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Tags: India | Japan | Narendra Modi

India's New Prime Minister Faces Tough Road

By    |   Friday, 19 September 2014 12:10 PM EDT

Narendra Modi, India's new prime minister, radiates confidence. He has the first outright majority in India's parliament in 30 years. The public lauds him, world leaders court him, and the Bombay Stock Exchange continues to soar.

But will this moment of euphoria translate into lasting gains?

Can India become the world's next economic powerhouse?

I had the chance to pose these questions when I met with Modi last weekend at his house in New Delhi, his first interview since becoming prime minister. Modi is extremely intelligent and focused but is different from most leaders I have met. His worldview has been shaped almost entirely from experience rather than formal schooling. Born poor and lower caste — which in India is a worse fate — he left home when he was 17 and soon got involved in politics, joining the RSS, a hard-line Hindu Nationalist group. He later got a bachelor's and a master's degree, but his real education came from traveling around India.

He recounted the thousands of villages he had visited as the head of the government in the state of Gujarat — a period during which Gujarat grew as fast as China. This feel for how people actually live animates him. Modi is passionate about hygiene and has launched an ambitious drive to build toilets in homes, schools and elsewhere. In his Independence Day speech last month, atop the ramparts of the Red Fort in New Delhi, Modi spoke plainly about the shame that vast numbers of Indians defecate in public. Any previous prime minister would have considered the topic beneath the office. But Indians love his down to earth approach.

During the election campaign, Modi placed a particular twist on the lavatory theme. He explained that India needed toilets first and temples later. It was a significant statement because Modi is seen as an ardent Hindu nationalist. His party platform still contains within it plans to build a temple in Ayodhya on the grounds of a destroyed mosque, an issue that has been extremely divisive in the country.

My own sense, based on our conversation, is that Modi is far too shrewd to be distracted by nationalist symbolism, which would derail his growth agenda and embroil him in a series of controversies that he does not seek.

Modi has also handled the international stage deftly. He wooed Japan and softly criticized China, then backed away and embraced Beijing — getting large investments from both countries. He is straightforwardly pro-American and seems to harbor little ill will toward Washington for having refused to give him a visa for almost a decade. And yet, he has not abandoned Russia, India's ally, choosing to be silent on its actions in Ukraine.

Where Modi has underperformed, surprisingly, has been in his core competence — economics. He has been slow to announce major reforms. His first budget was disappointing and many of his Cabinet appointments have been lackluster. Those expecting major changes in subsidies, trade policy or labor market restrictions have been disappointed.

The stalled reform agenda might actually be an outgrowth of Modi's great strength, his pragmatism. His economic ideas are not shaped by theories of free markets and trade. He is not a Reagan or a Thatcher. Modi wants to make things work.

If markets can do that, fine.

If government control gives him more and faster levers of change, that's fine as well.

He was defensive about India's — significant — protectionism and would not commit to privatizing the country's hugely inefficient state-owned companies. After all, he pointed out to me, he turned around Gujarat's government owned enterprises.

But India has many bottlenecks, and delaying major and needed reforms may come back to haunt Modi. Ruchir Sharma, the head of emerging markets for Morgan Stanley, studied the fate of leaders in the world's 20 largest democracies over the last two decades.

The pattern is clear. Leaders who make difficult reforms early get rewarded in later years.

This is partly, one assumes, because they have the political capital to make painful changes in their first year. By the second year, in those countries where leaders have wasted their honeymoon and delayed reforms too long, markets retreat, giving back most of their early gains. Sharma points to Japan as the best example of a country where the promise of reform exceeded the reality. Prime Minister Shinzo Abe eagerly embraced those policies that were politically popular — easy money and public spending — but never followed through on tough structural reforms.

As a result, growth and stock market performance in Japan have been tepid.

Already, Modi's honeymoon is coming to an end at home.

In a series of by-elections, his party has done surprisingly poorly. It would be a strange irony if the problem with Narendra Modi turns out to be not that he is too bold but rather that he is not bold enough.

Fareed Zakaria hosts CNN's "Fareed Zakaria GPS," and makes regular appearances on shows such as ABC’s "This Week" and NBC's "Meet the Press." He has been editor at large at Time magazine since 2010, and spent 10 years overseeing Newsweek's foreign editions. He is a Washington Post (and internationally syndicated) columnist. He is author of "The Post-American World." For more of Fareed Zakaria's reports, Go Here Now.

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It would be a strange irony if the problem with Narendra Modi turns out to be not that he is too bold but rather that he is not bold enough.
India, Japan, Narendra Modi
Friday, 19 September 2014 12:10 PM
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