India’s Modi Will Have to Reduce Fiscal Spending, Bhagwati Says

India’s new government led by Narendra Modi will have to reduce spending as one of its first steps, Columbia University’s Jagdish Bhagwati said.

“The problem that is inherited by the new prime minister is that fiscal spending is profligate,” Bhagwati, a professor of economics at the New York University, said in a radio interview today on “Bloomberg Surveillance” with Tom Keene and Michael McKee. “The first thing he’s got to do is to try and rein in the spending,” because government finances are “virtually bankrupt.”

“He’s got to cut some of the subsidies,” Bhagwati said, referring to Modi. “You can always go easy even on things like basic rights you’ve assured for health and education et cetera.” While the new leader is not likely to unravel what the previous government was doing, spending on social programs “doesn’t have to be done on the same scale” as before, Bhagwati said.

Modi’s Bharatiya Janata Party swept into power on May 16 as voters tired of sluggish economic growth handed an historic defeat to the ruling Congress Party. The win puts Modi in a position to take steps to boost the economy by passing measures, including the passage of a goods and services tax, increasing of food supplies to curb inflation and implementation of stalled projects.

The political party headed by Modi got a “fantastic majority” in the elections, Bhagwati said. “The Gandhi family committed hara-kiri” by “ignoring all the complaints that were coming their way” as economic growth “collapsed” to about 4.5 percent from 9 percent on average for the prior decade.

Inflation Recipe

If the growth rate plunges and “you continue spending large sums of money on social spending, particularly because you think you’re going into an election, that is a sure-fire recipe for inflation,” Bhagwati said. “Inflation hurts the poor” and the ruling government “got wiped out as a result.”

Rahul Gandhi, the 43-year-old heir to India’s most famous political family, headed the Congress party’s election campaign. Sonia Gandhi is his mother and party president. The Gandhi dynasty has dominated Indian politics since independence. Jawaharlal Nehru, Rahul’s great-grandfather and independence movement hero, became the country’s first prime minister. He was followed by his daughter Indira Gandhi and her son Rajiv Gandhi, Rahul’s father. Both were assassinated.

Modi’s BJP posted the biggest election victory in 30 years. It ended up winning 282 seats in the 543-seat parliament, while the outgoing Congress party won 44.

Faster growth in India under Modi’s leadership will help address its low taxpayer base, a well-known developing nation problem, Bhagwati said. Modi will follow the so-called Gujarat model of his home state, with an open economy and more trade and investment, he said.

“Growth will help because more revenues come in at any given tax rate,” Bhagwati said. “That’s going to give him much more leeway” to do the unpleasant things such as bringing more people into the tax base, he said.

To contact the reporters on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net; Tom Keene in New York at tkeene@bloomberg.net

To contact the editors responsible for this story: Carlos Torres at ctorres2@bloomberg.net; Vince Golle at vgolle@bloomberg.net Vince Golle, Brendan Murray

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