In the second week of 2024 enterprise leaders descended on Gujarat, the house state of Narendra Modi, India’s prime minister. The event was the Vibrant Gujarat Global Summit, one in every of many gabfests at which India has courted international buyers. “At a time when the world is surrounded by many uncertainties, India has emerged as a new ray of hope,” boasted Mr Modi on the occasion.

He is true. Although international progress is anticipated to gradual from 2.6% final 12 months to 2.4% in 2024, India seems to be booming. Its financial system grew by 7.6% within the 12 months to the third quarter of 2023, beating practically each forecast. Most economists count on an annual progress price of 6% or extra for the remainder of this decade. Investors are seized by optimism.

The timing is sweet for Mr Modi. In April some 900m Indians will likely be eligible to vote within the largest election in world historical past. A giant cause Mr Modi, who has been in workplace since 2014, is prone to win a 3rd time period is that many Indians suppose him a extra competent supervisor of the world’s fifth-largest financial system than they do another candidate. Are they proper?

To assess Mr Modi’s file The Economist has analysed India’s financial efficiency and the success of his greatest reforms. In many respects the image is muddy—and never helped by sparse and poorly stored official information. Growth has outpaced that of most rising economies, however India’s labour market stays weak and private-sector funding has disillusioned. But that could be altering. Aided by Mr Modi’s reforms, India could also be on the cusp of an funding increase that might repay for years.

The headline progress figures reveal surprisingly little. India’s GDP per individual, after adjusting for buying energy, has grown at a mean tempo of 4.3% per 12 months throughout Mr Modi’s decade in energy. That is decrease than the 6.2% achieved beneath Manmohan Singh, his predecessor, who additionally served for ten years.

But this slowdown was not Mr Modi’s doing: a lot of it’s right down to the unhealthy hand he inherited. In the mid-2000s an infrastructure increase went bitter. India confronted what Arvind Subramanian, later a authorities adviser, has referred to as a twin balance-sheet disaster, one which struck each banks and infrastructure corporations. They had been left loaded with unhealthy debt, crimping funding for years afterwards. Mr Modi additionally took workplace at a time when international progress had slowed, scarred by the monetary disaster of 2007-09. Then got here the covid-19 pandemic. The troublesome situations meant common progress amongst 20 different massive lower- and middle-income economies fell from 3.2% throughout Mr Singh’s time in workplace to 1.6% throughout Mr Modi’s. Compared with this group, India has continued to outperform (see chart 1).

Against such a turbulent backdrop, it’s higher to evaluate Mr Modi’s file by contemplating his said financial goals: to formalise the financial system, enhance the convenience of doing enterprise and increase manufacturing. On the primary two, he has made progress. On the third, his outcomes have thus far been poor.

India’s financial system has definitely turn out to be extra formal beneath Mr Modi, albeit at a excessive price. The thought has been to attract exercise out of the shadow financial system, which is dominated by small and inefficient corporations that don’t pay tax, and into the formal sphere of huge, productive corporations.

Mr Modi’s most controversial coverage on this entrance has been demonetisation. In 2016 he banned the usage of two large-value banknotes, accounting for 86% of rupees in circulation—stunning many even inside his authorities. The said purpose was to render nugatory the ill-gotten features of the corrupt. But nearly all of the money made its means into the banking system, suggesting that crooks had already gone cashless or laundered their cash. Instead, the casual financial system was crushed. Household funding and credit score plunged, and progress was in all probability harm. In non-public, even Mr Modi’s supporters in enterprise don’t mince phrases. “It was a disaster,” says one boss.

Demonetisation might have accelerated India’s digitisation nonetheless. The nation’s digital public infrastructure now features a common id scheme, a nationwide funds system and a personal-data administration system for issues like tax paperwork. It was conceived by Mr Singh’s authorities, however a lot of it has been constructed beneath Mr Modi, who has proven the capability of the Indian state to get massive tasks executed. Most retail funds in cities at the moment are digital, and most welfare transfers seamless, as a result of Mr Modi gave nearly all households financial institution accounts.

Those reforms made it simpler for Mr Modi to ameliorate the poverty ensuing from India’s disappointing job-creation file. Fearing that stubbornly low employment would cease residing requirements for the poorest from enhancing, the federal government now doles out welfare funds price some 3% of GDP per 12 months. Hundreds of presidency programmes ship cash on to the financial institution accounts of the poor.

