Politically, Indian Prime Minister Narendra Modi was a great success during his first term; he did, after all, win a sweeping re-election victory this May. Economically, however, he fell well short of expectations and his own promises. Instead of comprehensive liberalisation, he pursued cautious incrementalism, supplemented with a couple of unexpected and destabilising moves -- notably the decision to outlaw large-denomination bank notes, which inflicted a severe liquidity squeeze on the country.
Unsurprisingly, this has hurt the economy. GDP will expand by a relatively lacklustre 5.2% in 2019 according to EIU estimates, down from 6.8% last year and an average of almost 8% over the previous four. The central bank has cut rates by a total of 135 basis points this year in an effort to stimulate growth and is fretting about declining liquidity in the banking system.
Could this all change? A new analysis by the Cato institute suggests that Mr Modi will turn into a radical reformer during his second term. In September, the government slashed corporate tax rates, making India competitive with countries like Vietnam and Bangladesh that are benefiting from the manufacturing exodus from China.
Privatisation is also back on the agenda. In his first term, Mr Modi only sold minority stakes in public companies and failed to flog Air India. Now majority shareholdings in major oil, logistics and shipping companies look like they will soon be up for grabs. Meanwhile, the government is increasing the number of infrastructure assets it is opening up to private operators, adding airports and rail routes to roads, power stations and electrical transmission lines.
One reason Mr Modi is being more radical is that he can be. He has the political capital following his re-election in May; his BJP party has steadily increased its presence in the upper house via state election victories over the past four years; and the opposition is divided and demoralised. The second reason is that he must be. The economic slowdown has reduced tax revenues and Mr Modi's promised election give-aways are expensive. India's fiscal deficit may exceed 4% of GDP this year. Hence the need to raise money by selling off assets.
Whatever the cause, reducing the state's role in the economy should pay off in terms of increased efficiency and investment and hence faster growth. For evidence, just look at more lightly-regulated sectors, where local entrepreneurs are already thriving and foreign companies piling in. Oyo in hotels, Practo in healthcare and Paytm in payments are just some of India's growing number of unicorns, with Paytm set to be valued at $14 billion after its latest funding round. Meanwhile, drawn by the lure of a rapidly growing domestic market, Netflix and Amazon are investing heavily in video streaming in India, just as Wal-Mart, Amazon again and others are fighting for supremacy in e-commerce.
As we predicted in March, Modi 2.0 is likely to be a much more positive force for the economy and, in a slowing and uncertain world, India is likely to become an even more attractive destination for international investors.