This week, India, the world’s largest democracy with 900 million eligible voters, has kicked off elections for the constitution of its 17th parliament (called “Lok Sabha”). The elections will run until the 19th of May with counting taking place on the 23rd. Narendra Modi, India’s incumbent prime minister, hopes for a second term. Should his duration as prime minister be extended?

When Narendra Modi was first elected prime minister in May 2014, he was hailed as an economic reformer who would instill growth in the Indian economy (e.g. by killing the infamous license raj). Modi’s reputation as a reformer was affirmed during his time as chief minister of Gujarat, home state of the renowned Tata Nano, which experienced rapid growth during his time in office. Modi’s recipe for Gujarat was to invest in infrastructure (specifically roads and electricity grid) and to cut red tape and corruption. After winning a majority in parliament in 2014, Modi did oversee monumental reforms in his first term as prime minister of India. For example, he introduced a new bankruptcy law and an unified goods & sales tax (GST). He also recapitalized bankrupt public banks, replaced some distorting price subsidies by direct cash transfers, eased restrictions on foreign direct investments in different sectors and liberalized financial markets by raising caps on foreign holdings of domestic bonds and equities, even though foreign access is still very much restricted. And although India largely missed out on the globalization of manufacturing, it has a leading and competitive position in the exports of services (software development, client support, etc.). The reforms Modi implemented are not entirely his own as the core of these reforms already were designed by his predecessor, Manmohan Singh. In any case, most of the reforms are far from perfect. For example, the new GST, though a step in the right direction, is still rather complicated and burdensome. Over his term, Modi oversaw average annual growth of 7.3%. Although this sounds impressive, growth under Mr. Singh, was actually quite similar (8.1% in his first term, starting in 2004, and 7.2% in his second term). Unfortunately, a GDP growth rate of 7% is not enough in the context of a growing and young population. Every year (at least, for some time to come), 10 to 12 million people enter the workforce. Modi hasn’t been able to create enough jobs for these people, resulting in an unemployment rate of an estimated 6.1% in 2017, triple the rate 5 years earlier. And this rate most likely paints a too rosy picture as people are considered employed unless they don’t have work for the majority of the year.

Holy cow, a Nano…

Modi has made some mistakes as well during his term in office. His policy to cancel high-value banknotes to cut back the black economy hurt small businesses and farmers, who rely on cash payments, although in a more kind assessment it also may help to formalize the economy and thereby broadening the tax base. More serious, for foreign investors, is the run-in with the country’s central bank, Reserve Bank of India (RBI). The ministry of finance pressed the RBI to pay dividends out of its reserves and to go soft on weak public banks, relaxing strict lending rules imposed by the RBI. The government also urged to lower interest rates. After the governor of the RBI, Urjit Patel, stood down in face of these pressures, his replacement duly delivered the goodies, thereby damaging investors’ trust in the (independence of the) institution.

India has little room for either fiscal or monetary easing as the public deficit (projected at -6.9% for 2019, according to IMF) and debt to GDP (69%) remain high (the IMF believes that public debt should be whittled down to 60% of GDP). The current account is in deficit (-2.5%; driven by oil imports), whereas India has insufficient FDI to cover this deficit, making it vulnerable to international capital flows. Structural reforms, therefore, are the only way to generate sustainable growth and to create more jobs. There seems to be a good opportunity to grow India’s manufacturing base as some Western countries, notably the U.S., want to become less dependent on China whilst China’s labour costs are rising, thereby becoming less competitive. Liberalizing labour markets (making them less rigid and restrictive and, importantly, encourage female participation), improving training (and, thereby, productivity), completing the clean-up of public bank balance sheets (and improving governance at these banks and/or privatizing them) and spurring land reforms to facilitate (infra) investments should be the key ingredients of the reform program, in our view.

Modi’s main opposition comes from Rahul Gandhi, leader of the Congress party. Being short of a catchy vision, Gandhi wielded a proven tool of the trade: “showing the money”. He promises a minimum income guarantee of INR 72,000 (about US$ 1,000) per annum for the poorest 20% of households in India if they vote for him. Modi’s Bharatiya Janata Party (BJP) did something similar after a string of state election defeats in December of last year when the party promised to pay INR 6,000 per annum to farmers with plots smaller than two hectares. However, Indians know that promises are not always made good upon, so it is yet unclear whether Gandhi’s altruism (using the state’s coffers, that is) will pay off. To hedge his chances, the uncharismatic Gandhi brought in his telegenic sister Priyanka to accompany him on the campaign trail.

Modi’s engine of growth…?

Given that the economy has not been Modi’s forte in the last 5 years (at least, not in the eyes of his voter base), he is resorting to Hindu nationalism. Even though Hindus make up 80% of India’s population, they often feel and act like a piteous minority. Venting frustrations or anger against Muslims seems to be a national pastime. Mr. Modi, himself a RSS firebrand (RSS is a kind of paramilitary volunteer organization with a Hindu nationalist aim and is aligned to BJP), was presented with a gift from heaven when jihadists operating from Pakistan killed 40 Indian paramilitary police in a suicide attack in the state of Jammu & Kashmir. Modi reacted forcefully and ordered airstrikes on Pakistani targets. Not many of these targets allegedly were actually hit but since Modi has “cowed” most of the press into publishing his version of the truth, he was able to depict his strikes as being highly successful. Pakistan’s prime minister, Imran Khan, was smart enough not to pick a fight and released a captured Indian pilot days after the airstrikes.

Despite the rise in unemployment as well as the economic hardship felt by farmers (suicides being at a record high) and thanks to sabre-rattling against Pakistan, Mr. Modi probably will win the elections, though BJP may not retain its majority in parliament. We hope he finally will live up to his reputation and implement the much-needed structural reforms to stimulate growth and bring prosperity (or achche din, good times, in Modi’s words) to a larger contingent of Indians. We still believe he has a better chance at it than Rahul Gandhi, whose only policy seems to be to hand out money to the poor. Whilst we don’t like his streak of Hindu nationalism, extending the duration of Modi’s term by 5 more years may be a good thing…