What Biden can learn from Modi: Keep inflation in check

While Modi’s Hindu nationalist rhetoric is wildly popular, especially in India’s north, his economic management may indeed be what’s keeping him in power.  (PTI)
While Modi’s Hindu nationalist rhetoric is wildly popular, especially in India’s north, his economic management may indeed be what’s keeping him in power. (PTI)


  • Modi's inflation-targeting RBI mandate is a case of good politics, one that can be a bigger vote winner than many leaders around the world may think.

India’s general elections kicked off on Friday with voting in 102 of the country’s 543 constituencies. The outcome is not really in doubt. Prime Minister Narendra Modi has maintained, if not increased, his favourability ratings since he last won re-election in 2019. Such enduring popularity, in an age when most democratically elected leaders are struggling, can appear mystifying.

The standard argument doesn’t explain Modi’s success. While India’s economy might be posting impressive growth numbers, employment and wages haven’t kept up. Government data shows that, for the past decade, Indians’ average monthly real earnings have either declined or remained stagnant. Almost half the workforce is still paid below the official minimum wage. This implies that too few Indians have benefited from policies for economic reasons alone to account for his popularity. In fact, while Modi’s Hindu nationalist rhetoric is wildly popular, especially in India’s north, his economic management may indeed be what’s keeping him in power. And the lessons from that success could usefully be studied by leaders elsewhere.

Modi’s biggest macroeconomic priority hasn’t been to juice growth or wages. Instead, he has focused on controlling inflation. Even though his government has not been too keen on independent regulators or institutional reforms, it did push through legislation early on that set an inflation target for the Reserve Bank of India, whose six-member monetary policy committee has since been left mostly on its own to manage rates, in spite of occasional grumbles from New Delhi. Meanwhile, the government has deployed a mix of macro- and microeconomic levers to keep prices from spiralling out of control, including during supply disruptions brought on by the covid pandemic. Federal budgets have sought to shrink the deficit. Fuel taxes are high but have also largely insulated users from inflationary swings in energy prices.

The government insists that trade with Russia after it invaded Ukraine also keeps energy costs down. Even India’s attempts at industrial policy have been on the cheap: Elon Musk appears to have been lured to the country by the promise of lower tariffs on Tesla’s cars, not government handouts.

Not all of the government’s anti-inflation efforts have been sensible or responsible. The export of agricultural goods, for example, is frequently shut down at the first sign of higher domestic prices, causing chaos for fragile food supply chains across the developing world. Unpredictable trade policy is a reason that a promise to double farmers’ incomes couldn’t be met. Yet, this underscores a will to prioritize stable prices over employment and household income growth. In this, Modi seems to have learned from his predecessors’ mistakes. Previous governments failed to manage prices and faced widespread popular discontent as a result. Even if their record on growth and wages was better, inflation higher than Indians expected weakened support for past administrations.

For politicians seeking office, it may still be “the economy, stupid," but how we think about the interplay between the economy and voting patterns needs to change. The instability of inflation pretty clearly seems to alienate voters from their government far more than a stagnant economy and high unemployment.

US economists such as Paul Krugman have argued that Biden has delivered a “good economy" that isn’t being recognized because of “negative vibes," fuelled by right-wing media. And it is also true that the US continues to see robust job growth: Bidenomics prioritizes full employment over deficit reduction or price-reducing free trade.

Biden’s campaign may discover, however, that’s not necessarily what makes most voters happy. Lavish government spending and near-shoring efforts have kept US prices high and unpredictable— the true source of the mysterious ‘vibes’ that threaten Biden’s re-election. While real incomes may have increased, Americans seem to care even more about nominal prices. That’s illogical—but who says voters are rational?

Politicians in the West don’t seem to have worked this out. In Europe, leaders faced with restive populations are doubling down on spending packages and industrial subsidies. Meanwhile, polls ahead of this summer’s elections to the European Parliament suggest that rising prices are what really concern voters. Mainstream parties may face a debacle in Europe and Biden might lose. Meanwhile Modi, despite sky-high youth unemployment and declining real wages, is being rewarded for keeping prices predictable. The lesson of India’s polls should reverberate well beyond its borders: Elections are won through price stability, not subsidies. ©bloomberg

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