PM Modi delivers on all of its promises

Modi's big job

On Monday (May 26th, 2014) Narendra Modi was sworn in as Indian Prime Minister. After several weeks of election, a historic victory and an elaborate inauguration ceremony, he is now in charge. Expectations are high - Modi had promised the country economic development and good governance.

Modi has appointed 61-year-old Arun Jaitley, a lawyer, as Treasury Secretary. He must now implement reforms and fight stagflation - a combination of weak growth, high inflation and high unemployment.

The new finance minister is aware that he will take over the office at a difficult time. "We have to get back to the old growth pace, keep inflation in check and focus on fiscal consolidation." The government will present its budget in two months. Then it will show how resolute it is to tackle the reforms.

Modi's government takes over at a time when the Indian economy is experiencing its weakest growth rates in a decade. The gross domestic product, which used to grow almost in double digits, is only growing by four to five percent per year.

At around nine percent, inflation is one of the highest in South Asia. The central bank is therefore being forced to keep key interest rates high - in doing so, it should actually lower interest rates in order to stimulate the ailing economy.

Jaitley promises growth, low inflation and fiscal discipline

Main task growth

"The government's most important job is to fuel growth," said Eswar Prasad, an economics professor at Cornell University in the United States and a senior researcher at the Brookings Institution, a Washington-based think tank. "To do this, it must accelerate the reform process and pursue a reliable policy."

The government must "tackle the country's major infrastructure problems, reform the labor market and modernize the rules on land acquisition," said Prasad. In addition, it must explain how the public debt can be reduced in the medium term.

The finances of Asia's third largest economy are in poor shape. The government spends more than it earns. Most recently, the budget deficit was 4.1 percent of economic output. The cost drivers include high subsidies for fertilizer and oil.

Around three quarters of Indian crude oil requirements are imported, so the subsidies are a correspondingly heavy burden on the state treasury. Imports of oil and gold are also believed to be the main reason behind the deficit in India's current account. Because the value of imports exceeds the value of exports, the Indian currency, the rupee, is increasingly depreciating.

The question now is whether Modi can boost growth and create jobs without widening the hole in the treasury. "More people need access to credit, the manufacturing industry needs to be strengthened," said economist Prasad to Deutsche Welle. "This creates jobs, the profits are distributed more evenly among the population and poverty is reduced."

Model Gujarat?

Many economists are of the opinion that India should orient itself on the successes of China and other countries in East Asia. That would mean concentrating on industry and manufacturing in order to create jobs for young people and permanent high growth.

That would also accelerate the change in India - away from a rural agricultural society towards an urban industrial nation.

However, manufacturing only contributes 15 percent to India's economic output, and the share is shrinking. In order to strengthen this sector, India must become more attractive for domestic and foreign investments, write the economists Arvind Subramanian and Amrit Amirapu in a commentary for the Indian newspaper Business standard.

They refer to the successes of the Indian state of Gujarat, which Modi has ruled since 2001. Gujarat is the only region in India in which the manufacturing industry has a share of more than 20 percent of economic output and thus follows the high values ​​in other countries in East Asia.

During the election campaign, Modi has repeatedly highlighted the economic successes of his home country - strong growth, development of the infrastructure, a business-friendly environment and a relatively corruption-free government. Modi promised during the election campaign that he would transfer the "Gujarat model" to the whole country.

Difficult task

Can the "Gujarat model" be transferred to all of India?

However, analysts believe that the reforms will not simply apply to the whole of India. The central government in New Delhi has only limited influence over the states responsible for implementing the reforms, says Milan Vaishnav, South Asia analyst at the Carnegie Foundation for International Peace, based in Washington.

"Unlike in his 12 years as Prime Minister of Gujarat, Modi will now have to make compromises," Vaishnav told DW.

Economist Prasad says the new government must act quickly and decisively to push through the reforms. She has received a strong mandate from the voters, does not have to make any political concessions and is not dependent on coalition partners.

But Prasad emphasizes: "If Modi does not manage to turn the economic course quickly and meet the expectations of the lower and middle income groups, his shine could quickly wear off."