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Furthermore, to signal seriousness in opening up the Indian economy further
(see Figure 2), Modi passed two more ordinances increasing foreign firms’ access
to insurance ventures and commercial coal mining, which the country relies
upon to provide a majority of their electricity. By opening up to foreign
competition, Modi seeks to provide electricity to the millions of Indians who still
live in the dark and to the industries that will need a consistent supply of energy
if they are to “Make in India”.
In 1990, the average Indian citizen
had slightly more income
than the average Chinese citizen, as measured by GDP per capita.
Getting the Fiscal House in Order
India has balanced a budget at the federal level only once in the last 25 years. The
previous government poured endless rupees into wasteful subsidies, and in one
year, 2003, had a primary deficit of 5.5% of GDP. This fiscal deficit caused
Standard & Poor’s to give India a credit rating that is just one notch above “junk”
status (India is Baa3/BBB-/BBB-, upgrade watch by S&P). Modi has the
government on track to cut the deficit to 4.1% of GDP in 2015, but a budget
surplus remains elusive. India has not posted a budget surplus since 2007.
How will the government control its spending problem? The answer lies in
revenues and subsidies. In order to raise revenues, Modi promised to divest from
state-owned enterprises. He started this with a 10% sale of the coal-mining giant,
Coal India, raising funds to fill state coffers.
On the side of wasteful subsidies, Modi took advantage of the timing of falling oil
prices to remove costly diesel fuel subsidies, which accounted for a quarter of the
government’s total subsidy bill. In order to be more efficient with the subsidies
still being disbursed, the Indian government opened bank accounts for 18 million
poor people (almost the population of the State of New York) in a week in order
to make sure subsidies reach their destination. To date, they have opened 115
million bank accounts.6
What Next?
We have here presented an optimistic case for India. But Modi’s popularity and
upstart presence alone are not enough to solve all of India’s problems. For
example, inflation, were it not for the decline in crude oil prices, might still be
running too high.
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