Starting small

Modi's slimmed-down team can speed Indian reforms

Narendra Modi's first decision as India's new prime minister has been to shrink the government. His newly inaugurated cabinet will have just 46 ministers, compared with 71 in the previous administration. That's a welcome first step toward speeding up the country's notoriously slow pace of policymaking.

Shrinking the headcount allows Modi to sensibly combine some portfolios. Interlinked ministries like coal and power will fall under a single minister. Now that they report to the same boss, bureaucrats will have a bigger incentive to work out a solution to the country's acute shortage of coal, which in turn means that electricity production can't meet demand.

The rationale for combining finance and defence is less obvious. But defence-related manufacturing is due for a significant easing of foreign investment restrictions: foreign companies are currently allowed to own no more than 26 per cent of defence groups. As finance minister, Arun Jaitley could open up the industry in his first budget in July. If the defence bureaucracy also reports to him, he won't have to worry as much about resistance. Later, one of his two jobs could pass to another minister.

Modi's other sensible decision is to keep control of railways. Unlike previous governments, which destabilised the industry by often putting their coalition partners in charge, Modi has found a lawmaker from his own party to helm this important ministry. That may make it easier for him to open the largely state-controlled freight train business to foreign investment.

The new prime minister's biggest challenge, however, will be to live up to expectations. The government's electoral mandate - the strongest since 1984 - has raised voters' hopes. But these could turn to despair if the government is slow to improve the investment climate and create new jobs. Similarly, sustaining the 17 per cent gain in India's stock market so far this year will require meaningful reforms in banking, infrastructure and taxation. The government will need to articulate them before investors lose patience.

By slimming down the cabinet, Modi has kept the first half of his promise of "small government, maximum governance." The second half will be tested in the coming months.