| "We are not big-bang reformers," the top economic aide to India Prime Minister Manmohan Singh told me in 2011. Montek Singh Ahluwalia's take was that all the major economic policy initiatives were already done. Fast forward 12 years, and Sanjeev Sanyal, economic adviser to Prime Minister Narendra Modi, couldn't have given a more different answer. In a recent interview, he spoke of the need to tear down the entire "architecture of bureaucracy" that's held back Indian development—including, eventually, the building in which he (and Ahulwalia before him) works. "Those buildings actually embody the old Soviet culture—five-year plans, bureaucratic licenses," Sanyal said. A former Deutsche Bank economist, he left the banking industry and returned to India excited by the "opportunity to do some very big structural reforms." Sanyal laid out an arc of economic transformation that India surely needs. But it's also apparent that the Modi administration's program has deeply controversial and divisive elements, along with nationalistic baggage from the Soviet-style era. And that risks hindering India in what some dub its "carpe diem moment."  Narendra Modi Photographer: Prakash Singh/Bloomberg Sanyal credits the former ruling party, Congress, for kicking off vital reforms in the early 1990s. That's when New Delhi dismantled a raft of barriers to trade and investment—forced to act by a balance-of-payments crisis. Sector after sector was opened up as licensing rules were overhauled. Among the huge successes: airlines. A state-owned airline duopoly turned into an ultra-competitive, private sector-dominated industry that's seen passenger travel explode. Under Modi, big-bang reforms have included an overhaul of an archaic bankruptcy law that now allows for much faster resolution of failed companies—promoting the forces of "creative destruction," as Sanyal put it. The administration also established a national sales tax system that sped up interstate commerce and made it less costly—"a free-trade agreement India signed with itself," he quipped. Now, Sanyal said the focus is on "process reforms," making sure the government is helping to facilitate business rather than hampering it. For example, do companies find the national sales tax website actually works? Is there a feedback button for users to flag problems? Are there people monitoring it to answer questions and direct the feedback to staff who can act on suggestions? Another "process reform" is beefing up the patent-registration system. Sanyal says historically there just weren't enough staff to consider patent applications in a timely manner. Innovations risked becoming obsolete by the time they were protected. So the government is boosting personnel and training to establish a more robust intellectual-property protection regime. "These are the painful, irritating things I spend my time on," Sanyal says. At the municipal level, the Modi administration is working with state and local authorities to radically improve quality of life, by measures including building public transit, improving drainage systems and removing garbage. In Mumbai, "we are basically doing open heart surgery on that city."  Heavy rains regularly impede India's cities, showcasing the need for more resilient drainage systems. Photographer: Indranil Aditya/Bloomberg There's little argument that this is exactly what India needs, along with the broader infrastructure buildout noted in last week's edition of this newsletter. But the Modi administration hasn't shaken off all the vestiges of the old "Soviet" era. Antipathy to foreign businesses back then was such that Coca-Cola Co. was effectively pushed out in the 1970s. Today, for all Modi's embrace of "friend-shoring," high tariffs are still hindering foreign investment. To set up operations like semiconductor fabs, companies require importing equipment. "But import tariffs could be financially unviable for businesses setting up operations in the country," Arjun Gargeyas, a tech policy specialist, wrote in a Hinrich Foundation report this week. Case in point: Apple Inc. supplier Foxconn recently pulled out of a grand plan to set up a chip plant in Modi's home state of Gujarat, a move also made in the wake of limited government support. And protectionist policies are in some cases only getting tougher. This week saw a new move to require licenses for the import of computers from laptops to tablets. More broadly, India hasn't pursued any concerted trade agenda. A would-be deal with the European Union has foundered. It abandoned the idea of joining an Asia-Pacific pact and has been wary about a new Biden administration regional plan. As robust and productive as Modi's domestic reform agenda may look, the current government has baggage that threatens to hold the nation back. The ruling BJP party's promotion of Hinduism as a unifying national identity has not just alienated hundreds of millions of non-Hindus, but has seen disturbing outbreaks of violence. Recent days saw sectarian clashes not far from a modern business hub near New Delhi. With national elections looming next year, it's unclear whether the world's most populous nation will be able to combine what's been an impressive record of tough economic reforms with a renewed appreciation of its secular traditions and a final dismantling of its protectionist past. —Chris Anstey Get Bloomberg's Evening Briefing: Sign up here to receive our flagship newsletter in your mailbox daily, along with our Weekend Reading edition on Saturdays. | 
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