The Promise of Modinomics

How the New Prime Minister Can Bring Back Growth

A construction site in New Delhi, November 20, 2013.
A construction site in New Delhi, November 20, 2013. (Anindito Mukherjee / Courtesy Reuters)

For the first time in India’s modern history, a non–Congress Party outsider with no prior involvement in running the central government has won an absolute majority in the parliament. But as the euphoria associated with Narendra Modi’s extraordinary election gives way to the duties of the office, the new prime minister must turn to the hard work of delivering the economic promises he made during the campaign. For Modi, that will raise three key questions: Is sustained rapid growth, which is essential for his development and employment plans, even feasible? If it is, what reforms should the government undertake now and in the longer run to achieve it? And what obstacles will he face in carrying out these reforms?

WHAT AILS INDIA?

Until the 2012 fiscal year, the Indian economy had grown at eight percent per year for nearly a decade. That track record busted apart the myth that democracy hinders economic growth -- a common conclusion among many looking at the economic growth of authoritarian China, Singapore, Taiwan, and (in an earlier age) South Korea. Although policy mistakes have resulted in a sharp decline in India’s growth rate to below five percent in the last two fiscal years, sustained policy reform could bring the country near-double-digit growth over the next two decades.

There are three reasons for this. First, throughout the last decade, India’s national savings rate has been consistently at 30 percent of GDP or higher. Those savings guarantee that India has plenty of investible resources to grow the stock of capital, an important ingredient in growth. Second, demographically, India is young, and it is predicted to become even younger, with a healthy growth in population. It will not, therefore, face the labor shortages that have already hit many other economies, including China. In fact, the working population will rise as a proportion of the total population, which, in turn, could lead to a further increase in the savings rate. Finally, with a per-capita income of around only $1,500 per year, India still has vast room to catch up. It remains very far from the global productivity frontier and can grow rapidly as it races toward it.

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