For all the bombast, it is possible to see the still relatively new premiership of Indian leader Narendra Modi as a disappointment. Despite the Prime Minister’s overwhelming General Election victory in 2014, his promises of business-friendly reforms have remained largely unfulfilled.
Crucially, the passing of an all-embracing VAT, known as the Goods and Services Tax (GST), has become the litmus test of the Prime Minister’s reformist credentials. To pass the tax would make India, after millennia, a common market for the first time, one of 1.25bn people. This, in turn, could lead to the next big bang in terms of global economics, freeing India to become a major motor of the planet’s growth, in the way China has become.
Seemingly positively, the GST amounts to the one reform Modi’s BJP Party and the opposition Congress actually agree on. However, the politics of the debate has turned toxic. When Congress was in office, its attempt to introduce the GST was blocked by the BJP. Now, Congress’s forces in the upper house, where the BJP does not command a majority, in turn act as the spoiler. This is a pity, because it is estimated that passage of the GST would add a dramatic full two percentage points per year on average to India’s already formidable GDP growth rate.
It seems Modi politically misplayed his hand. During his first year in office, following on from his thumping victory, the Prime Minister arrogantly ignored the opposition. His political strategy was to believe that the momentum from his electoral triumph would carry the BJP to subsequent victories in state elections, which send delegates to the upper house. However, rather than triumphantly progressing to a majority there, the BJP has been beaten in a number of state elections in key places, most notably Bihar, the third most populous state. A majority in the upper house is going to elude the Prime Minister for the time being. The only hope for his reform plan now is to go cap in hand and compromise with Congress.
But we are quibbling. For all that, India is presently undoubtedly the single most positive economic story on the planet. Buoyed by increased manufacturing output, India’s economy grew by an impressive 7.4 per cent in the third quarter of 2015 at an annualised rate, the fastest growth of any major country in the world. Inflationary pressures have decreased, with price rises running at 4-5 per cent a year.
The dramatic fall in global energy prices has been a boon to the country, as India imports fully 80 per cent of the oil it consumes. As its central bank governor has said, this amounts to a $50bn gift to the Indian economy. And, despite the frustrations over the pivotal GST, the government has – as of November 2015 – announced sweeping liberalisation to the regime regulating foreign investment, including in the retail, banking, and defence sectors.
Moreover, India’s demography is one of its greatest economic assets. Within a generation, it will become the planet’s most populous nation. At that point it is set to be – along with China and the US – one of the world’s three largest economies. Its present population of 1.25bn is similar in size to China’s; but India is much younger, with the median age being only 27. For the next generation, among great economic powers, India will find itself in the most favourable demographic position by far.
I have been a vocal supporter of investment in India since even before the rise of the pro-business Modi. I remember conducting this thought experiment when I landed in Delhi, in the waning days of the government of former Prime Minister Singh. It was characterised by decay, corruption, incompetence, and an inability to act decisively. I thought to myself, “All that is true, and it is still growing at a fantastic 4.5 per cent; what happens when the place has some real leadership?” We are about to find out.