Nisid Hajari writes: As a campaigner, Indian Prime Minister Narendra Modi has drawn comparisons to U.S. President Barack Obama. The U.S. president with whom Modi would seem to have the most in common, though, is not the 44th but the 40th: Ronald Reagan. Like the Gipper, Modi was elected at a time of malaise and drift, with an economy hobbled by high inflation and slowing growth. He came to office promising to lead a national revival, in part by eliminating excessive state intervention in the economy.
In fact, Modi is no more Reagan than he is Obama. The U.S. doesn’t even seem to be Modi’s role model for economic policy. His decisions thus far lean more toward the Chinese and Japanese models of state-led capitalism.
Modi has made it clear that he prefers to give them more managerial autonomy and allow them to reform themselves rather than sell them off outright. His administration’s first budget made no concessions on tax rates. While some attempt was made to trim spending, the budget included no high-profile initiatives to end wasteful subsidies or dole programs.
On monetary policy, Finance Minister Arun Jaitley has repeatedly favored lowering interest rates, despite persistent inflation. His priority is clearly infrastructure — whether roads, power, ports or railways. All these sectors require massive investments and involve considerable risk in terms of returns. These are not areas where private companies traditionally rush to invest.
On the other hand, companies backed by state-funding or cheap finance from state-owned banks and financial institutions can more safely assume these huge risks. This is precisely why Modi returned from a bilateral visit to Japan with commitments worth $35 billion for infrastructure. When Chinese President Xi Jinping visited India a few weeks later, he pledged another $20 billion. Modi will bring home no such promises from the U.S.
The prime minister is more statist in his approach than leaders in Beijing. Where China has largely liberalized foreign direct investment across all sectors, Modi has been reluctant to raise FDI caps above 49 percent in sectors such as defense and insurance.
While this approach worked well for Japan and China, it’s far from guaranteed to achieve similar results in India. The Indian state, which is dysfunctional at several levels, is never likely to be even half as efficient as China’s or Japan’s. India’s largely government-owned defense companies have not produced world-class products in six decades. Government-owed insurance companies have not delivered either.
On the other hand, India’s private-sector companies have already shown that they can be as efficient as U.S. corporations. What they need are technology, investment and expertise.
