Manmohan Singh’s mixed economic legacy

Above all, Singh, who was 92, is remembered for the economic reforms he oversaw in 1991 as finance minister—reforms that opened India’s economy to more market competition and foreign investment. It was the first time since independence in 1947 that India repudiated the socialist policies that had pushed it to the brink of bankruptcy. Backed by then-Prime Minister P.V. Narasimha Rao, Singh became the public face of the economic reforms. He devalued the rupee, reduced tariffs and other trade barriers, ended industrial licensing, and welcomed foreign investment.

Thanks to liberalization, India is now the world’s fifth-largest economy at market exchange rates and is on track to become the third-largest by 2028. What a contrast to 1991, when India was the world’s second-most-populous country but had only the 17th-largest economy.

Yet although Singh deserves some credit for these advancements, a closer look at his career reveals a mixed record. Departing from his legacy as finance minister, as prime minister he put the brakes on market-friendly reforms. India stopped privatizing state-owned companies, launched an expensive rural job-guarantee scheme, and introduced a retrospective tax that spooked foreign investors.

Today Singh’s political party, the opposition Indian National Congress, has all but turned its back on economic liberalization. The party’s leader, Rahul Gandhi, rails against big businesses and champions expanded caste quotas, a form of affirmative action.

Prime Minister Narendra Modi of the ruling Bharatiya Janata Party isn’t the Thatcherite economic reformer his admirers hoped he’d be either. Granted, he has upgraded infrastructure, stanched corruption in welfare programs through digital transfers, somewhat simplified taxation through a national goods-and-services tax, and improved the balance sheets of India’s public-sector banks. But when it comes to politically contentious reforms, Mr. Modi has proved weak. His administration has struggled to privatize state-owned enterprises, enable businesses to hire and fire workers more easily, and allow market forces to play a greater role in agriculture and land acquisition. On these issues, Mr. Modi has either proceeded cautiously or retreated when challenged.

Under Mr. Modi’s leadership, India has also reversed its post-1991 policy of steadily lowering tariffs. The Modi model is a mixture of higher tariffs, spending billions of taxpayer dollars to boost manufacturing in favored industries, and a cozy relationship between the government and large Indian conglomerates such as the Adani Group and the Reliance Group. Dhiraj Nayyar, an economist with India’s Vedanta Group and former adviser to the Modi government, said in a phone interview that Mr. Modi “believes in industrial policy and in creating national champions," as South Korea did while it industrialized.

The experience of the past 20 years—Singh’s two terms as prime minister followed by Mr. Modi’s first two terms—shows that the appetite for economic reform in India goes only so far. If both Mr. Singh, hailed as the hero of India’s reforms, and Mr. Modi, who enjoyed single-party majorities in his first two terms, were unable to advance the ball meaningfully on free-market reforms, it’s unlikely that Mr. Modi will do better in his third term—especially since his government now depends on support from coalition partners.

What does this mean for India and the world? The good news is that even India’s limited reforms have paid off. In 1990, 46% of India’s 850 million people lived in extreme poverty. Today, the World Bank estimates that only 9% of India’s 1.4 billion people live in extreme poverty. Foreign direct investment has risen from less than $100 million in 1990-91 to $28.1 billion last year. Foreign-exchange reserves in 1991 stood at $1 billion, enough to cover roughly two weeks of imports. They’re now at $644 billion.

The bad news: India still punches below its weight. The International Monetary Fund forecasts that India’s gross domestic product will cross $5 trillion in 2027 but will still be only a fraction of America’s ($33 trillion) or China’s ($22 trillion).

China isn’t the only Asian country that is lapping India. In 1991, Vietnam’s per capita GDP was about half of India’s; now it’s nearly double: $4,650 compared with India’s $2,700. Indonesia remains similarly ahead of India in per capita GDP despite weathering the 1997 East Asian financial crisis and a tumultuous transition from dictatorship to democracy.

In a budget speech as finance minister, in 1991, Singh famously quoted Victor Hugo: “No power on earth can stop an idea whose time has come." But if the idea was for India to join the ranks of East Asia’s prosperous economies, 1.4 billion people are still waiting for its arrival.