India announced Tuesday that its economy expanded at 7.9% in the three months to April, making it the world's fastest-growing major economy. That may sound like reason for Narendra Modi to celebrate, but the Prime Minister has much more to do to make good on his ambitious promises to ordinary Indians.
Since coming to office in 2014, Mr. Modi's government has addressed some of the many obstacles to private enterprise and bottlenecks in the economy. It reduced foreign-ownership restrictions in many industries, made government more transparent and improved the country's score on the World Bank's ease of doing business survey.
Yet improving the performance of government isn't the same as reducing the state's role in the economy. India still isn't creating enough new jobs to absorb the million young Indians entering the workforce every month. Labor Bureau statistics show that the eight biggest labor-intensive industries added 100,000 new jobs last year, compared to 400,000 in 2014. One bank calculates that for every percentage point of GDP growth, employment now grows 0.15 of a point, down from 0.39 in 2000.
One reason is that private capital expenditures shrank last year. Many companies are using profits to deleverage, reflecting uncertainty about the future. Total investment is up, but only because of government spending on roads, railways and ports.
The parlous state of India's banking system is partly to blame. The Reserve Bank of India is forcing banks to write off bad loans and the government has set aside $ 3.7 billion to recapitalize state-owned banks, which account for 70% of lending. But so far there's no plan to privatize those banks and eliminate the moral hazard created by government bailouts. Until bank balance sheets return to health, large companies and government entities are borrowing abroad.
Large companies are also held back by outdated labor regulations. It is virtually impossible to lay off workers legally, which drives jobs into the underground economy. Some $ 10 billion in road projects are on hold because of disputes over buying land. Apple CEO Tim Cook was told last month that he would have to move manufacturing to India before the company could open Apple stores.
In an interview with the Journal last week, Mr. Modi said he has undertaken "maximum reforms." He blamed the opposition Congress Party for blocking key labor and land reforms and said his government has allowed states to take the initiative. Congress certainly deserves blame, especially for holding up reform of the Goods and Services Tax. But Mr. Modi chose to be cautious in pushing reforms that risked a public backlash. Instead he pushed for rural access to banking and better hygiene.
He also can't seem to let go of his statist instincts, saying that government has a "very important role to play" in the economy. He didn't mention that a government audit found that by last year 157 companies controlled by New Delhi had accumulated losses of $ 16.5 billion.
The ruling coalition's strong showing in state elections last week gives Mr. Modi another political opening to press for deeper reforms. He might remember that his predecessor, Manmohan Singh, came undone when he rested on his own growth laurels.
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