 2 Years

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Sign of the times ImageAs the Prime Minister Modi travels from the US to Tokyo and everywhere in between, one thing seems clear; there is widespread hope and good wishes around the world for India to succeed in its endeavour to progress in its development. Mr Modi took the helm of an India overburdened with problems from flagging economic growth, high inflation rates, a high fiscal deficit and increasing foreign investor disillusionment, all of which required immediate attention. Mr. Modi’s message struck a chord with the Indian voter base, particularly with the country’s burgeoning middle class, and his party was voted into power with the a parliamentary majority in India in almost three decades. The breadth and ambition of the reform agenda laid out by the BJP and the electorate’s overwhelming support have raised the hope that India’s democracy, long perceived as a tax on development, now has the potential to become a dividend. Two years later significant progress has clearly been made: Economic growth, which had fallen to as low as [4.5%], has now recovered to [7.5%], inflation has been contained by a combination of government and monetary policy, the government has embarked on a path of impressive fiscal consolidation, and the investment climate in India has gradually improved. When measured across the full spectrum of goals the government had set for itself however, reform progress has been somewhat uneven. While there are officially three years left on the BJP’s term in office, the political realities of major state elections in 2017 and general elections in 2019 mean that the next twelve months will be critical for the government to push pending and further deepen successful reforms.

 

Key Initiatives Launched by the NDA Government

Given the state of the country it inherited after 10 years of Congress rule, it was clear that the Modi government would have its hands full in terms of urgent reforms and actions. Simply tallying the sheer number of initiatives during past 24 months points to both the government’s tenacity and activity across a wide range of issues. The list below captures the major reforms enacted by the BJP since assuming power in May 2014:

 

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Government Progress Across Key Reform Areas

From the list above it is clear, that the rate of governance in the country has significantly accelerated under the NDA over the last two years, with the initiatives announced across a wide range of areas, and expected to target a diverse demographic. When evaluating the government’s overall performance over the last two years, it is useful to take a step back and weigh the impact of these initiatives against the key policy areas that the NDA needed to address when it assumed power.

 

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Key Conclusions: A Reform Manifesto for the Next 18 Months

Mr Modi has been welcomed by his electorate and by the international community as a man who is serious about bringing India onto the world stage as a major economic and political force. It is clear that Mr Modi has first created this opportunity and then taken it seriously. Supported by rapidly improving macro-economic fundamentals and an economic and political environment that is favourable relative to most emerging market economies, India has a unique window of opportunity to transform its economy over the next decade. Doing so will require the NDA government to build on the reform progress that it has made over the last two years, by maintaining momentum in areas where it has already met with success, and combining shrewd political maneuvering with wins in upcoming state elections in order to get more controversial “big-bang” reforms passed. For the Modi government to maintain India’s positive momentum, the next wave of reforms will need to focus on the following key goals:

As highlighted earlier, the NDA has a 12-18 month window to complete what it set out to do in 2014. Despite the government’s many achievements to date, it will need to accelerate reforms and deliver more tangible results to an impatient electorate. In the meantime, the fractured opposition is beginning to coalesce, although to date no one has yet emerged with a superior vision or even a viable alternative to the government’s proposed agenda. Importantly, Mr. Modi still has the mandate to disprove the widely held notion that far reaching reforms can only be implemented in authoritarian rather than democratic regimes, where pluralism and the need to balance the priorities of wide ranging constituents risks watering down bold reforms. Executing and delivering on the next wave of reforms and securing the country’s continued economic development would comprehensively demonstrate the ability of democracy to underpin growth even in developing countries. In the absence of a scaled and successful democratic case study, many developing countries to date have looked to China and its state driven model as the benchmark to emulate.

Two years into office Mr. Modi appears to have put India onto the path of becoming one of the great turnaround stories of the decade. He has also set India on an economic and strategic path to become one of the major powers of the 21st century. Having changed India’s overall direction, the next phase of reforms will be critical in shaping the trajectory of the country in the years to come. Timing is as always the critical question. The expectations of Mr. Modi are high, perhaps too high. The challenge is of course to accelerate India’s development so that like China a decade earlier, the country achieves a new level from which to grow further. If this takes too much time, the development of India may well be pushed out into a less certain geopolitical future. The BJP has demonstrated its commitment to reforms and its ability to execute an ambitious agenda. It is time for the government to take this commitment to the next level if it is to succeed.

 

 

India | Narendra Modi | Economy | Reforms | Elections | Foreign Capital | Taxation | Infrastructure | Financial Inclusion | Manufacturing

2 Source: GPC analysis, calculate based on the difference between India’s savings rate and investment rate required to grow at 8% p.a.
3 Source: Deloitte Research