Modinomics
Narendra Modi's re-election is good news for economic reform

Reuters

Narendra Modi, Chief Minister of India's western state of Gujarat, gestures while greeting his supporters after taking his oath as chief minister during a swearing-in ceremony in Ahmedabad December 26, 2012.

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  • For his many admirers, Modi’s re-election sets the stage for a march on New Delhi. @Dhume01

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  • Modi's re-election marks the most unambiguous political victory for reformism over populism in India since 2004.

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  • Modi’s re-election proves that voters don't always pick the lure of handouts over the promise of jobs and development.

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Watched by his party's top leadership, regional politicians and a sea of adoring supporters, Narendra Modi was sworn in Wednesday for the fourth time as chief minister of the Indian state of Gujarat. For his many admirers, the strongman's re-election last week, his third straight win since 2002, sets the stage for a march on New Delhi.

But while talk of the prime ministership remains premature—national elections aren't due until 2014, and anti-Muslim riots on his watch in 2002 make Mr. Modi an awkward choice for India's top job—it's not too early to assess the Gujarat election's impact on economic discourse.

Simply put, Mr. Modi's re-election marks the most unambiguous political victory for reformism over populism in India since 2004. The chief minister's longevity—he first took office in 2001—signals to his peers in an increasingly federal polity that fiscal prudence and business-friendly policies can be good politics. It proves that voters don't always pick the short-term lure of handouts over the long term promise of jobs and development. In short, it's a public affirmation of the so-called Gujarat model that emphasizes rapid economic growth, investor-friendly policies, first rate infrastructure and raised agricultural productivity to boost rural incomes.

In 2004, the Congress Party argued (erroneously) that reforms had hurt the poor and defeated a BJP-led government that campaigned on the premise that India was "shining" thanks to economic growth. That same year, the country's most prominent reformist chief minister, Andhra Pradesh's N. Chandrababu Naidu, who famously wooed Microsoft MSFT +1.99% and Oracle, ORCL +2.96% among others, to invest in his state, lost to his populist Congress rival.

Though the new government in New Delhi was ostensibly led by a respected economist, Dr. Manmohan Singh, who piloted India's first bout of economic liberalization as finance minister in 1991, it soon became apparent that real power lay with Congress Party President Sonia Gandhi and a gaggle of leftist advisors with a strong preference for redistribution over growth.

Three years ago, the Congress returned to power with an enhanced majority despite stalling much needed reforms such as the privatization of loss-making state-owned companies and the rationalization of labor laws to make it easier for companies to hire and fire workers. The party based its appeal to voters on a program guaranteeing 100 days of work each year to villagers and the promise of more freebies to come.

For much of the political class, the 2009 election reinforced the anti-reform message of 2004. As if on cue, politicians who promised voters free laptops and other tax-payer funded goodies won subsequent elections in two of India's largest states, Tamil Nadu and Uttar Pradesh.

To be sure, since September, faced with sharply slowing growth, a yawning fiscal deficit, and the prospect of a downgrade of India's credit rating to junk status by international ratings agencies, Mr. Singh's government has belatedly embraced reform by cutting fuel subsidies and allowing increased foreign investment in retail, power and aviation. But battered by corruption charges, and faced with unprecedented protests in the national capital after a brutal sexual assault on a young student earlier this month, the government will almost certainly turn on the freebie spigot ahead of the 2014 elections.

Indeed, a sneak preview of this strategy was visible in Gujarat, where the Congress pooh-poohed economic progress under Mr. Modi, promised free housing for the poor and unveiled a cash transfer program that will allow it to pump government cash directly into the bank accounts of poor voters. Had the campaign succeeded, it would have snuffed out arguably the most promising economic experiment in India by sending the message that even double-digit growth over a decade, and thousands of jobs added by such companies as Tata, Ford, Abbott and Bombardier, wasn't enough for the Indian voter.

Needless to say, Mr. Modi's re-election hardly means that India's 27 other chief ministers will embrace his policies lock, stock and barrel. Indeed, the combination of cutting red tape and rolling out the welcome mat for businesses by promising them land, good infrastructure and freedom from petty harassment is more likely to take root in the prosperous coastal states of the South and West, already attractive to investors, than in India's impoverished Hindi heartland. Some of these states, most notably Tamil Nadu and Maharashtra, have managed to grow about as fast as Gujarat over the past decade despite lacking the latter's reputation for clean and efficient government.

But even if Gujarat's lessons are adopted piecemeal, it would mark a step in the right direction. For the BJP, torn between reformists who applaud Mr. Modi and traditionalists suspicious of markets, it could herald a welcome end to a schizophrenic approach to reform, albeit most likely not before 2014.

Perhaps most importantly, Mr. Modi represents that rarest of Indian politicians, one willing to bat publicly for small government, fiscal prudence and a state that unabashedly enables wealth creation by the private sector. Of course, this doesn't mean that those who oppose the chief minister's national ambitions on moral grounds have reason to stop doing so—there's more to politics than growth rates and investment—but anyone who wishes India well should welcome this rare electoral victory for sensible economics.

Mr. Dhume is a resident fellow at the American Enterprise Institute and a columnist for WSJ.com. Follow him on Twitter @dhume01

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