A year after Indian voters handed Narendra Modi a once-in-a-generation mandate for change and economic revival, messy realities are sinking in.
The Indian prime minister has swaggered across stages from New York to Paris to Sydney since taking office, helping put the country back on investors’ maps. And as he marks the anniversary of his swearing-in on Tuesday, he can point to some accomplishments.
He has allowed more foreign investment in railways and defense and helped cut red tape. His government has deregulated fuel prices and permitted private competition in coal mining–market-friendly moves designed to attract investment. For the poor, his administration has helped open millions of bank accounts and created new pension and insurance programs.
But on other key fronts, Mr. Modi has moved less decisively, frustrating investors who hoped for bolder change after last year’s election. Mr. Modi pledged to shake up the world’s second-most-populous nation after years of fitful economic growth.
His government has avoided privatizing state-run banks and companies, which could trigger unpopular job cuts. Despite vows to improve India’s reputation for unpredictable tax collection, the government has hit investors with demands for back taxes they say they shouldn’t have to pay.
Mr. Modi’s “Make in India” drive, which aims to supercharge manufacturing growth to 12% to 14% a year, is so far mostly hype. In the year ended March 31, manufacturing activity expanded by 6.8%, from 5.3% the previous year, with electricity shortages and congested ports holding back growth.
Although the economy expanded 7.4% in the year ended in March, analysts say that result was inflated by recent revisions in the way the statistics office estimates output.
By other measures, the economy is merely limping along. Inflation-adjusted lending for capital investment last year fell to a level not seen since 2004. Factories are running at 72% of capacity and slowing. Exports were down for the fifth straight month in April. Spring’s corporate earnings were dismal.
Foreign institutional investors have pulled around $2 billion out of Indian stocks and bonds in May so far, compared with a net investment of $15 billion in the first four months of the year.
India’s benchmark S&P BSE Sensex is among the worst-performing major Asian indexes this year, with a gain of 0.5% through Monday. Japan’s Nikkei 225 and Hong Kong’s Hang Seng Index are up more than 16% so far this year.
“We’ve reached that time wherein the euphoria phase is over,” said Gaurav Patankar, who co-manages more than $7 billion in emerging-market investments for the Boston Company Asset Management LLC, a unit of BNY Mellon Corp.
He says he is positive on India long-term, but that the government needs to make it easier for businesses to acquire land, among other reforms. The “next six months would be critical.”
Arun Jaitley, India’s finance minister, rejected suggestions that Mr. Modi’s honeymoon was ending.
“A year ago, there was a general environment of gloom. In place of that there is an atmosphere of enthusiasm,” he said in a news conference Friday.
Other senior officials have said it would take time to fix India’s problems.
“You’ve just got to chip away,” said Arvind Subramanian, the finance ministry’s chief economic adviser. “Things will cumulate into something big.”
Mr. Modi told an Indian newspaper this month that he has changed Indians’ view of their government as corrupt, slow-moving and absent in times of need. A year ago, he said, headlines were about “this scam or that scam, this hasn’t happened, that hasn’t happened.”
Some companies are pleased.
“We are seeing a lot of progress in ease of doing business,” said Krish Iyer, president and chief executive of Wal-Mart Stores Inc. in India. “We feel encouraged by the market- and consumer-driven policies of the government.”
ACB (India) Ltd., a Gurgaon-based coal-processing firm, said it began seeking federal environmental clearance for a major new plant in 2007. The previous government’s environment ministry never made a decision, but the new one did, said Vishnu Sahay, a vice president at ACB. “This government doesn’t sit on files,” Mr. Sahay said. “In our case, they’ve laid down many conditions, but at least it is done.”
Ashok Lavasa, India’s environment secretary, says Mr. Modi has sent a clear signal down the bureaucracy’s ranks that the routine functioning of government must improve. “That’s how you tackle delays.”
Still, Mr. Modi has come up against the legislative limits of his power, despite his party’s large majority in Parliament’s lower house. Parliament’s latest session ended this month with two important reform bills in limbo.
One, to help streamline India’s tangle of federal and state sales taxes, will likely pass later this year. The other, which would make it easier for the government to seize rural land for new factories and infrastructure, will be harder.
Opposition is entrenched in farming areas, where land remains the sole productive asset for people like Om Prakash, who grows wheat and mustard in Haryana state.
When the government announced plans to build a warehouse complex several years ago in his village, residents protested. Mr. Prakash says police shot him through his torso during a 2012 clash, landing him in the hospital for two weeks. A spokesman for the district police acknowledged officers fired on farmers but said it was a last resort after protesters blocked traffic.
Last December, villagers rejected compensation offered for their land. The acquisition was canceled.
“We do not want to obstruct the progress of the nation,” Mr. Prakash said. “But this is not what we asked for. When Modi said good days were ahead, this is not really what we thought he meant.”
The opposition Congress party, though weakened by last year’s defeat, is seeking to capitalize on farmers’ discontent, which grew this year because of bad crops. The land-reform fight is threatening to derail other Modi priorities, such as easing restrictive labor laws.
“They underestimated the level of opposition,” said Sasha Riser-Kositsky of the Eurasia Group.
Another problem for Mr. Modi: Many of India’s bottlenecks in building rural roads, providing drinking water and starting new businesses aren’t his to solve. India’s 29 states retain broad powers.
Neelkanth Mishra, a Credit Suisse strategist, said his client presentations now include a map of India with each state labeled with the name of the country whose population is most similar. Maharashtra state’s population of 110 million makes it the size of Mexico. Uttar Pradesh, with 200 million people, is like Brazil.
“For one person sitting in Delhi to change Brazil, Mexico, Japan, Germany, France, Turkey and Canada in six months or one year is, I think, a completely irrational expectation,” Mr. Mishra said.
Ravindra, a 25-year-old clothing-maker employee outside New Delhi who goes by only one name, said he’s glad he voted for Mr. Modi. Corruption isn’t as bad now, he said.
But he is still waiting for the great leap in living standards he felt he was promised. The government-run shop where his family buys subsidized grain remains badly managed. Roads are crumbling.
“We can’t blame Modi for anything, but we can’t give him high marks,” he said.