This column is being written before final Indian election results are available, let alone a government being selected. However if exit polls are confirmed and Narenda Modi has won a majority that allows him to govern for five years, then he has potentially the most important job in the world. Let me explain why, and why this high-flown claim operates only if he “gets it right” – a condition that I will also attempt to define, and to suggest how Modi may achieve it.
 
There is some reason for Indians to hope that Modi’s election marks a genuine change of direction, with potential to solve the economic insanities that are holding the country back. While Manmohan Singh made the first modest reforms of India’s benighted “permit raj” after 1991 the most vigorous reforms were carried out by Atal Bihari Vajpayee’s BJP government in 1998-2004. The Indian electorate then repaid Vajpayee with a staggering act of foolish ingratitude by voting out the BJP in 2004 and returning Congress to power.
 
You can argue which was worse, the Indian electorate’s behavior to Vajpayee or the British electorate’s voting out Winston Churchill in 1945 – I would argue voting out Churchill wasn’t as bad, because his peacetime record was mediocre. Anyway, the ten years since then have seen policy stagnation and corruption, which have gradually accrued barnacles to India’s grossly oversized state bureaucracy and subsidy network. India’s brisk economic growth, continuing for several years on the momentum caused by Vajpayee’s reforms, has since slowed to a constipated crawl.
 
At this point, it is to be hoped that Modi is another Vajpayee, courageous, reformist and free-market oriented in economic policy and moderate on the communal policies that separate Hindu and Muslim. His record in Gujarat is encouraging, his handling of the 2001-02 Gujarat riots less so. In any case, one term in office will not be enough; if the 2019 elections saw a return of the socialist Congress, or perhaps worse, a descent into un-governability through proliferation of minor parties, any policy and economic progress made in the previous five years would quickly be reversed. As I shall explain, the global economic environment is unlikely to be as forgiving to India in 2019 as it was after 2004.
 
To meet with success, Modi has two main tasks to accomplish. First, he must eliminate the public sector deficit of close to 10% of GDP that has bedeviled Indian finances for the last decade. With the public sector soaking up so much of the financial pool, the balance of payments is permanently in deficit, causing the rupee to be forever weak and preventing the Indian private sector from accessing finance. Given India’s growth over the last decade, for the first half of which it ran considerably faster than projections, the deficits should have disappeared through the magic of buoyant revenues. The fact that they didn’t is itself a damning indictment of Congress’s fiscal ineptitude. Halving the deficit is not enough; Modi needs to eliminate it altogether, on a consolidated basis including the center and all the states. Only thus will finance be released for the private sector and India’s dismal cycle of stop-start growth broken.
 
There are two approaches to be taken to reduce the public deficit. First, the subsidies on fuel and basic foods must be removed, allowing those prices to reach their international market level. Most of these subsidies do not go to the poor; for example any subsidy on petrol benefits primarily the middle class who have cars and motorbikes. Inevitably, removing the subsidies will cause hardship to many, and will be politically very unpopular; thus they should be removed immediately.
 
The other immediate reform that Modi must undertake, which will benefit both the budget and the economy, is to carry out a “bonfire of controls” closing regulatory bureaucracies wherever possible and abolishing the regulations themselves. He has the example and many of the personnel of the Vajpayee government available, which became quite bold in its bureaucratic reforms in the last years of its term, but inevitably, much of this will have to be done again and much new dead wood has grown up. Allowing competition and foreign investment into sectors where it is currently blocked will be immensely beneficial in the long run, while India’s size both demographic and economic will ensure that competition is strong and “national champions” will appear on their own in sectors and companies that are truly competitive.
 
If the budget is cut back ruthlessly and controls are removed to stimulate growth, within three years the budget should be close to balance, helped by buoyant revenues as well as Scrooge-like expenditure controls. Once the bureaucracy has been streamlined, and corruption cut back, a social welfare program should be instituted, to alleviate India’s horrendous poverty and maximize the chance of retaining power. This should be modeled on the Brazilian “Bolsa famila”, modest payments made to mothers conditional on their children staying in school. Budgetary reasons as well as crude electoral calculations suggest this should be delayed a couple of years — it should be an early dividend of renewed vigorous growth, coming into effect shortly before the next election.
 
The key to success will be re-election; the ten-year detour that followed 2004 must not happen again. 2019 will not necessarily be a benign environment to achieve this; the West will most likely be in the throes of the major recession that must follow the bursting of the current enormous bubble, with destruction of the gigantic malinvestment in all sectors that is accompanying it. Should Congress win the 2019 election, they will be able to utter happy Keynesian cries of “stimulus” as they reverse all the Modi government’s reform policies and squander money on hopelessly unproductive state investment. The resulting mess will be much worse than the current one, with correspondingly less ability for India to pull itself definitively out of poverty.
 
Should a reformist government finally be allowed ten years by the electorate, as no reformist government has had in India, it should be able to push India into middle-income status. That will allow Indian growth to continue with much less pressure from population, as growing prosperity will cause fertility to decline. Since India by that stage will have more than a sixth of global population, it should provide a sufficient market for countries, mostly in Africa, that remain very poor that they too will embark on the road to prosperity. The result will be a global virtuous circle of competent policy and economic growth.
 
Westerners of a zero-sum mindset will object that this will not benefit the West, which will see yet more competition from India, to join that from the resurgent China. After all, Western living standards have stagnated in the last 20 years as globalization and modern telecoms technology have allowed global supply chains to be built.
 
That criticism confuses two separate trends of the last two decades. The internet and modern telecoms would have happened anyway, and cannot be reversed. Hence Western economies are inevitably more subject than they used to be to competition from workforces in poor countries. If poor countries remain badly run, then they remain poor, and the additional wealth from globalized supply chains is dissipated in corruption and public sector boondoggles. Global wealth increases only modestly, and Western workforces continue to suffer from low-wage competition and suffer declines in living standards.
 
However, if poor countries are well run, then they become richer, the cost pressures on Western labor from their citizens become less and the richer citizens of poor countries provide interesting markets for production from the West, their own countries, and other places that are still poor. In this case, global wealth increases rapidly, and the West too shares in the increasing global wealth – the cake is getting larger fast enough for bigger slices to be available for everybody.
 
That’s why Modi is potentially so important. If he can put India on the road to wealth, and give the country a decade of capable government that eliminates restrictions and cuts back the public sector, then not only India but the world as a whole will become much richer, because of India’s size and importance.
 
Conversely, if he proves to be only a feeble reformist, or is voted out of power after a single term (there being no other forces in India from which reformism can be hoped for) then India will remain poor, as will other poorer countries in Africa, while Western incomes will also tend to decline. With incomes declining, the chances are that a poisonous combination of the ideas of Maynard Keynes and those of Thomas Piketty will dominate public policy, impoverishing ordinary people still further. Only the corrupt bureaucrats and crony capitalists, who use their control over bottlenecks to extract rents, will benefit, as Piketty’s dire predictions become self-fulfilling. Given the pressures on global population from a world that remains poor, the decline in living standards may well become terminal.
 
Narenda Modi, it’s up to you. Don’t let the world down!

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)