Sourajit Aiyer, For The Straits Times

Next Indian PM's economic challenge

A man working in an electrical appliances manufacturing unit on the outskirts of Jammu in north-western India. The country's GDP growth is the lowest in a decade, industrial growth has frozen and job growth has dried up.
A man working in an electrical appliances manufacturing unit on the outskirts of Jammu in north-western India. The country's GDP growth is the lowest in a decade, industrial growth has frozen and job growth has dried up.PHOTO: REUTERS

In the second half of May, after the conclusion of a staggered national election, India will have a new prime minister.

The leading candidates for the job are Mr Rahul Gandhi of the Congress-led United Progressive Alliance (UPA), Mr Narendra Modi of the National Democratic Alliance (NDA) which is led by the Bharatiya Janata Party, and Mr Arvind Kejriwal of the Aam Aadmi Party.

The new prime minister will inherit an economy in crisis. India's gross domestic product (GDP) growth is the lowest in a decade, inflation is high, industrial growth has frozen and job growth has dried up. Meanwhile, infrastructure development has slowed and the fiscal deficit hangs like Damocles' Sword.

So, what can one expect the economic agenda of the next prime minister to be? One might roughly describe Mr Gandhi's approach as social welfare-led development.

This contrasts with commerce-led development for Mr Modi and clean politics-led development of Mr Kejriwal.

GDP growth has now dipped to a dismal 5 per cent. Worse, it has not been inclusive. Large swathes of the population have been left out of India's rather skewed growth story. Poverty rankles deep, economic distress is a reason for migration and the socio-economic imbalance gives rise to crime.

Mr Gandhi promises a return to 8 per cent growth. But popular expectations that he can deliver are coloured by the dismal record of the UPA since 2010, in which policy paralysis and corruption were major factors in the economic slowdown.

Mr Kejriwal wants to increase the participation of the private sector. But the private sector has gone into a cocoon regarding fresh investments, leaving the government to take the initiative. Unfortunately, India's fiscal situation is weak and the ability to increase public expenditure is limited.

This is a challenge Mr Modi faces too. Based on his track record in Gujarat, expectations are high that he can revive the Indian economy.

He might be able to clear stalled projects quickly, but these will need time to bear fruit. Negotiating with provincial governments is yet another potential problem, as are weather uncertainties, with El Nino affecting crop output (and consequently inflation and interest rates), thus posing challenges to reviving growth.

Meanwhile, the social welfare plans of the candidates may put fiscal deficit under pressure. While mega social welfare plans are synonymous with Mr Gandhi's UPA, even Mr Modi and Mr Kejriwal have announced populist programmes. All of them promise access to electricity, sanitation, drinking water, education, affordable health care and low-cost housing.

Mr Modi and Mr Gandhi also talk of education and entrepreneurship assistance for backward communities. Populist promises by Mr Modi and Mr Kejriwal also include paying 50 per cent over the input cost for crops to farmers.

Mr Modi has also raised the topic of skills creation as a means of enhancing economic activity. He also has plans to bring down inflation, thus reducing the need for social welfare schemes.

He wants to stop hoarding and black marketeering, and use technology to ensure the rapid dissemination of prices to farmers.

All of the leading candidates have addressed job creation and entrepreneurship.

Mr Gandhi promises to create 100 million new jobs, improve university and school infrastructure, provide scholarships for backward communities and skills vouchers for unemployed graduates.

Mr Modi talks of improving artisan skills for small-scale industry development and the establishment of a nationwide incubation programme for entrepreneurship. He also aims to develop labour-intensive sectors and modernise retail and agri-employment.

Mr Kejriwal promises a conducive entrepreneurship ecosystem and talks of countering economic distress-led migration by enhancing small-scale and traditional industries.

In the past, the need to balance coalition politics has taken its toll on the speed of reforms. This, along with environmental issues, policy delays and inflation, has slowed the investment cycle and infrastructure development.

Mr Gandhi aims to build upon the success of the Cabinet Committee on Investment, which has made some headway in moving stalled projects.

He also wants to speed up the development of industrial corridors and the construction of railway lines carrying freight, enable a single-window clearance for manufacturing projects and support industrial townships.

Mr Modi also talks of creating single-window clearance systems and time-bound environment clearances, while encouraging investment in infrastructure and global hubs of manufacturing.

Much is expected of Mr Modi, given his track record in Gujarat. But he could face a challenge from opposition activists and may struggle to manage coalition politics.

Mr Kejriwal's focus is on "honest enterprise". He talks of streamlining regulatory processes, fostering competition in the market economy and the need to curb monopolistic tendencies.

There has been talk of "big businesses" being overly friendly with Mr Modi due to the incentives he has extended to get them to invest in large-scale projects, thus making the big guys bigger.

Mr Kejriwal's plans call for a crackdown on corruption and an effective citizen's ombudsman.

Targeting the black economy and promoting transparency in governance might increase the government's productivity and maximise benefits to the citizens. But the issue here is the time required to clean up the system, and whether people have the patience to wait that long.

Mr Modi also talks of transparency, while Mr Gandhi also mentions corruption and black money. All the candidates for prime minister also have plans to speed up the judicial process.

Mr Modi's success in converting Gujarat into one of India's most developed states gives him credibility. Some observers believe that Mr Gandhi might still be too inexperienced for the top role. Mr Kejriwal is also regarded as lacking experience.

However, Mr Modi's success in Gujarat can be exaggerated. Maharashtra, Delhi, Tamil Nadu and Haryana did just as well over the last decade in terms of net domestic product growth - even better in some cases.

Rajasthan, Bihar, Madhya Pradesh beat it in agriculture, while Bihar, Haryana, Maharashtra, Madhya Pradesh beat it in services.

India possibly needs elements of the approaches offered by all three candidates. It remains to be seen whether the ultimate winner can maintain a clean image while ensuring holistic development.

The writer works with a leading capital markets company in India.