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Narendra Modi: Has new prime minister given India its mojo back?

By Ravi Agrawal, CNN
July 10, 2014 -- Updated 2249 GMT (0649 HKT)
  • Indian economy moving again: Stocks up 25%, foreign investment back, rupee is stable
  • This follows Prime Minister Narendra Modi's election to office this year
  • He promises to enact tax reforms, clean up corrupt bureaucracies, and provide housing
  • Yet his real challenge will be moderating expectations at home and abroad

Editor's note: Ravi Agrawal is CNN's New Delhi Bureau chief and was formerly senior producer of the network's "Fareed Zakaria GPS." Follow him on Twitter: @RaviAgrawalCNN.

New Delhi (CNN) -- If you believe the mood here, India is going to be the next China, the new frontier of global growth.

Stocks are up 25% since the start of the year. Foreign investment is back. The rupee is stable. World leaders are in town regularly to meet the new government and strike business deals -- the latest being Britain's George Osborne and William Hague.

They've followed a long line of top envoys from France, China, and Russia to visit India since Prime Minister Narendra Modi assumed office in May.

Amid all the diplomacy, Modi himself has been mooting big, ambitious ideas: a plan to build 100 new "smart cities," a proposal to launch high-speed bullet trains, and a pitch to make India a "global Walmart" for space technology. Add that to promises to enact tax reforms, clean up corrupt bureaucracies, and provide housing -- and toilets -- to every Indian.

Modi has made all the right sounds. But as his government delivers its annual budget -- the first official outline of its economic plans -- is too much being promised? More importantly, is too much being expected?

Room to grow

Ending India's subsidy economy
Can India's new PM deliver?
Modi puts Indian diplomacy in fast lane
India's New Era

On paper, there's no reason why India shouldn't begin a period of rapid growth. Certainly, it has room to grow, having missed out on the economic boom its Asian neighbors long enjoyed. Consider that just a generation ago the average Indian was better off than his Chinese counterpart. In 1990, per capita income in China lagged that of India's by 15%. Just 20 years later, Chinese income per head was three times that of India's. The potential was there but too many opportunities were missed.

Or consider India's struggles with poverty. In 1981, according to World Bank data, 60% of Indians were rated as impoverished. Today, that ratio has dropped to 32%. But the fall relies on India's immense population growth, from 700 million in the 1980s, to around 1.2 billion today. In reality, the actual number of Indians living in poverty has barely changed, staying at around 400 million for the past three decades.

The data shows that there is room -- and a great opportunity -- to improve all of these statistics. But why hasn't it happened already? It is a question that tempers the current optimism.

India has had its moments of optimism before. Analysts and investors have tended to either put India's prospects on an impossible pedestal -- remember when India and China were mentioned in the same breath? -- or they have taken to denouncing India's prospects in dire and abject terms (read: all of 2013).

None of the seesawing feels right; reality is probably somewhere in the middle.

India's vast population -- four times that of the United States -- is its greatest blessing as well as a potential curse. The median age in India is just 28. That makes for 600 million young Indians who could form the backbone of the next three decades of global productivity. But that's also 600 million Indians who are soon going to demand an education, jobs, health care, access to food, water, and basic infrastructure. Unmet demands could lead to all kinds of chaos -- for India and the world.

Cutting red tape and costs

Modi's new government has some key strengths that position it well to correct India's lagging performance. It is making the right sounds on cutting red tape, improving infrastructure, and kick-starting growth. It is attracting money from all over the world.

Perhaps most importantly, it has a complete mandate and majority to enact a vision. The hurdles ahead are clear: subsidies have risen sharply from 1.4% of GDP in 2008 to 2.5% today. Meanwhile India's tax-to-GDP ratio has stayed roughly constant around 10% through all those years.

Quite simply, India needs to figure out how to raise money and cut costs at the same time. The answer will undoubtedly mean short-term pain for the people. Can Modi afford to be honest with his constituents?

Amid all the hype and hysteria in India this week, Modi's greatest challenge isn't his government's first budget -- stocks will rise or fall a little, but not by much. His real challenge will be moderating expectations at home and abroad, creating a road map for the next decade, and then delivering over time.

READ: Friend or foe? Modi an unknown quantity abroad

READ: Who is Narendra Modi?

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