Five Questions: Why the World Is Watching India’s New PM

Narendra Modi was sworn in as India’s new prime minister on Monday, a little over a week after a landslide victory at the polls. The resounding win gives Modi much greater freedom to implement his agenda than any Indian leader in recent years, says international economics fellow Russell Green. What will Modi’s India look like, and how will it affect the U.S.? Green, who spent four years in India as the U.S. Treasury Department’s first financial attaché to that country, explains:

Modi’s Hindu nationalist Bharatiya Janata Party was the first single party to win an outright victory in India in 30 years, sweeping the long-dominant Congress Party from power. Why did the election result in such a dramatic reversal of fortune for the two main parties?

The election was about two main issues. The first reflected the classic U.S. election rubric of “it’s the economy, stupid.” The previous administration had focused on handouts but not on maintaining a business-friendly environment. As a result, economic growth in India has halved. The second major issue was governance — a loaded term in India referring to the quality of public administration, and also to corruption.

Modi ran on his record as the chief administrator of the state of Gujarat, which has had better-than-average economic growth. He had developed a reputation both for facilitating economic growth and for reducing the level of corruption in the state. So his record played very well in contrast to the record of the ruling Congress Party coalition.

Is Modi an economic policy superhero?

We have to be realistic about the ability of any one leader in India, regardless of the size of the mandate or size of the majority in Parliament, to be able to fix some of India’s most vexing problems. Modi is hoping to boost manufacturing activity, which will require a lot of very difficult government measures, including ramping up its infrastructure investment, reforming labor laws, and privatizing a large number of state-owned enterprises. If Modi could achieve any one of these, it would be a major victory for the Indian economy. We’ll have to see how far he can get.

Will India return to double-digit growth?

India is a very young country, meaning that it has a very large number of young adults entering the workforce each year. It needs to create almost a million jobs per month to meet the needs of this population. If India could undertake the right kind of reforms to facilitate growth of manufacturing that leverages its huge resources of low-wage workers, it could see phenomenal growth. But India is not going to return to double-digit growth on the basis of the service sector that propelled it forward in the last decade. The job story is part of why Modi’s reform agenda is so important for the Indian economy — it’s about rapid growth, but it’s also about lifting tens of millions of young adults out of poverty and onto a career path that will help them achieve their aspirations.

What is Hindu nationalism about?

Modi represents the Bharatiya Janata Party (BJP), which is a Hindu nationalist party. Hindu nationalism is inspired by the idea that India should be a country for and about Hindus. This has resulted in some innocuous measures under past BJP administrations — such as the renaming of major cities from Bombay to Mumbai and Madras to Chennai — but has also been associated with some very divisive policies in a country that remains 17 percent Muslim. The ugliest of these events took place when Modi was chief minister of Gujarat, where sectarian riots in 2002 resulted in hundreds of deaths in the Muslim community. One of the few good things that seems to have come out of the riots is that Modi has substantially toned down the Hindu nationalist agenda since then and instead focused on economic policy. At this point, the only policy that appears to be a priority of his administration that appeals to the Hindu nationalist agenda is cleaning up the Ganges river, which arguably deserves to be a top environmental priority for India anyway.

Does Modi’s election matter for the U.S.?

No one in Washington would disagree with the claim that U.S.-India relations have not been sailing smoothly during the Obama administration after major advances in the Bush administration. Unfortunately, Modi himself has few reasons to prioritize relations with the U.S., as it has denied him a visa since 2005 on the grounds of humanitarian concerns related to the riots.

Any change in government presents an opportunity to change the tone of our relationship. The U.S. is in the process of changing its ambassador to India, and there are a number of points on our bilateral agenda that the U.S. could move to help set the right tone. A good relationship with India could help on the margins for U.S. companies gaining access to the Indian economy. But at the end of the day, what will help our firms most would be the same kinds of improvements in the business climate — domestic reforms — that will help domestic Indian firms or other multinational companies.

Where this election matters most for the U.S. is probably in the foreign policy arena. One of the biggest and most positive surprises to come out of this very young administration so far was the appearance of Pakistan’s prime minister at the swearing-in of Modi as prime minister. If India is able to ease tensions with its neighbor, it could bring about a number of follow-on benefits in terms of easing regional tensions and fighting terrorism. India potentially plays an important role vis-à-vis China and the broader U.S.-Asia policy, but the complexities of that dynamic require a much longer explanation than space allows.

Russell A. Green, Ph.D., is the Will Clayton Fellow in International Economics at Rice University’s Baker Institute. Green’s engagement in India primarily focused on financial market development, India’s macroeconomy and illicit finance, but included diverse topics such as cross-border tax evasion and financing global climate change activities.

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