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Asia

One year on - Modi's reform agenda at a crossroads

A year ago, PM Narendra Modi swept into office on pledges of reviving a foundering economy. DW examines to which extent the Indian PM's reform measures and his "Make in India" campaign have helped deliver on his promise.

Expectations for the Indian prime minister were high last year. After presiding over 12 years of strong economic growth as chief minister of the western Indian state of Gujarat, Modi and his Hindu-nationalist Bharatiya Janata Party (BJP) swept to power in 2014, wining the national elections. Modi received a strong mandate to transform India's troubled economy - his core electoral promise - and replicate the politician's record of economic success on the national stage.

But has the PM been able to lay the foundations for strong economic growth during his first 12 months in office? Analysts give the PM mixed marks in this regard. While most say he has done better than the previous UPA government, many argue he has under-delivered on the promise of bringing a radically refreshing approach to governance and business.

Steps in the 'right direction'

Taking stock of his government's performance, it is worth pointing out that Modi has taken many steps to reorient India's economic policy in a more pro-business direction. For instance, Modi's first full budget announced in February this year featured a host of measures, including increased spending on infrastructure, a universal social security scheme and an unprecedented corporate tax cut to 25 percent over the next four years - all of which have been hailed by economists as steps in the right direction.

Indian Prime Minister Narendra Modi (R) and Chinese Premier Li Keqiang (L) review an honor guard during a welcome ceremony outside the Great Hall of the People in Beijing, China on May 15, 2015 (Photo: REUTERS/Kenzaburo Fukuhara/Kyodonews/Pool)

During PM Modi's recent visit to China, an estimated $22 billion of trade and investment deals were concluded

Moreover, the passage of two bills, which allowed the government to auction mining licenses, has paved the way for a more efficient and liberalized mining sector. The government has also decided to lift direct investment caps in sectors such as insurance and defense, decontrol the price of diesel and invest in direct cash transfers for subsidy benefits, to name a few items. The country's economic growth could accelerate to as much as 8.5 percent in the coming fiscal year, which could make it the world's fastest-growing large economy as China's expansion continues to slow.

Generally, Modi's actions have been well received by industry and the markets, despite a growing sentiment that the changes instituted thus far have not been dramatic enough. In fact, a Forbes India and BMR Advisors survey conducted in April among senior industry leaders on the government's business agenda indicated an overwhelming belief in the steps taken by the government to usher in economic growth.

Resistance and challenges at home

Nevertheless, the government's reform agenda has also run into a number of roadblocks over the past few months, a development which bodes badly for a key part of Modi's economic overhaul plans. For instance, the BJP has faced serious difficulties in the upper house of parliament - where it lacks a majority - and has thus been constrained to use short-term ordinances to implement key measures, especially regarding an amendment to the land acquisition law designed to make it less onerous for industry to procure land.

While some analysts say India's poor infrastructure and conflicts between farmers and companies trying to secure land for industrial projects are some of the main impediments to increased GDP growth, Modi's bill to ease rural land acquisition rules for industry has drawn much criticism and prompted India's usually fractious opposition parties to join forces.

In a symbolic march in New Delhi from parliament to the president's home, the opposition demanded the government to drop its plans, accusing it of making it easier for industry to buy rural agricultural land, at a time when farmers are suffering crop losses and depressed incomes.

"Strong popular opposition to the amendments - which many argued were not in the best interests of agricultural workers - led the government to dilute the terms of the executive order. And more recently, the bill itself has faced major delays in the Rajya Sabha - where the BJP lacks a majority - and looks set to elapse quietly," said Shilan Shah, India economist at Capital Economics.

In this context, Milan Vaishnav, an expert in political economy at the Carnegie Endowment for International Peace, also points out that while the number of states under the BJP's control has reached an all-time high, the vast majority of India's states are still controlled by the Congress party or a diverse set of regional political outfits. "Given divergent interests and partisan identities, the states have not all been willing to sign up to Modi's proposed reforms," said Vaishnav.

But some difficulties have been self-inflicted. For instance, the government has been remarkably flat-footed about communicating its intentions and reform vision for the country. Vaishnav explains, for example, that notwithstanding some moves to decentralize power to the states, there has been an excessive centralization of power within the Prime Minister's Office, which has irked many of the ministries and, hence, hampered coordination.

