The Transformation of Diplomacy
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When India’s prime minister, Narendra Modi, ran for the top job five years ago, he campaigned as the country’s best hope for economic reform. The government he ran against, led by the Congress party, had mismanaged the economy, fallen into paralysis, and faced one major corruption scandal after another. Modi convinced voters that he was the answer to their economic woes. He spouted slogans like “minimum government, maximum governance” and promised that the “government has no business to be in business.” On the strength of such promises, he led his Bharatiya Janata Party (BJP) to a sweeping general election victory in 2014 and followed that with a landslide reelection in 2019.
Modi has enjoyed remarkable political success in that time. Public opinion surveys show that he is as popular today as he was five years ago. He has created the most powerful, centralized prime ministerial office since that of Prime Minister Indira Gandhi 35 years ago, concentrating many cabinet functions in the hands of close aides. Modi’s party has secured a second straight parliamentary majority and radically expanded its grip on India’s states: today, two-thirds of all state governments rest with the BJP or its allies. If current projections hold, the BJP and its allies could occupy a majority in India’s upper house of parliament—which must confirm major legislation passed in the lower house—by the end of next year.
The dominance of the BJP, however, has surprisingly little do with its economic track record. Modi has succeeded politically despite—not because of—the economy, which is in the midst of a protracted downturn that began on his watch. For his second term, the prime minister has doubled down on the grand economic promises he made in his 2014 campaign and gone still further, setting a goal of turning India into a $5 trillion economy by 2024. But his government has struggled to articulate just how it will bring about India’s economic renewal. While the prime minister has yet to pay a serious political price for this failure, he cannot count on the indefinite forbearance of Indian voters.
The Modi government made some important economic reforms in its first term. Following nearly two decades of debate, New Delhi adopted a sweeping indirect tax known as the Goods and Services Tax (GST), which economists liken to India signing a free trade agreement with itself. For decades, thanks to a patchwork of state-specific tax regimes and border levies, firms in India often had an easier time exporting goods and services abroad than exchanging them across state borders. The GST, at least in theory, creates uniformity across state lines. Moreover, the government has pushed through an ambitious bankruptcy code, which is meant to facilitate “creative destruction” by making it easier for loss-making firms to wind down their operations. Despite initial resistance from members of his own political party, Modi persisted with a biometric identification scheme established by his predecessor in order to root out corruption in the delivery of welfare benefits. With that initiative, and by investing in the public provision of private goods like gas connections, toilets, and housing, Modi has gradually overhauled India’s creaky welfare state. Many Indians now feel that the country’s once-maligned bureaucracy, which they have long viewed as a problem, can finally be part of the solution.
But coupled with a global economic slowdown, Modi’s policies have only managed to produce underwhelming growth, encourage little investment, and, according to a recent study, lose jobs at a time when India desperately needs to create jobs for its young workforce. India’s GDP growth has slumped so much over the last five quarters that domestic and international agencies have significantly slashed their economic forecasts. Growth slipped to a six-year low of around five percent between April and June of this year. New private investments have dived to a 16-year low. Even private consumption expenditure, the single engine that previously powered the skittish Indian economy, tanked to a nearly five-year low of 3.1 percent.
The much-anticipated GST actually has coincided with a shortfall in government revenues for at least two reasons. For starters, consumer demand in the economy has plummeted, meaning that there are simply fewer economic transactions to tax. Compounding the situation, however, are problems in the implementation of the new tax regime, which is not at all the “good and simple tax” that Modi touted. These problems include burdensome compliance procedures, a worrying rise in fraudulent tax invoices, and a confusing structure of tax rates.
Despite bold promises, Modi’s policies have only managed to produce underwhelming growth.
Some of the government’s larger economic missteps were sins of omission. The public sector dominates India’s banking system. By failing to trim back its role, the government left conflicts of interest and cases of dodgy governance unchecked. Similarly, the government’s refusal to meaningfully divest itself of state-owned companies has encumbered the budget. For instance, just days ago, the government announced plans to spend $6 billion of public money to try to revive two struggling state-owned telecommunications companies. At a time when India is facing a massive fiscal crunch and needs to cut expenditure on public investment, this plan is misguided.
The Modi government also committed serious sins of commission. Chief among these was “demonetization”— the abrupt invalidation of high-denomination currency notes in an attempt to cleanse the economy of untaxed cash, known as “black money.” By some estimates, the move cut India’s GDP by two percent and cost 1.5 million jobs. India’s reserve bank calculated that demonetization entirely failed in its goal of purging black money from the economy: more than 99 percent of invalidated currency nonetheless found its way into banks. Economists are still assessing the damage inflicted by this radical policy—a difficult task given the scarcity of reliable data from India’s vast informal economy.
