Nine Years Of Modi Shows Just How Important Political Stability Is For Economic Growth

After the recent Supreme Court nod to the Narendra Modi government’s Kashmir decisions, Bharatiya Janata Party (BJP)’s former MP and noted journalist, Swapan Dasgupta posted on X, that the party had delivered most of its early promises.

The stage was now set to “create a developed, prosperous and proud Bharat." 

The BJP had been consistent and sincere in building a national alternative to a family-controlled Congress. Their earlier avatar Jan Sangh was merged with Janata Party in the 1970s. BJP was born in 1980 after the Janata experiment failed. 

What happened next is known. In a little over three decades, they filled the vacuum created by Congress’s decline. The Narendra Modi government (from 2014) freed India from the menace of coalition politics, ensured political stability and gave a new head start to the economy.  

Over the last 10 years, which includes the pandemic, India has undergone its boldest set of reforms and policy decisions since economic liberalisation in 1991. Some failed attempts apart, almost every sector of the economy, witnessed dramatic changes. 

The results are visible in start-up and e-commerce revolution, shooting tax collection, logistics efficiency, energy transition and last but not least, fast growth in the export of manufactured items, which is a factor of foreign direct investment (FDI) by global technology giants. 

With the Modi government looking confident to come back for a third term — a record since the end of the Nehru era (1947-1964) — with an equally brutal majority, the investment flow should gain momentum over the next five years. 

Focus FDI

The proof of the pudding will lie in improving the FDI-Gross Domestic Product (GDP) ratio from the prevailing 1.5-2 per cent.

A substantial and sustainable jump in the ratio, will consolidate India’s position as a global sourcing destination and improve job prospects in the country. 

Though the volume of FDI in India increased significantly since 1991, its share in GDP hovered around 1 per cent till 2005. The ratio improved up to 3.6 per cent (2008) between 2006 and 2010, before stabilising at the current level. 

In comparison, FDI has been ruling above 4 per cent of the GDP in Vietnam since 1992. In volume terms, Hanoi attracted only $15.6 billion in global investments in 2022.

However, as the fifth largest economy, India’s $50 billion is awfully short of the requirement to make a visible impact. 

In China, the share of foreign investment rose in the first two decades of liberalisation to peak at 6 per cent of GDP in 1993. Since then, it declined steadily to 1 per cent in 2022. However, Beijing receives over 3.5 times in FDI when compared to India’s $50 billion. 

To put it into perspective, in terms of the quantum of foreign direct investment, which is a factor of the confidence of the global investors in the country, a democratic India is exactly two decades behind the single-party ruled China. 

As if that’s not enough, we failed to maintain the FDI flow in the past when compared to a relatively consistent Beijing. The Congress-led Manmohan Singh government attracted a record $43 billion investment in 2008, but failed miserably to maintain the tempo. India took another seven years to touch this level. 

The good news is, since 2015 the FDI inflow remained stable and touched a new peak of $64 billion in 2020.

The credit largely goes to political stability — which is translated into policy consistency — and bold decision-making in the face of global uncertainty. 

A combination of policy decisions — like import curbs and focus on domestic manufacturing, free trade pacts with important partners and, leveraging India’s buying power to woo prestigious brands like Apple, GE, Boeing in setting shops in the country — have done tremendous good. 

As of 2022-23, military hardware and smartphones together earned over $13 billion in export revenue. Five years ago, they contributed less than $2 billion. At less than $2 billion, military hardware exports are still small but smartphones are a done deal and are expected to grow five-fold by 2025-26. 

The achievements are not limited to these two items. A lot of initiatives are underway in the electronics and renewable energy sectors. This is over and above, consolidating India’s position in areas of strength like pharmaceuticals, biotechnology, IT etc. 

Political Stability Matters

All governments in the last three decades pursued growth. Every decade was marked by more intense attempts to improve the GDP growth numbers. But, we failed to keep these numbers steady. 

This was largely due to the slow pace of reforms, inordinate delay in project implementation, and policy inconsistency (retrospective tax in 2012), which were linked to coalition politics and related instability. 

A strong Modi government removed the legacy hurdles. Coal sector denationalisation and goods and services tax were implemented two decades after they were proposed. The aim is now to make the most of the prevailing global situation and attract investment to India. 

We have already got investments in the lower order of the production value chain. The challenge is to move up the ladder, as China and the entire South East Asia did over the last 30-40 years. 

However, there are certain definite hurdles in repeating the Asian Tiger story in today’s context.

First, the prevailing global uncertainty may last for the next five to six years. That means, India has a limited time window, to increase FDIs to a respectable level. 

Second, the world is moving backwards from the path of globalisation. The same US that once encouraged Taiwan to manufacture semiconductors using American technology is now asking Taipei to manufacture chips in the USA. 

This is to ensure both control over the technology and improve job prospects in the US. Clearly, the case for outsourcing is no more as strong as it was. 

Third, India, therefore, should leverage its buying power to encourage global producers to set up shop in India. To achieve this goal, the states must follow the growth strategies adopted by the federal government on a war footing. 

Until recently, barely half a dozen states were at the forefront of attracting investments. 

The good news is, backward states like Uttar Pradesh (which alone accounts for 15 per cent of India’s population) Odisha, Assam etc have now joined the race to develop.

On the flipside, the eastern states of West Bengal and Bihar — which together have a population equivalent to Uttar Pradesh — are not showing any intent to change. 

Once the second largest industrial hub of the country, West Bengal is now among the poorest. Odisha had recently overtaken Bengal in per-capita income. 

The point is simple: without due participation of states, India cannot be successful in its attempt to develop as fast as China.