The analyst argues that given a once-in-a-generation mandate to reform India's economy, the Modi-led government has moved only gradually and incrementally. "In that sense, the one-year record has not lived up to the campaign hype or the lofty rhetoric then-candidate Modi espoused."

International success

But to understand the full extent of Modi's performance on the economic front, it is important to also take into account the PM's actions on the international arena which have been focused on strengthening India's foreign relations, boosting trade ties and reviving foreign investment. The PM has joined the club of the most traveled world leaders, with his foreign trips taking him to capitals such as Washington, Beijing, Seoul, Berlin, Kathmandu, Ottawa, Ulan Bator and Canberra, just to name a few destinations. To date, he has traveled to at least 19 countries around the world during the past one year.

German Chancellor Angela Merkel and Indian Prime Minister Narendra Modi shake hands before talks at the Chancellery in Berlin April 14, 2015 (Photo: AFP PHOTO / TOBIAS SCHWARZ)

Modi has traveled to at least 19 countries around the world during the past one year

Rajiv Biswas, Asia-Pacific Chief Economist at the global analytics firm IHS, believes PM Modi has done an excellent job in rebranding India as a dynamic, high growth economy. "He has made very successful visits to the world's largest economies, including the US, China, Japan and Germany, meeting with government and business leaders and being accompanied by large Indian business delegations," Biswas told DW.

His personal flair and commitment to India's economic development have helped him to build very good personal relations with many global leaders. As a result, there have been significant outcomes from these visits, with large new government and private sector trade and investment deals agreed. For instance, during PM Modi's recent visit to China, an estimated $22 billion of trade and investment deals were concluded.

'India is back'

Experts argue that Modi's key achievement on the foreign policy front has been to improve the sentiment about India in the world's key capitals and in the neighborhood. India's star had dimmed considerably in the final years of the UPA government, when growth rates were cut in half, inflation ran amok, and governance came to a standstill. "Modi has energetically traveled the world to signal to governments, investors, and the Indian diaspora that 'India is back' and once again 'open for business.' In this sense, Modi's foreign policy vision has been wrapped up with his domestic economic agenda," said Vaishnav.

Smruti Pattanaik, a research fellow at the New Delhi-based Institute for Defense Studies and Analyses (IDSA), explains that at the heart of this foreign policy approach lies Modi's "Make in India" campaign. By presenting India as a manufacturing hub, the PM hopes to lure foreign investment, facilitate the transfer of technology and create employment opportunities in the country. "A key aspect of his foreign policy consists in attracting foreign investment to sectors such as infrastructure and industry with the aim of boosting growth," Pattanaik told DW.

Farmers cheer as they listen to a speech by India's Congress party vice-president Rahul Gandhi (not pictured) at a farmers rally at Ramlila ground in New Delhi April 19, 2015 (Photo: REUTERS/Anindito Mukherjee)

The opposition accuses Modi of making it easier for industry to buy rural agricultural land, at a time when farmers are suffering crop losses and depressed incomes

Directly related to this has been the government's broader foreign policy approach for the Asia Pacific. Given the swiftly changing security dynamics in the region, PM Modi rechristened India's traditional "Look East" policy as "Act East," stating the importance of also seeking deeper ties with partners such as Japan, Vietnam, South Korea and Australia.

But while the PM may be seen as a strong and charismatic leader abroad, analysts say that the effectiveness of India's foreign policy would heavily depend on the Modi government's ability to transform the nation's economy.

As analyst Vaishnav points out, India's standing around the world, its attractiveness to major partners, and its ability to wield its influence abroad cannot be delinked from its capacity to develop economically at a rapid clip. "There's a saying that, 'India's best foreign policy is sustained eight percent growth.' I couldn't agree more."

Economist Biswas agrees. "PM Modi needs to push Indian economic growth back above eight percent within the next 18 months by boosting infrastructure development and foreign direct investment inflows." This, he adds, would provide a substantial boost to industrial production and consumer spending momentum, putting the Indian economy on a higher growth path over the medium term outlook.