India in 2024 – Modi once more but bolder reforms wanted

Official results are not out until 23 May, but Modi and his incumbent coalition government are set to retain power as suggested by a few exit polls after India concluded the final phase of its six-week ballots. As the election is viewed as a referendum on Modi’s leadership in the past five years, the victory of Modi indicates that the public is willing to give him a second-term to carry on his unfinished tasks. Even with the recent economic slowdown, India still boasts Asia’s fastest growing economy in 2018. There is no doubt that the slowdown of India economy casts shadow on Modi’s second term and whether this time it will be different, as in whether Modi will finally push through key economic promises to provide India with the much-needed jobs and infrastructure. India’s absorptive capacity for the country’s growing supply of labor remains weak and so does its ability to build the necessary infrastructure. This remains a key problem as its working population is expected to expand rapidly - India needs to create at least 11 million jobs per year in the next decade. Moreover, India’s investment in infrastructure has stagnated in less than 10% of GDP. We assessed Modi’s pledges on three key factors of production: labor, capital and productivity. Whether it is demonetization, GST or FDI liberalization, most progress is made on capital while it remains very limited on labor reform or generally increase i n total factor productivity. It seems clear that the reform agenda has not generated enough jobs to absorb India’s excess labor. If the progress of the Modi government, albeit positive, is not enough to help India escape the low middle-income trap, then what is required? India needs more inward FDI into the manufacturing sector as well as a higher savings rate. We use China in the early 2000s as an example of what is needed for India. India currently attracts only 0.6% of GDP in manufacturing FDI versus China’s 2.5% of its own GDP in the early 2000s. In other words, manufacturing FDI was 9.5% of fixed asset investment (FAI) for China versus India’s 2% of FAI. This is particularly surprising since China’s overall FAI is larger than that of India as a percentage of GDP. In addition to requiring about 2% of GDP more in FDI, India needs to also increase its savings rate to fund the much-needed infrastructure development. Our analysis of Modi progress shows that he has made some progress in attracting capital and reforming the banking sector. Still, much of the work is left unfinished as India still does not attract enough FDI in manufacturing to absorb its labor force. Moreover, India needs to also increase its savings rate to boost infrastructure investment. Both require Modi to deliver much bolder reforms in his second term that is certainly a strong leap from where it is today. That said, India is the only country comparable to that of China and any significant progress in India will be globally consequential.