Modi's New Challenge Is Embracing Urbanization

His expansion of welfare benefits has won him votes from rural citizens—but if he wants to build a “new India,” he must focus on cities.

When Narendra Modi led his Bharatiya Janata Party (BJP) to an outright parliamentary majority in 2014—a feat no party had been able to achieve in the previous 25 years of Indian politics—the hopes and expectations for his first term were straightforward, if lofty. Modi promised to build a “new India” that would curb corruption, spur economic growth, and advance the interests of the growing “neo–middle class” of erstwhile villagers striving to reinvent themselves as consumers.

Five years later, the BJP has secured a new electoral mandate even more impressive than the last, a testament to Modi’s unmatched political prowess. Yet it has done so despite an economic record that can be described only as underwhelming. If Modi hopes to do more than simply stay in power, if he still aspires to bring his new India to life, he’d do well to heed the advice of a small clique of economists who’ve been calling on his government to more fully embrace urbanization.

Why is it that Modi’s premiership failed to deliver robust growth? During his tenure as chief minister of Gujarat, one of India’s more prosperous and industrialized states, Modi envisioned India as a manufacturing powerhouse in the making. But that was not to be. To his credit, on his ascension to national office, Modi was clear-eyed enough to recognize that his preferred development strategy—cultivating a labor-intensive manufacturing sector that could sell its wares overseas, as China had done with such great success—was ill-suited to emerging global economic trends.

Modi and his advisers quickly came to understand that a combination of depressed demand in the mature market democracies and robust competition from other low-wage countries had essentially foreclosed the export-driven model of development, as Amy Kazmin and Lionel Barber report in the Financial Times. Instead, Modi reached for a grab bag of reforms and public investment, an approach one of his advisers described as “light many fires at once—to see if any of them would catch.” Modi’s policy mix has indeed succeeded in lighting many fires, though not all of them are burning quite as he might have wished.

It must be said that Modi has achieved some modest successes. His move to overhaul the tax code is a step in the right direction. The previous tax system vested too much power in the state and local levels, such that India’s domestic market was littered with internal trade barriers. The newly instituted VAT promises to facilitate more interstate trade and, hopefully, raise some badly needed revenue for India’s chronically under-resourced central government. In just two years, India’s tax base has increased by 50 percent.

The creation of a streamlined bankruptcy process is another long-overdue reform. An IMF report cited by the Financial Times found that under the old regime, creditors who turned to the courts to settle bankruptcy disputes could expect a process that would take four years to resolve itself and would, on average, end with them writing off three-quarters of the debts they were owed. Though far from perfect, Modi’s new bankruptcy code appears to have leveled the playing field for creditors, which should, in time, make Indian firms more attractive to investors at home and abroad.

The stimulus from these important reforms, however, has been dulled by a simultaneous liquidity contraction provoked by an ill-conceived policy of demonetization. Modi attempted to smoke out nefarious actors who were hoarding their wealth in hard-to-track cash, but instead produced a complicated and protracted financial crisis.

In November 2016, in characteristically secretive and dramatic style, Modi announced that following a 50-day grace period, the country’s high-denomination bills would be worthless. What happened next was a short-term cash crunch as people took money out from under their proverbial (and sometimes literal) mattresses and poured it into bank deposits and mutual funds. Much of this $220 billion liquidity surge found its way into the hands of shadow banks, which in turn sparked a series of financial ructions that I won’t pretend to fully understand.

On balance, though, Modi has failed to deliver on his promise of faster growth. Under his government, India’s GDP has grown at about 7 percent a year, which looks more like the growth produced by the preceding government than it does the 10 percent average growth China maintained from 1990 to 2010. Moreover, the failure to jump-start manufacturing employment has left the country with an unemployment rate of 7 percent, driven in large part by a 20 percent jobless rate for urban men under 30, a slice of the population not known for its quiescence.

Perhaps the most high-profile undertaking of the Modi government has been its war against graft and corruption. Lest voters miss the point, Modi updated his Twitter handle to include the prefix Chowkidar, or “watchman.” Here too, it is unclear that Modi’s successes outnumber his failures. During the campaign, Modi’s opponents played off his own self-branding, telling voters “chowkidar choi hai” or “the watchman is the thief.” His success at the polls notwithstanding, 42 percent of Indian voters felt as if corruption had grown worse under Modi, compared with 36 percent who thought it had improved.

