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New Indian P.M. Modi’s mandate for growth

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Published : 2014-05-18 20:35
Updated : 2014-05-18 20:35

WASHINGTON, DC ― In an impressive exercise in democracy, 800 million eligible voters participated in India’s 16th general election. The new prime minister will be Narendra Modi of the conservative Bharatiya Janata Party, who presided over rapid economic growth in his 13 years as chief minister of the state of Gujarat, on India’s northwest coast. Modi won because most Indians believe that he can deliver more rapid growth in the country as a whole.

The election once again demonstrated how different in political terms India is from its giant neighbor, autocratic China. Now, however, the new government must try to match the superior economic progress that China has achieved over the last three decades. To do so, it will have to foster, in a different political context, two key ingredients of China’s economic success.

The first ingredient is a robust industrial sector composed of manufacturing industries that use unskilled labor, which would offer a route out of poverty for India’s hundreds of millions of rural laborers and their families. It is the route that China, and other countries before it, has taken. In India, by contrast, the underdevelopment of the industrial sector has kept the country from realizing its full economic potential.

The second ingredient is the infrastructure that all economic growth requires: roads, bridges, ports, and schools, as well as reliable supplies of electricity and clean water. Poor infrastructure constrains the industry that India does have. Factories need reliable supplies of power to operate effectively, good roads and railways to source inputs and distribute products, and, if they are to export those products, ports for cargo ships and airports for high-value items and business travel. China has these things in abundance. India does not.

Power outages are routine in India, nearly half the country’s households lack any electricity at all, and modern highways are scarce. While a trucker in the United States can haul a load a thousand miles in about 20 hours, in India the equivalent trip takes 4-5 days.

The underlying cause of these two shortcomings is one of the fundamental features of Indian democracy, and indeed of all democracies: the power of minorities. In democracies, people are free to organize themselves, and often do so on the basis of common economic interests. Such groups work politically to bring benefits to their members, but the benefits can come at the expense of the general welfare ― and in India they have blocked the development of low-skilled industries and high-quality infrastructure.

While India abounds in workers with low (or no) skills, laws governing employment make it all but impossible for large firms to fire workers, discouraging them from hiring in the first place. The most efficient companies tend to avoid precisely the industries that could, if established on a large scale, lift millions of Indians out of poverty. Similarly, laws restricting the use of land make it difficult to build facilities such as factories and hotels, which could employ large numbers of people.

It is a particular kind of interest group ― trade unions ― that promotes and defends the laws that discourage large firms from entering industries that employ unskilled workers. While these laws benefit union members, who make up a very small fraction of the total workforce, they penalize India as a whole. Other interest groups obstruct the growth of employment-creating businesses. Local protesters, for example, sometimes prevent the use of land for industrial and other commercial purposes.

Political minorities also inhibit the construction of infrastructure and the development of the educational system that India needs by using the democratic process to divert resources to themselves, which then cannot be used to build roads or pay teachers. Subsidies of various kinds, all of them legislative achievements of interest groups, account for fully 2.4 percent of the country’s GDP.

The Indian bureaucracy itself is a large, powerful, and voracious interest group. Its salaries consume resources that would be better devoted to more productive uses. Special-interest spending leads to budget deficits, while the borrowing needed to finance these deficits drains yet more money from infrastructure and education.

Modi’s new government cannot ― indeed, must not ― abolish the democratic rules that permit minorities to flourish. With its various ethnic groups, religions, castes, and 30 languages used by more than a million native speakers each (and another 105 spoken by at least 10,000 people), India is more culturally diverse than the entire European Union ― but with twice as many people. Without the emphasis on compromise, peaceful dispute resolution, and minority rights inherent to democracy, a united India could not exist.

So Modi’s challenge is to overcome the obstacles to growth-promoting polices using democratic methods. Here, the election has brought good news: the growing strength of India’s growing middle class, a potent ally in the cause of pursuing the needed economic reforms.

That middle class consists of propertied, salaried people, many of them young, who see government as an impersonal enforcer of the law and a neutral arbiter of disputes, rather than as a source of funds and favors. The votes of such people helped Modi win the election. His success in office will depend on how well he can harness the power of the middle class to overcome the political obstacles to the economic growth that its members demand.

By Michael Mandelbaum

Michael Mandelbaum is the author of “The Road to Global Prosperity.” ― Ed.

(Project Syndicate)

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