India's Lost Economic Focus

Mired in domestic social issues such as banning beef or purging universities of 'anti-national elements,' India's government seems to have lost focus on the agenda of economic reform promised by Prime Minister Narendra Modi at the time of his election in May 2014. The second budget of the Modi administration, instead of pushing for big reforms chose to act like its predecessor government by moving left: focusing on agriculture, offering few incentives for foreign investment with few measures that would help resolve the structural fiscal challenges.

Modi rose to power promising "minimum government, maximum governance." His image as a business friendly chief minister and his no-nonsense style of functioning created the aura of a new India: an India that would look to the future, not the past, would move towards an open society not paternalistic control and would focus on economic issues above all else.

Eighteen months later, Modi's Bharatiya Janata Party (BJP) has been unable to legislate any of the key economic reforms it promised to the electorate. An attempt to change the land acquisition process, critical to bolster investment in Indian manufacturing, ended in a fiasco because of opposition from both the ruling party's own members and the opposition in parliament. The government ultimately withdrew the bill.

Absence of a BJP majority in the Upper House of parliament led to failure of attempts at labor reforms at the federal level. These too are critical if manufacturing is to expand in India. Now chief ministers in BJP-ruled states have been asked to experiment with labor reform, hoping for a best practices model that might take years to unfold.

Another Modi priority should have been ending the practice of retrospective taxation that deterred even Indian corporations from increasing their investments, dating back to the time of the previous Congress-led United Progressive Alliance (UPA) government. While on the campaign trail, Modi termed the practice of imposing tax on past earnings at new rates as a 'breach of faith' and promised early end to such taxation. Not only is the taxation still on the rule books but recently Vodafone, the British multinational telecommunications firm, was recently threatened with seizure of assets if it did not pay $2 billion in taxes imposed retroactively.

The Modi government appears so mired in dealing with religious, cultural and social issues to be able to afford priority to economic ones. A few months after the May 2014 elections there was a rise in attacks on minorities, especially Muslims. Hindu chauvinist organizations close to the ruling party asserted they would seek to convert Muslims back to Hinduism, arguing that even those whose ancestors had converted centuries ago should return to the fold of their ancient faith. The program was called 'ghar wapsi' ('returning home').

These attacks on religious minorities were accompanied by the demand for a ban on cow slaughter and eating of beef, forbidden among some Hindus out of respect for the cow. Numerous incidents of mob-enforced rule led to October 2015 when in a village outside of Delhi, an elderly Muslim gentleman was lynched to death by a mob that wrongly accused the Muslim family of eating beef. They were, in fact, eating mutton.

Focus on issues like "cow protection" and "ghar wapsi" instead of economy resulted in the BJP's defeat in key state elections in the northern state of Bihar. Success in these elections would have helped the BJP build its strength in the upper house of the Indian parliament and thus push through economic reforms. Instead of the election campaign being focused on the need for economic growth and development, social issues dominated the BJP's campaign, leading to its loss.

In early February 2016 the Modi government held a weeklong event to promote its flagship program "Make in India": an attempt to convince both Indian and foreign corporates to bring state of the art technology and skills to India and manufacture in this country. The attention of both Indians and the world was diverted by student protests at Jawaharlal Nehru University (JNU), a bastion of left wing academia and student activism. The protests were spurred by the controversial arrest of the student union president on grounds of the colonial era law of sedition.

These protests have turned key segments of the Indian intelligentsia against the government and hurt India's image internationally. They have also played into the hands of left-wing protestors, making it difficult to push economic reforms- like the passage of the much needed Goods and Services Tax (GST) bill - in the upcoming critical budget session of the parliament.

The recent budget demonstrates that the message the government has learned is not that it needs to push through critical reforms that would boost India's economy and lead it down the path of faster growth. Instead it appears the Modi government believes it will benefit by going back to the policies of its predecessor Congress-led government, where redistribution was the focus, not growth and development.

India has demographic, economic and strategic potential but the Modi government appears to be losing this unique opportunity by embroiling itself in issues of identity politics. As the world's third largest economy on purchasing power parity (PPP) basis, India has been seen as the potential competitor to China for global leadership. In February 2016, India overtook China as the fastest growing economy in the world but that reflected China's problems more than India's achievements. With a GDP of USD $8.7 trillion (PPP basis), a labor force of half a billion and a middle class of over 250 million people, India's economy is predicted to grow at over 7 percent over the next two years. It can grow at double-digit rates if it can repair and rebuild its British era rail, road, and air transport and port infrastructure, improve accessibility to basic amenities like electricity and water and untangle the Gordian knot of its complicated bureaucratic rules and regulations.

That opportunity would remain unrealized if Indians continue to fight over unresolvable religious issues or ethnic and caste divisions. Instead of trying to garner votes by appealing to the divisions among Indians, Modi should keep his promise of building India to its full potential.