What Modi Can Learn From Renzi

As anticipation mounts about the prospect of Narendra Modi becoming India’s next prime minister, his platform of economic revival has rekindled hoary India-China comparisons. But for a more nuanced and instructive parallel, one would do well to look further west. In Italy, as in India, politics has stymied growth and thwarted potential.

There are many structural similarities between Indian and Italian politics. Both countries exhibit a fractured voter base, huge legislatures — India’s bicameral legislature has 793 seats, Italy’s has 950 — and a large number of political parties relative to the size of the electorate. All of this makes unwieldy ruling coalitions the norm. Especially in recent years, this challenging political dynamic has compounded the two countries’ respective economic woes.

Although Italy’s per capita GDP is roughly 25 times higher than India’s, the two economies face several common challenges. The most important is stagnant growth. Italy is only now beginning to emerge from a harsh two-year recession, with output projected to increase by 0.6 percent this year and 1.2 percent the next. This follows average growth of a mere 0.2 percent over the decade prior to the onset of the euro zone crisis.

Even though India’s recent annual average growth of around 5 percent is ostensibly enviable in comparison, it represents a sharp slowdown from the 8-10 percent rates recorded just a few years ago. Moreover, India has a much larger labor force and lower income levels that require faster growth to stimulate job creation and improve living standards.

Both countries also feature sclerotic labor markets that make achieving full employment difficult even when the economies are growing at potential. And monetary policy is constrained in both countries: in Italy’s case because of its membership in the euro zone, and in India’s because of the Reserve Bank of India has a dual mandate to focus on economic growth as well as stable inflation. This complicates the setting of the policy framework that would be conducive to growth.

Strong men, unwieldy systems

But an even more intriguing comparison can be made between the men who are hailed as potential saviors of their countries’ economies: Modi and Italian Prime Minister Matteo Renzi. Their swift rise to national prominence has generated high expectations — domestically and internationally — around their potential to shake up their respective countries’ stagnant economies and dysfunctional political systems.

In reality, the underpinnings of democratic governance in both India and Italy may limit the two leaders’ ability to bring about meaningful structural changes. In both countries, it is not clear yet whether fresh and more dynamic leadership will suffice in overcoming the many challenges at hand.

In Italy, this fact is evident in the circumstances that brought Renzi to power. Until recently, he had framed his political career in sharp contrast to the country’s discredited political elite, by repeatedly defeating "party men" in open elections, as opposed to rising through the ranks. Nevertheless, he was abruptly thrust to power in February by an opaque intra-party coup, making him the third non-elected prime minister in three years — a record even by Italian standards.

Renzi now presides over the same diverse coalition that he so vehemently criticized before coming to power, comprising parties with very different political orientations and but a slim majority in parliament. Furthermore, while most of Renzi’s fellow democrats nominally support the new prime minister, in reality the party remains deeply divided, with a significant portion still closely tied to labor unions and dependent on them for re-election. His leadership is also complicated by stringent EU spending rules that will continue to constrain the resources available to the government for stimulus measures.

Similarly, Modi – the prime ministerial candidate of India’s Bharatiya Janata Party (BJP), which is heavily favored to win the general election that concludes on May 12 — has emphasized his status as a political outsider. His humble origins as the son of a tea-seller differentiate him from the leaders of the incumbent, now-discredited Congress party, which is headed by India’s most successful political dynasty. But Modi’s self-driven rise to power is seen by some as ruthless; intra-BJP strife, based partly on strong anti-Modi sentiment among some BJP factions, is likely to complicate policymaking and policy implementation, even if the BJP wins a strong plurality in the upcoming election.

Italy’s last chance?

In Italy, voters are so far giving Renzi the benefit of the doubt, judging this to be Italy’s "last chance," as is often professed. Indeed, his popularity and the sense of urgency he has conveyed give him some leverage over his allies and opponents. But failure to deliver on these high expectations could be fatal for a politician who staked his career on his reputation as a reformer.

The sudden change in government has made it possible to move past the existing gridlock, and reforms are back on the agenda, including potentially momentous changes to Italy’s electoral system and to the bicameral parliamentary architecture. The new administration appears to be moving in the right direction with these measures. Despite the recent headway made on institutional reforms, however, enacting contentious economic policy proposals may prove more difficult.

When it comes to the economy, Renzi seems to be more focused on policies that can provide quick electoral returns, while steering clear of more politically costly measures. The decision to prioritise (modest) cuts in labor taxation for low-earners over a reduction in the corporate income tax rate, for example, will help support demand, but it will do little to improve Italy’s competitive position vis-à-vis European peers. A similar argument can be made for a recent draft labor regulation bill, aimed at boosting employment by tweaking the r
ules for fixed-term contracts and re-vamping active labor market policies.

Reform in India, but how fast and how far?

In India, the BJP’s election campaign has centered on Modi’s track record of growth and investment in the state of Gujarat, where he is serving his third consecutive term as chief minister. His campaign has been built on promises that he can do for India’s economy what he has done for his state — although how much credit he is due for Gujarat’s success remains a point of contention.

Under a Modi-led government, India’s governance, administration, and economic policymaking would almost certainly improve – albeit from an extremely low base. But political constraints are likely to limit progress on structural economic reforms in areas like labor law, the power sector, and the justice system, which would help unleash more of India’s vast economic potential. Though it has a reputation as a pro-business party, the BJP is not uniformly in favour of liberalizing reforms, and in some cases it is adamantly opposed to them.

Moreover, the BJP can only hope to govern at the head of a coalition, and some of its allies are likely to prove obstreperous as they pursue their own parochial interests and try to extract maximum concessions for their support. Finally, with the government – including the coalition partners – likely to command, at best, a slim majority in the lower house of parliament (the current parliament includes representation from 35 parties, plus nine independent MPs), the opposition will have ample scope to thwart controversial reforms.

The challenge of democracy

Regardless of the level of economic development, governing large, complex democracies often presents challenges that are beyond the reach of any single head of state. The potential for a new administration to implement economic reforms depends as much on the broader political context as on the strength or popularity of the leader. Given the difficulties of coalition politics in countries like Italy and India, leaders might do well to consider how they can confront the institutional and social underpinnings of their democracies to bolster their chances of implementing reforms.

In Italy, Renzi has been successful at inciting broad popular support beyond the Democratic Party’s traditional support base. The time could also be ripe for a break from the country’s solidified political traditions. The gradual easing of sovereign market pressures, combined with the slow return to growth after years of sovereign debt-induced recession, present the new prime minister with a unique window of opportunity to address some of the country’s more long-standing issues.

We have yet to see whether Renzi will go beyond skilful rhetoric and politicking and effect change in the substance of politics as well as the style. The risk is that, rather than meaningfully improving the functioning of Italy’s economic and political institutions, his greatest achievement will be securing his leadership within the left.

Assuming he becomes India’s next prime minister, Modi might do well to observe this dynamic. In India, too, economic conditions and sweeping social change present a window of opportunity. The combination of slowing growth, an increasingly demanding electorate, an aspirational youth bulge, and political institutions tarnished by corruption may yet, with some strong leadership, facilitate a battle against long-standing vested interests.

Modi and Renzi have already achieved a dazzling political rise, but their legacies will be all the greater if their achievements go beyond the personal and these leaders help to free some of the vast untapped potential of their countries.

Anjalika Bardalai is a senior analyst in Eurasia Group’s Asia practice. Federico Santi is an associate in Eurasia Group’s European practice, focusing on Italy.