An entrepreneur who says business is in his blood, Ajay Gandhi, 61, does not think much of India’s political establishment. He blames it for byzantine regulations and an intrusive bureaucracy that leave private enterprises facing what he says are “hurdles unimaginable in any [other] part of the world”.

The Hyderabad-based accountant’s disillusionment is all the deeper because he thought India was on the cusp of change in May 2014, when Narendra Modi swept to power — backed by a business community fed up with the policy paralysis of the previous Congress-led administration. The premier had a reputation — built while chief minister of Gujarat — for creating a welcoming climate for private investment. His overwhelming national mandate raised hopes for a string of market-friendly reforms.

“He is identified closely with the trading and business community — they are his strongest supporters,” says Mr Gandhi, who employs around 270 people in his accountancy and software companies. “They are not from a leftist ideology . . . I thought they would understand the pain areas [for] business and address them.”

After four turbulent years Mr Gandhi feels let down. India rose 30 points last year on the World Bank’s Ease of Doing Business report to rank 100 out of 190 countries. Movement of goods between states has become easier and faster. Yet growth and reform plans have both fallen short of expectations and Mr Gandhi says the business climate feels little changed.

Indian economy chart

“I was proven wrong,” he says. “There are 1,000 irritants that every business faces that you can see only at the ground level. But they [Modi’s government] don’t have an ear for that, and they don’t have an eye for that. They are only looking at headlines.”

Debate over Mr Modi’s economic record promises to intensify as the prime minister — who rode to power on promises of more jobs and opportunity — bids for a second term in national elections now less than 12 months away. Not long ago, the charismatic leader looked set to romp to an easy victory against a weak and fragmented opposition. But with opponents banding together to try to halt Mr Modi’s Hindu nationalist Bharatiya Janata party, India now appears headed for a fiercely competitive electoral contest.

What remains unclear is whether his economic record will help or hinder his prospects. India is recovering from the twin shocks of his draconian cash ban and a difficult transition to a new tax system. Now just as it is regaining some lost momentum, the economy is facing a fresh threat from global turbulence.

“It’s going to be a very, very difficult and challenging election,” says Vivek Dehejia, a senior fellow at Mumbai’s IDFC Institute, a think-tank. “[Mr] Modi himself set very high expectations. Voters are going to ask themselves ‘has he delivered?’ on those promises.”

In the past four years, Narendra Modi's administration has invested in infrastructure and social welfare schemes © AFP

The question might seem odd to outsiders. India is the fastest-growing large economy in the world with gross domestic product rising 7.7 per cent in the first quarter of 2018, something the BJP government touts as evidence of its success.

In the past four years, the administration has pushed through a new bankruptcy law, overhauled the previously convoluted tax regime and strengthened its monetary-policy framework. It has invested in roads and railways and tried to make social welfare schemes more efficient. Government supporters say these efforts have put India on course for stable, accelerated growth.

“We undertook the structural reforms that have set the stage for sustained high growth in the future so that we can grow for decades without boom-bust cycles,” says Jayant Sinha, the former deputy finance minister, who led the now abandoned effort to privatise state carrier Air India . “There is no other government in the last four years anywhere that has attempted a reform agenda that is as sweeping, [or] impactful, as India’s.”

Indian economy chart

But many Indians, including Mr Sinha’s father, an 80-year-old BJP veteran, see the past four years as a wasted opportunity, when Mr Modi could have done far more to unshackle the country’s economic potential.

Just two years ago, Arvind Subramanian, the government’s chief economic adviser, bullishly forecast that India was poised for GDP growth of between 8 and 10 per cent. That is the range, most economists agree, needed to generate sufficient jobs for its youthful population, and for it to reach upper-middle income status in the coming decades.

But instead of reforming India’s highly regulated labour and land markets — or privatising inefficient state enterprises, time and energy was diverted to Mr Modi’s fanciful cash ban, when 86 per cent of banknotes were abruptly cancelled in a drive to eradicate black money. Critics argue the administration was also slow to get to grips with the severity of India’s bad debt crisis, a major drag on growth.

