Modi's Fatal Weakness

He seems impregnable politically. But it won't last.

Better days.

Photographer: Kevin Frayer/Getty

It's been almost three years since Narendra Modi took over as prime minister of India -- but, in many ways, it feels longer. Modi's domination of Indian politics, and of Indians' imagination, is complete; no alternative seems possible, every challenger has been defeated. But bad economics has a habit of catching up with its practitioners eventually. And for all his political success, Modi's mismanagement of the Indian economy may yet be his downfall.

When he became prime minister, in 2014, Modi was welcomed by market-friendly liberals convinced that his record as a pro-business leader of Gujarat state meant that he'd be a reformist in New Delhi. Reality was a harsh let-down. Modi's government has certainly instituted reforms worth noting -- a nationwide tax overhaul and a new bankruptcy law, for example. But he hasn't moved as aggressively to expand the role and power of markets as many had hoped. At best, he's about as market-friendly as the government he replaced.

He's even gone backward in some respects. One gets the feeling that the mood in his government is distinctly truculent today. Bolstered by a big election victory in India's largest state, it isn't interested in listening to liberals bleating on about privatization, freer markets and trade.

Perhaps the turning point was Modi's decision in November to withdraw all high-value currency notes in circulation. Most people would think that taking 86 per cent of a country's currency out of circulation, and then botching up the process of returning the money stock to normal, would be a disaster politically. It was certainly a disaster economically. But Modi has since gone from strength to strength politically. Not only did he win a series of state-level elections in March, but last week he trounced one of his main challengers, the anti-corruption crusader Arvind Kejriwal, in local elections in the latter's stronghold of Delhi.

It would be a serious problem for India if Modi saw these successive victories as a sign that he could sell any policy, no matter how disastrous. Yes, the currency withdrawal -- "demonetization," as it's called -- was terrible economics while being excellent politics. The average Indian suffered a great deal of hardship, but consoled herself with the belief that rich, corrupt Indians were suffering as much, if not more. It would be easy for any politician to believe that if they've succeeded so well in turning a blunder of nearly unique proportions into an electoral advantage, then they could do whatever they please with the economy without suffering the slightest blowback.

Recent signals from Modi suggest he thinks just that. This week, he inaugurated a new airline scheme that featured caps on ticket prices of 2,500 rupees, or about $40. The government had already experimented with price controls -- for example on cardiac stents, the price of which it forced down by about 85 percent. Last week, Modi hinted that he might force doctors to prescribe only drugs mandated by the government, claiming that their bad penmanship was a conspiracy: "Poor people do not understand the handwriting," he said, and have to buy medicine "from private stores at high prices."

You get the sense that Modi, who came into office as a market-friendly reformer, is happy to fight the next general election in 2019 as a class warrior. And on current form he might well win handsomely.

The problem is that India's economy is growing at 7 per cent today -- more than most other countries, but well short of its potential. Good policy would get you double-digit growth. And it's double-digit growth, as China's experience shows, that produces the kind of social and economic transformation that Modi repeatedly promises his voters.

If he fails to make good on those promises, the first casualty will be Modi himself. He may have no credible challengers now, but democracies have a way of creating contenders out of nowhere -- as was the case with Modi's own rise. Potential opponents are being incubated already, within the prime minister's own party. In the long run, bad economics doesn't give you growth, investment and jobs. And doing without growth, investment and jobs isn't good politics at all.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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    Mihir Sharma at

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