It is an enormous enchancment on the outdated system, wherein most welfare was distributed bodily and, owing to corruption, usually failed to succeed in its meant recipients. The poverty price (the proportion of individuals residing on lower than $2.15 a day), has fallen from 19% in 2015 to 12% in 2021, in line with the World Bank.

Digitisation has in all probability additionally drawn extra financial exercise into the formal sector. So has Mr Modi’s different signature financial coverage: a nationwide items and providers tax (GST), handed in 2017, which knitted collectively a patchwork of state levies throughout the nation. The mixture of homogenous funds and tax programs has introduced India nearer to a nationwide single market than ever.

That has made doing enterprise simpler—Mr Modi’s second goal. GST has been a “game-changer”, says B. Santhanam, the regional boss of Saint-Gobain, a big French producer with massive investments within the southern state of Tamil Nadu. “The prime minister gets it,” provides one other seasoned manufacturing govt, referring to the necessity to lower purple tape. The authorities has additionally put critical cash into bodily infrastructure, akin to roads and bridges. Public funding surged from round 3.5% of GDP in 2019 to almost 4.5% in 2022 and 2023.

The outcomes at the moment are materialising. Mr Subramanian lately wrote that, as a share of GDP, in 2023 web revenues from the brand new tax regime exceeded these of the outdated system. This occurred at the same time as tax charges on many objects fell. That extra money is coming in regardless of decrease charges means that the financial system actually is formalising.

Yet Mr Modi is just not glad with merely formalising the financial system. His third goal has been to industrialise it. In 2020 the federal government launched a subsidy scheme price $26bn (1% of GDP) for merchandise made in India. In 2021 it pledged $10bn for semiconductor corporations to construct crops domestically. One boss notes that Mr Modi personally takes the difficulty to persuade executives to take a position, usually in industries the place they face little competitors and so in any other case may not.

Some incentives may assist new industries discover their toes and present overseas bosses that India is open for enterprise. In September Foxconn, Apple’s foremost provider, mentioned it could double its investments in India over the approaching 12 months. It at present makes some 10% of its iPhones there. Also in 2023 Micron, a chipmaker, started work on a $2.75bn plant in Gujarat that’s anticipated to create some 5,000 jobs straight and 15,000 not directly.

So far, nevertheless, these tasks are too small to be economically important. The worth of manufactured exports as a share of GDP has stagnated at 5% over the previous decade, and manufacturing’s share of the financial system has fallen from about 18% beneath the earlier authorities to 16%. And industrial coverage is pricey. The authorities will bear 70% of the price of the Micron plant—that means it would pay practically $100,000 per job. Tariffs are ticking up, on common, elevating the price of overseas inputs.

So what issues extra: Mr Modi’s failures or his successes? As nicely as financial progress, it’s price private-sector funding. It has been sluggish throughout Mr Modi’s time in workplace (see chart 2). But a increase could also be coming. A current report by Axis Bank, one in every of India’s largest lenders, argues that the private-investment cycle is prone to flip, because of wholesome financial institution and company balance-sheets. Announcements of latest funding tasks by non-public firms soared previous $200bn in 2023, in line with the Centre for Monitoring Indian Economy, a think-tank. That is the very best in a decade, and up 150% in nominal phrases since 2019.

Although increased rates of interest have sapped overseas direct funding prior to now 12 months, corporations’ reported intentions to spend money on India stay sturdy, as they search to “de-risk” their publicity to China. There is a few probability, then, that Mr Modi’s reforms will kick progress up a gear. If so, he may have earned his popularity as a profitable financial supervisor.

The penalties of Mr Modi’s insurance policies will take years to be felt in full. Just as an funding increase may vindicate his method, his technique of utilizing welfare funds as an alternative choice to job creation may show unsustainable. A failure to construct native governments’ capability to supply primary public providers, akin to schooling, might hinder progress. Subhash Chandra Garg, a former finance secretary beneath Mr Modi, worries that the federal government is just too eager on “subsidies” and “freebies”, and that its “commitment to real reforms is no longer that strong.” And but for all that, many Indians will go to the polls feeling cautiously optimistic concerning the financial adjustments that their prime minister has wrought. ■