Arvind Subramanian, the chief economic adviser, bullishly forecast that India was poised for GDP growth of between 8 and 10 per cent © AFP

Now, the IMF and Moody’s, the rating agency, are both forecasting that India will grow between 7 per cent and 8 per cent this year and next. That is healthy by global standards but far short of the double-digit growth needed over the coming years for New Delhi to lift its per capita income — just $1,709 last year according to the World Bank — closer to China’s $8,123.

“This government — judging by the promises that it made to the people of bringing good days for everyone — has not delivered,” says Yashwant Sinha, Jayant’s father, who was finance minister in a previous BJP government, but who quit the ruling party in April.

“We let 2014 go by. We let 2015 go by. In 2016, we came with the hammer blow of demonetisation and the hammer of a botched goods-and-services tax. Now we are looking at the tepid growth rate of a little over 7 per cent.”

TN Ninan, chairman of the Business Standard newspaper, credits Mr Modi with injecting dynamism into an inert governmental apparatus. But he says the efforts have not improved economic competitiveness: India’s labour-intensive exports have been flat for three years, despite factory wage levels that are half those in China. “At this level of per capita income, growing 7 per cent is not a super-impressive thing,” he says. “If you were doing something well, you should be growing at 9 or 10 per cent.”

Indian economy chart

Now a more volatile global economic climate with rising oil prices, threats of trade wars and financial market instability has exposed India’s macroeconomic vulnerabilities, particularly its fragile public finances and widening current account deficit. Since 2014, the combined fiscal deficit of India’s central and state governments has remained above 6 per cent, as efforts at fiscal consolidation were countered by expansionary spending at the state level.

According to HSBC, even India’s strong first-quarter growth was “lifted by the hand of government”, with a surge in public spending compensating for muted private investment. “There has been a massive amount of government spending underlying this economy,” says Jahangir Aziz, head of emerging markets research at JPMorgan. “But the fiscal deficit is widening and there is no spare firepower within fiscal or monetary policy to shield the economy.”

Reflecting the new skittishness, foreign portfolio investors withdrew $6.7bn from India’s markets between April 1 and June 4, part of a growing shift away from emerging markets back towards the US. Bond yields have risen from 6.2 per cent in November 2016 to 7.8 per cent last week. “Things have become much more volatile and uncertain,” Mr Aziz says.

Adi Godrej, chairman of the eponymous consumer goods group: 'In India, if you do too much, you destabilise things' © AFP

Mr Modi came to power with the first single-party majority of any Indian government in 30 years. Given this strong mandate and his freedom from coalition partners, many hoped for bold measures. “He could have done anything he wanted, no one was asking him a question,” Mr Gandhi says.

But the premier had little appetite for reforms that could erode his popularity. An initial attempt to revise India’s controversial 2013 land acquisition law, which businesses complain makes it too expensive to obtain land for industry, was abandoned after an outcry from farmers.

Afterwards, hopes faded for an overhaul of labour laws that make it nearly impossible for large companies to lay off or fire employees — rules that economists say have deterred job creation and large-scale manufacturing. Privatisation has made little progress.

Instead, the administration focused on selling India as an appealing destination for manufacturing investment, with its “ Make in India ” campaign and a drive to improve the country’s ranking in the ease of doing business index. “They retreated into trying to be good managers and pushing technocratic, non-controversial reforms that wouldn’t cause political blowback,” the IDFC’s Mr Dehejia says.

Indian economy chart

India attracted $40bn in FDI in 2017 according to the UN, but as a percentage of GDP that is still lower than at its peak a decade ago, while job growth is sluggish. Meanwhile piles of bad debt in state banks were allowed to fester. It took two years for the administration to push through the bankruptcy law, then another year for the Reserve Bank of India to order 12 large defaulters — accounting for 25 per cent of all bad debt — into court.

