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Economy

Narendra Modi faces big economic challenges

Narendra Modi was sworn in as India's 15th prime minister on Monday. DW takes a look at the major challenges and hurdles his government faces in fulfilling its core electoral promise to foster economic development.

After a month-long election, a historic victory and a lavish swearing-in ceremony, Narendra Modi finally took charge as prime minister of India, and it's time to get to business. High hopes are pinned on the new government as it is expected to turnaround the nation's economic fortunes and deliver on its twin promises of development and good governance.

Modi appointed a 61-year old lawyer, Arun Jaitley, as finance minister. Holding one of the critical posts in the new cabinet, Jaitley will have the task of implementing reforms and dealing with the economy that is suffering from stagflation; a combination of slow economic growth, soaring inflation and high unemployment.

Noting that he is taking over at a challenging time, the new finance minister said: "We have to restore back the pace of growth, contain inflation, and obviously concentrate on fiscal consolidation itself." The new government's determination to take bold decisions regarding reforms will be known in less than two months, when it presents its budget.

Modi's administration inherits an economy that is growing at the slowest pace in a decade, with GDP expansion plummeting to around 4-5 percent from the near double-digit growth rates several years ago.

Inflation is hovering at around 9 percent - one of the highest in the region - forcing the central bank to maintain high interest rates, to bring the prices down, even as growth dips.

Indian politician and Bhartya Janta Party Leader of Opposition in the Rajya Sabha Arun Jaitley addressing the party workers ahead of the upcoming parliamentary election in New Delhi

Jaitley vows to restore growth and tame inflation while paying attention to fiscal discipline

Key challenges

"The key challenge for the government is to revive growth by restoring momentum to the process of economic reforms and creating a sense of policy certainty," says Eswar Prasad, economics professor at US-based Cornell University and a Senior Fellow at the Brookings Institution.

In order to boost growth, it has to "tackle the country's vast infrastructure needs, reform the labor market and streamline land acquisition policies," explained Prasad, adding that New Delhi also has to lay out a plan to bring down the public debt over the medium term.

Public finances in Asia's third largest economy are in a bad shape. Fiscal deficit – where a government's spending is higher than its revenue - is high, amounting to around 4.1 percent of the GDP on the back of subsidies and payouts, particularly on items such as fertilizers and oil.

And as resource-hungry India imports about three-fourths of its crude oil needs, subsidizing its price often puts a strain on state coffers. Oil imports, coupled with those of gold, are also regarded as the main reasons for the nation's persistent current-account deficits - as the value of its imports outstrips that of its exports - putting downward pressure on the value of the India's currency, the rupee.

Many hope that Modi will undertake necessary measures that will unleash the growth potential and create jobs without blowing the budget. Economist Prasad told DW that "broadening access to the financial inclusion and reviving manufacturing growth would help boost employment generation and help to spread the benefits more evenly among the population and reduce poverty."

Replicating Gujarat?

This view is also shared by many other economists who believe that India should emulate the successes of China and other East Asian states and focus more on its industry and manufacturing, in order to create jobs for the country's young people and to attain high and sustainable growth rates.

Furthermore, this could accelerate the South Asian nation's transformation from a predominantly rural, agricultural society into a more urban, industrial one.

But manufacturing in India accounts for a mere 15 percent of the country's total economic output and its share has even been dwindling. In an op-ed published by the Indian daily Business Standard, economists Arvind Subramanian and Amrit Amirapu argue that boosting the manufacturing sector will require a lot of hard work, particularly to create an environment that attracts domestic and foreign investment.

They point out that the state of Gujarat – which was governed by Modi since 2001 until his stepping into the shoes of PM - has been the only region where manufacturing as a share of economic output exceeded 20 percent and came close to the levels seen in major manufacturing hubs in East Asia.

During the election campaign, Modi and his team repeatedly trumpeted such economic achievements in his home state - including rapid expansion rates, development of physical infrastructure, creation of a business-friendly environment and a corruption-free administration - and promised to replicate the "Gujarat model" across the country.

A tough task

However, analysts believe scaling up of national-level reforms is going to be a tough task. Milan Vaishnav, South Asia analyst at the Washington-based Carnegie Endowment for International Peace, says that it will be extremely challenging to implement the Gujarat model on an all-India scale as New Delhi has limited power over the states, which are largely responsible for policy implementation.

"Modi will have to make compromises he simply did not have to bother with when he ran Gujarat for the past twelve years," Vaishnav told DW.

An Indian worker sprays water onto panels of India's first 1MW canal-top solar power plant at Chandrasan village of Mehsana district, some 45 kilometers from Ahmedabad

Experts say replicating 'Gujarat model' acriss India will be a tough task

Economist Prasad said that in order to enact reforms, the new administration will need to act decisively and rapidly as it has received such a strong mandate from the Indian electorate and does not need to bestow political favors on any coalition partners or be constrained by them.

But he underlined that "if Modi does not move quickly enough to shift economic momentum that satisfies the aspirations of India's lower and middle income classes, then there is a danger that the shine will wear off quickly."