A friendly US can help India's new leader lift millions from poverty


Article Highlights

  • Modi improved Gujarat, can "Modinomics" transform the whole of India?

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  • India's economic reforms must include labor laws, land privatization, and tax reform.

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  • India faces daunting challenges with potentially huge rewards - lifting hundreds of millions out of poverty.

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EDITOR'S NOTE: The writer is addressing the question, "Should President Obama move to cement relations with India's new leader?" 

Newly elected Indian Prime Minister Narendra Modi does bring heavy baggage into office - he is seen as disinterested in, or even indirectly responsible for the vicious anti-Muslim riots in 2002. But Modi now has the opportunity to improve the lives of all Indians through badly needed economic reform. This is how the Obama administration should view him.

The riots were awful, with deaths inflicted by horrible means. As chief minister - think U.S. governor - of the state of Gujarat, Modi may have unwittingly encouraged the violence and clearly failed to punish perpetrators. These are serious matters, not easily forgotten or forgiven.

Nonetheless, Modi neither led the riots nor endorsed them. Afterward, he consciously rebranded himself as a transformative leader on economic issues. Under more than a decade of his stewardship, Gujarat has performed well, some say extremely well.

The Obama administration cannot settle the ongoing debate over exactly how well Modi did in Gujarat. And no one knows yet whether "Modinomics" can translate to the whole of India. But this is the crucial issue, because India needs an economic revolution.

Americans may view India as a rising economic powerhouse, following in China's footsteps. This is far from accurate. Malnutrition is twice as common among Indian children as among children in sub-Saharan Africa. Even if child malnutrition could be stomped out within a few years, those suffering now could experience long-term health problems, which will haunt India for decades.

General poverty is staggering - in mid-2013 the Indian government estimated that more than one-fifth of the population earned less than $225 annually. Even adjusting for much lower prices in India, this is the equivalent of about $1.25 per day in the United States. Two-hundred fifty million people trying to live on $1.25 per day is cause enough to focus on economic plans.

And those above this poverty line are hardly thriving - average income is barely $1,300 per year. India is not a burgeoning economic superpower, it is a very large, very poor country. One of the many reasons for this is ineptitude by the last government, which preferred government subsidies to reform based on free markets.

Enter Modi. His precise economic agenda is unclear. In the United States this would be discouraging but there are politically powerful Indian groups that dislike competition and even the idea of capitalism. In this setting, it was reasonable for Modi not to invite additional criticism by campaigning on huge spending cuts, for example. Given inevitable political opposition and the many policy changes to make, flexibility will serve Modi well.

There are a few "musts," with manufacturing jobs topping the list. Modi's Gujarat was successful in creating these jobs and its success must spread. India has no less than 600 million people under the age of 25. The service sector cannot provide jobs for half this number, most will work in manufacturing or not at all.

The challenge is twofold: it must be made easier to start a business and safer to expand one. The World Bank ranks India 179th of 189 countries in the ease of starting a business, behind war-torn Libya. Highly restrictive labor laws then make it very risky to expand manufacturing firms beyond 100 workers. If Modi can effectively address just these two problems, tens of millions of young workers could find new jobs, and keep them.

There are other issues, as well. Given the extent of rural poverty, the right of the poor to fully own the land they work must be made clear. Also, a tax system that is truly national in scope must be created.

These are daunting challenges with potentially huge rewards - better lives of hundreds of millions of people. How Modi does on this front is what should matter to the Obama administration.


Derek M. Scissors is a resident scholar at the American Enterprise Institute.

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