However, the faltering economy did little to undermine Modi’s 2019 reelection bid. A military standoff with Pakistan buoyed nationalist fervor, and as a result the BJP actually increased its parliamentary tally—making it the first non-Congress government in India’s post-independence history to win reelection. Millions of Indians saw Modi as decisive, muscular, and incorruptible, embracing his campaign slogan of “Modi hai to mumkin hai” (With Modi, anything is possible). BJP voters seemed to believe him when he reminded them that he could not undo 65 years of lackluster economic performance in one five-year term.
But Indian voters will not suspend their disbelief forever. Modi faces a mounting economic crisis in his second term. The International Monetary Fund recently proclaimed that India’s growth slowdown is “more pronounced” than it had previously anticipated, while the ratings agency Standard and Poor’s foresees a deep, broad-based decline.
The BJP issued a new budget in July 2019, fresh off its electoral win. But the plan not only failed to offer a credible package of policies to counteract the downturn—it actually made matters worse. The budget stoked, rather than soothed, foreign investors’ fears. It instituted new taxes, both on international investments and on startup investors. The government followed up the budget with a bill that stipulated criminal penalties for CEOs who violated a corporate social responsibility law. Over the last three months, in dribs and drabs, the Finance Ministry has systematically rolled back nearly all of these controversial proposals. And the government hurriedly advanced one major announcement: it slashed corporate tax rates to encourage greater investment—a move that it promised in 2015 but never implemented.
The Modi government’s struggles to come to grips with the economy contrast with its decisive and robust actions in other areas. The ruling party has moved with alacrity in executing its Hindu nationalist social-cultural agenda, such as by gutting Kashmir’s semi-autonomy in August and abolishing an Islamic practice of instant divorce in July. The government is even rumored to be working on a bill banning religious conversion, timed for the next session of parliament.
The BJP cannot rely on the same kind internal consensus to propel its economic policies as it does its cultural ones. Modi’s party belongs to a broad constellation of right-wing Hindu nationalist organizations, collectively known as the Sangh Parivar, which includes economic nationalists, libertarians, and everyone in between. What unifies the so-called right in India is not market economics but cultural conservatism. The BJP high command, therefore, must try to reconcile several—often contradictory—economic ideologies.
In setting an economic agenda, the BJP has to be careful not to alienate its Hindu nationalist base.
The opposition Congress party, too, boasts a big economic tent, housing both socialists and free market advocates. But the BJP, unlike the Congress, is very accountable to its grassroots workers—referred to in India as “cadres.” The BJP is one of the few nationwide, cadre-based political outfits in India—and many of its rank-and-file members are highly suspicious of liberalizing economic reform. In setting its economic agenda, the BJP has to be careful not to alienate the Hindu nationalist base that has powered its electoral triumphs.
In early October, one of BJP’s affiliated grassroots groups announced a ten-day nationwide protest against India’s participation in a proposed free trade agreement with ASEAN member states and affiliates. The grassroots group has regularly lobbied the government to limit foreign trade, curb foreign direct investment, and abandon the privatization of the public sector. Yet the BJP also appeals to many middle-class voters who have enjoyed the fruits of economic liberalization and who nudge the party in a more market-friendly direction. The policy initiatives that emerge, unsurprisingly, have an air of indecision and equivocating.
The Modi government’s recent moves—including the partial rollback of policies that upset business leaders and the introduction of a long-awaited corporate tax cut—signal an acknowledgement that India is in the grips of a severe slowdown. That slump is at least partly of the government’s own making.
For the time being, waging a culture war and appealing to muscular nationalism has inoculated the BJP from its economic troubles. Voters have not punished Modi for poor performance in managing the economy—yet. But the political capital Modi invests in sowing social divisions will eventually serve to undermine economic growth.
Already this October, the BJP’s majority slipped in two states that suffer from rising unemployment and rural distress. Bad economic news fills the papers, from the sales slump that is hampering India’s festival season to the inability of informal laborers to pay back loans. Voters will soon demand that the BJP live up to its promise of delivering incomes, jobs, and economic mobility—especially in a country where the median age is 27 and one million young people enter the labor market each month, only to struggle to find jobs commensurate with their aspirations. Modi knows a thing or two about frustrated aspirations: after all, economic anxiety helped catapult him to power in the first place.