Interestingly, Kazmin and Barber of the Financial Times suggest Modi’s anti-corruption fervor has deepened his country’s credit crunch. They point to the case of Jet Airways, India’s oldest private airline, which went bankrupt because no state bank was willing to extend it credit, despite the fact that these same banks had taken managing control of the company and had been shopping around for a buyer. Kazmin and Barber present the view of an anonymous businessman who thinks this curious series of decisions can be attributed to fear of prosecution: “There is a subtle difference between being anti-corruption and anti-business. If I feel I am going to be persecuted, I’m going to be very careful in how I take my investment decisions.”

Given that Modi failed to deliver rip-roaring economic growth, how do we account for Modi’s irrefutable political success? Those who attribute Modi’s success exclusively to his willingness to indulge and promote Hindu chauvinism, a sentiment not uncommon among English-language interpreters of Indian political life, miss an equally important, if more prosaic, explanation: the efficient delivery of generous welfare benefits, particularly to rural citizens.

Writing in Foreign Policy, Srinivas Thiruvadanthai of the Jerome Levy Forecasting Center argued that Modi deserved more credit for his effective administration of the welfare state, which is exceedingly important when you consider that more than 70 million Indian citizens live on less than $1.90 a day.  One particularly impactful policy provided bank accounts to 300 million previously unbanked citizens. Though the program is still in its infancy, preliminary research has shown that areas with high exposure to the program saw upticks in health-related borrowing. Separately, in an effort to cut down on pollution and improve sanitation, the government has built 81 million household toilets and provided financing for more than 60 million cylinders of Liquid Petroleum Gas, which is a much cleaner home-cooking fuel than the cheap alternatives of firewood and kerosene.

While latrine building and small-dollar banking are not the most glamorous subjects for foreign correspondents to take up, they mean an awful lot to the citizens who no longer have to relieve themselves in fields or rely exclusively on informal networks for credit. Presumably, it was these tangible, bread-and-butter outcomes that allowed Modi to fare so well in left-leaning regions—such as West Bengal, which had long been a Marxist redoubt—and, more striking still, among Muslim women.

But all the latrines in the world won’t make India an economic dynamo. To pull off that feat, Modi must persuade Indians to embrace an urban future. Reuben Abraham and Pritika Hingorani, both of India’s IDFC Institute, a small but enormously influential think tank based in Mumbai, have made a convincing case that at present India’s state governments—which are each empowered to decide what qualifies as urban—systematically underestimate the urban share of their populations. According to the Indian Census, only 31 percent of the country’s population resides in urban areas. If, however, you were to adopt Ghana’s or Lebanon’s definition for what amounts to an urban area, India is almost 50 percent urbanized.

This definitional game has consequences—classifying an area as urban completely shifts the statutory responsibilities of local governments. Urban governments must do the important work of funding fire departments, building sewage lines, and drafting building standards. India’s current policy of closing its eyes to emerging cities is helping to ensure that its cities are filthier, more chaotic, and less economically productive than they would be otherwise.

And if India’s growth strategy is going to be defined by high-value services rather than labor-intensive, low-wage manufacturing, it ought to heed the lessons of the world’s most successful postindustrial metropolises. Abraham and Shashi Verma, the chief technology officer of London’s transportation office, have argued that India should recast Mumbai, India’s financial capital, in the mold of New York or London, primarily by converting its shrinking port into a sleek new business district offering a high quality of life. Trivial though this effort might sound, the rise of Shenzhen, and the creation of Shanghai’s Pudong financial district, did a great deal to spur China’s urban development.

Ideally, Abraham and Verma’s Mumbai project would demonstrate that educated Indians needn’t move abroad to enjoy decent services or to build successful businesses. In The Other One Percent, a comprehensive analysis of the Indian-origin population of the U.S., the social scientists Sanjoy Chakravorty, Devesh Kapur, and Nirvikar Singh posit that “controlling for quality, it will take decades for India’s system of higher education to simply match the stock of India-born doctorate-degree holders in the science and technology disciplines.” Only by building attractive global cities of its own can India hope to compete with the San Franciscos and Singapores in its efforts to attract and retain intellectual and entrepreneurial talent. And in doing so, Modi might finally deliver the accelerated growth that he has promised his voters.