In an impressive exercise in democracy, 800 million eligible voters participated in India’s 16th general election. The new prime minister will be Narendra Modi of the Bharatiya Janata Party (BJP). Modi won because most Indians believe that he can deliver more rapid growth in the country as a whole.
Now, however, the new government must try to achieve unprecedented economic progress. To do so, it will have to foster, in a different political context, two key ingredients of China’s economic success.
The first ingredient is a robust industrial sector composed of manufacturing industries that use unskilled labor, which would offer a route out of poverty for India’s hundreds of millions of rural laborers and their families. It is the route that China, and other countries before it, has taken. In India, by contrast, the underdevelopment of the industrial sector has kept the country from realizing its full economic potential.
The second ingredient is the infrastructure that all economic growth requires: Roads, bridges, ports and schools, as well as reliable supplies of electricity and clean water. Poor infrastructure constrains the industry that India does have. Factories need reliable supplies of power to operate effectively, good roads and railways to source inputs and distribute products, and, if they are to export those products, ports for cargo ships and airports for high-value items and business travel. China has these things in abundance. India does not.
Power outages are routine in India, nearly half the country’s households lack any electricity at all, and modern highways are scarce.
The underlying cause of these two shortcomings is one of the fundamental features of Indian democracy, and indeed of all democracies: The power of minorities. In democracies, people are free to organize themselves and often do so on the basis of common economic interests.
While India abounds in workers with low (or no) skills, laws governing employment make it all but impossible for large firms to fire workers, discouraging them from hiring in the first place. The most efficient companies tend to avoid precisely the industries that could, if established on a large scale, lift millions of Indians out of poverty. Similarly, laws restricting the use of land make it difficult to build facilities such as factories and hotels, which could employ large numbers of people.
It is a particular kind of interest group — trade unions — that promotes and defends the laws that discourage large firms from entering industries that employ unskilled workers. While these laws benefit union members, who make up a very small fraction of the total workforce, they penalize India as a whole. The Indian bureaucracy itself is a large, powerful, and voracious interest group. Its salaries consume resources that would be better devoted to more productive uses. Special-interest spending leads to budget deficits, while the borrowing needed to finance these deficits drains yet more money from infrastructure and education.
Modi’s new government cannot — indeed, must not — abolish the democratic rules that permit minorities to flourish. Without the emphasis on compromise, peaceful dispute resolution and minority rights inherent to democracy, a united India could not exist. So Modi’s challenge is to overcome the obstacles to growth-promoting polices using democratic methods. Here, the election has brought good news: The growing strength of India’s growing middle class, a potent ally in the cause of pursuing the needed economic reforms.
That middle class consists of propertied, salaried people, many of them young, who see government as an impersonal enforcer of the law and a neutral arbiter of disputes, rather than as a source of funds and favors. The votes of such people helped Modi win the election. His success in office will depend on how well he can harness the power of the middle class to overcome the political obstacles to the economic growth that its members demand.
- Project Syndicate
