Modi's U.S. visit has been heavy on atmospherics.

Is Modi India's Gipper?

Dhiraj Nayyar is a journalist in New Delhi. Trained as an economist, he has worked at the Financial Express, India Today and Firstpost.com. He is editor of "Surviving the Storm: India and the Global Financial Crisis."
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As a campaigner, Indian Prime Minister Narendra Modi has drawn comparisons to the man he met for dinner at the White House on Monday night: U.S. President Barack Obama. Both men are dramatic orators who make good use of their personal story in speeches. Both have exploited new technologies, especially social media, in the effort to rally grassroots supporters to donate and come out to vote.

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. Many Modi fans imagined he would immediately sweep away reams of outdated laws and regulations, allowing the invisible hand of the market to operate freely for the first time in India.

In fact, Modi is no more Reagan (or his British counterpart Margaret Thatcher) 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, rather than traditional Anglo-Saxon laissez-faire.

If Modi were inspired by Reagan, he would have prioritized an obvious series of initiatives: a cut in tax rates combined with curbs on government spending, the privatization of state-owned enterprises, a tight money policy to strangle inflation and aggressive action against labor unions. So far, Modi seems disinclined to any of the above. While he may divest piecemeal stakes in some government-owned companies, he 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 (and didn't entirely lift the threat of retroactive taxation that hangs over foreign companies). 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. On his trip to the U.S., Modi promised the chief executives of major U.S. companies that he planned serious labor reforms. Yet he has yet to prove he's willing to take on India's powerful unions -- many of which are affiliated with his own political party.

Some hopeful Modi fans counsel patience, saying the prime minister should be given at least until his next budget to prove his willingness to push for more dramatic changes. But consider the issues on which Modi has concentrated thus far. 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., no matter how successful his trip has been in terms of atmospherics.

In fact, in some ways, the prime minister is more statist in his approach than leaders in Beijing even. 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. He remains convinced that some "strategic" sectors should stay under Indian control.

While this approach worked well for Japan and China, it's far from guaranteed to achieve similar results in India. The fact is that 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. (The country still imports 80 percent of its defense requirements.) Government-owned insurance companies have done a terrible job of spreading insurance to the masses.

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 -- all things that the U.S. private sector can provide much more efficiently than the Chinese or Japanese governments. Last week, Modi declared that for him, FDI meant "First Develop India." If he's serious, he's going to have to act a little more like Ronald Reagan than he has thus far.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Dhiraj Nayyar at dhiraj.nayyar@gmail.com

To contact the editor on this story:
Nisid Hajari at nhajari@bloomberg.net