Why India Needs Modi

The country’s leader has fulfilled his economic promises.

Originally appeared in the New York Times.

Exit polls are predicting a significant win for Prime Minister Narendra Modi of India when final results are announced on Thursday. That’s not only good news for Mr. Modi; it’s also good news for his country.

While his bold economic policies generated a blizzard of controversy, I came away from a recent trip to India more optimistic about the prospects for India and its 1.3 billion people. For that, much credit goes to Mr. Modi. Elected in 2014 on a platform of aggressive change, he has delivered on important reforms to modernize India’s hidebound economy.

Perhaps the most important challenge that Mr. Modi had to address was lagging productivity. In part, that’s due to the country’s slowness to urbanize. Mumbai may be wildly overcrowded, but India’s overall urbanization rate is only 34 percent, compared with China’s 59 percent. And it’s also a consequence of poor infrastructure and the estimated 81 percent of Indians who work in the “informal” economy.

At first glance, some of Mr. Modi’s reforms may seem small. He replaced a portion of a complex tax system with a kind of national sales tax. The change is forcing businesses operating in the informal sector to regularize and — this is important — begin to pay taxes. (India’s taxes as a share of the size of the economy are among the lowest in the world.)

He instituted a new bankruptcy code. That may also appear minor, but providing a mechanism for reorganizing insolvent companies speedily is central to increasing private investment, a critical need for India. The list goes on.

To be sure, India’s growth rate, after picking up earlier in Mr. Modi’s tenure, has slowed a bit. But even the International Monetary Fund is optimistic about the prospect of a reacceleration.

Other measures also show promise. In the World Bank’s latest Ease of Doing Business Report, India rose to 77, up from 100 a year earlier, a jump that the bank’s president called “historic and unprecedented.”

The new approach has come with noneconomic improvements, everything from clean government (at least in proximity to Mr. Modi) to clean(er) cities.

Of course, Mr. Modi’s tenure has not been an unvarnished success. Even a sparkling growth rate isn’t enough to lift the standard of living in India close to that of China. Of late, a mini-financial crisis has put a damper on credit growth.

For many, the reforms (and in sectors like agriculture, the lack of them) have been tough. Agricultural employment and wages have fallen.

The tax reforms and failure to modernize labor markets have brought increased joblessness. And “demonetization” — elimination of old currency, a signature Modi initiative — has brought more dislocation than fiscal progress. When India’s rupee fell last year, the country’s reliance on imported oil meant soaring energy costs.

To some degree, Mr. Modi is suffering from a common problem of transformational leaders: unfulfilled lofty expectations.

India will not become China, with its vast investment in infrastructure, its world-class technology companies and its inescapable drive to succeed.

As recently as 1990, the economies of China and India were roughly the same size. Today, India’s gross domestic product per person ($2,000) is a fraction of China’s ($8,800).

Any hope of eclipsing China has vanished. Indeed, a government-sponsored think tank recently acknowledged that India would remain smaller than China even as far out as 2047.

But at least for now, India’s rate of expansion is higher than China’s and for that, Mr. Modi deserves much credit. If India is to maintain that superior performance, it should stay the course with him.

For his part, Mr. Modi should recognize the importance of a less statist approach and pursue with more vigor important initiatives like deregulation and privatization of state-owned companies. A bit more Thatcherism would serve India well.