Bad loans are now believed to have peaked, but the clean-up will take years. Eleven distressed state banks have had curbs placed on their lending while Moody’s has warned a $32bn recapitalisation plan announced last year is “insufficient to support credit growth”.

“The government took three years to verify whether the bad debts were truly a problem or whether it was just being amplified by analysts and rating agencies,” says Mr Aziz. “They are doing the right thing now, but they are doing [it]much later than they should have.”

India investment map

The boldest move of the Modi tenure so far is also perhaps its oddest: the November 2016 cash ban. With the vast informal economy severely disrupted, jobs lost and growth hit, Indians still debate whether the benefits outweighed the painful costs.

Industrialist Adi Godrej, however, is in no doubt: it was a poor economic choice, coming just ahead of an important but disruptive reform intended to force more businesses to pay tax.

“In India, there are a lot of suggestions on reform, but there’s a hazard that if you do too much, you destabilise things,” says Mr Godrej, chairman of the eponymous consumer goods group. “Although there was a large black economy, demonetisation could have been avoided. The GST reform was going to do most of the things that demonetisation was supposed to do.”

India in numbers



Increase in GDP in Q1 2018, lower than earlier bullish forecasts


In FDI attracted by India in 2017, as a percentage of GDP less than in 2007


India’s per capita income last year, well short of China’s at $8,123

Political calculations still influence economic decisions. Ahead of last year’s Gujarat state elections, Mr Modi yielded to complaints from small businesses that the new GST was too onerous for them to comply with, and rolled back many requirements for companies with revenues of less than $300,000.

Saurabh Mukherjea, chief executive of Ambit Capital, estimates that with those moves, New Delhi essentially gave small businesses a tax cut equivalent to around 1 per cent of GDP, a giveaway that it could ill-afford. “Under duress, they are giving up all the gains of modernisation and reforms,” he says.

But Rajiv Kumar, vice-chairman of government think-tank NITI Aayog, insists Mr Modi’s actions will pay off.

“Having done demonetisation and GST, we have made it much tougher for ourselves to get the investment cycle back up,” he says. “But the whole host of structural reforms we have done are going to be game-changers. They will produce higher growth going forward. By 2022, we should be at 9 per cent [GDP growth] and above.”

This story has been amended to note that Arvind Subramanian is still serving as the government’s chief economic adviser

Price swings: Oil offers slicker indicator of economic strength

In assessing Narendra Modi’s record, both supporters and detractors tend to correlate the ups and downs of India’s growth with the prime minister’s actions. But economists say this overlooks a more critical factor: the impact of global oil price swings on India’s economy.

When Mr Modi took office in May 2014, India, which imports 80 per cent of its fuel, was paying $108 a barrel for crude. But in the following six months, prices halved, ending 2014 at $57 a barrel. The sharp drop, which continued through 2015, alleviated the pressure on New Delhi’s public finances, eased inflationary stress and flattered India’s gross domestic product, improvements for which Mr Modi happily took credit.

“Tell me, hasn’t the petrol price come down? Are you not saving money,” he asked supporters in February 2015. “People say that all this has happened because Narendra Modi is lucky. If my luck can benefit the country, why do you need to elect an unlucky government?”

In 2016, New Delhi began levying new excise duties on petrol and diesel. Some of these revenues funded infrastructure investment, while the rest bolstered fragile public finances. But when oil prices began climbing again in 2016, India’s GDP growth softened, even as the global economy gained momentum.

India’s vulnerability was highlighted in May, when oil prices briefly touched $80 a barrel. It prompted a clamour for New Delhi to cut excise duties, which account for 17 per cent of its total revenues.

“India’s economy has been driven almost entirely by luck,” says Jahangir Aziz, head of emerging markets economics at JPMorgan. “When oil prices came down, the economy looked great. When oil prices started to go back up, it took its toll.”

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