India

“Pressure on China and India to revive growth”

Wednesday, October 16th, 2019

Presentation by Hubert Fromlet, affiliate (affilierad) professor at Linnaeus University (Linnéuniversitet), Sweden, on October 16, 2019, at its annual
“Baltic Sea Region /Emerging Market (China) Day“ in Kalmar/ Sweden ————————————————————————————————–

Brief summary in Swedish

Både Kina och Indien drabbas för närvarande av dämpad BNP-tillväxt. Tillväxtförsvagningen är mestadels hemmagjord. Kina påverkas dock mer än Indien av USA:s protektionism. Såväl Kina som Indien är piskade att undvika en ytterligare tillväxtdämpning eller att snarast möjligt komma på en (något) snabbare eller åtminstone stabilare tillväxtbana igen.

I Kina handlar redan nu all ekonomisk planering bakom kulisserna om att kunna presentera landet i en mycket positiv dager vid Kommunistpartiets 100 års jubileum år 2021 – men också att redan nästa år kunna framkalla positiva rubriker vid utvärderingen av de cirka 50 ekonomiska reformplanerna som lades fram vid Centralkommitténs Tredje Plenum år 2013. Utvecklingen bortom 2021 förblir oklar som resultat av den till jubileumsåret delvis artificiellt framkallade tillväxten.

För regeringen i Indien gäller det inte minst att återvinna konsumenternas förtroende. Nationalräkenskaperna visar att det är framför allt konsumenterna som på sistone blivit mer skeptiska. Indiens ständiga hänvisning till att den egna tillväxten på senare år varit bättre än Kinas håller inte riktigt eftersom Indiens upphämtningsprocess kommit igång tydligt senare än Kinas. Indiens långsamma reformtempo bör höjas i den mån det är möjligt.

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Why GDP growth is so important to China these days …

Despite regularly returning general criticism, the Gross Domestic Product (GDP) is still treated by almost all analysts as the most important and most frequently used macroeconomic indicator of a country. Critics, however, mostly want conditions like the environment, national health, wealth etc. to be included in annual national accounting (GDP) as well. Certain governments work already on widened definitions of economic growth but rather in additional terms than on substitutional conditions. These efforts are – in my view – a good idea but certainly difficult to develop and measure in practice. Attempts should be made all the same – like intended in Sweden (though I have so far not heard anything about the progress in this specific respect).

Good numerical GDP growth means traditionally a lot to China and its political leaders. Progress can be shown to the public in a relatively simple and understandable way. The lagging accuracy of official GDP statistics is not really an issue for discussion in the second largest economy (second in dollar terms – but in so-called PPP terms, total Chinese GDP is already the largest in the world).

Outside China, however, many economists have recognized the qualitative statistical shortcomings and inconsistencies of China’s GDP calculations – however, without having the tools to explain these shortcomings in a more accurate way. However, it is certainly not normal that Chinese GDP-growth rates are more or less even during at least several quarters and very predictable from quarter to quarter and from year to year. This happens to my knowledge nowhere else in the world but in China.

The extremely important anniversary year of 2021

For this reason, I feel very sure that the evaluation and anniversary years of 2020 and 2021 will be presented as (very) positive years for the Chinese economy. 2021 will be a key year for the Communist Party, 100 years after its foundation. It is certainly not desirable for China’s political leadership to announce and/or admit a notable downsizing of GDP growth in 2021. GDP growth will therefore be particularly stimulated by monetary policy, certain (environmental) investments and financial support to state-owned companies – indeed as much as possible. Any GDP growth below 6 percent in 2019, 2020 and 2021 would be a major surprise – and probably mean that the development in reality has been worse than this. And besides, in Chinese mythology six is certainly a more lucky number than five.

It could be added when trying to figure out what is really happening in China’s economy, I prefer using indications or indicators like official statements by President Xi Jinping and Prime Minister Li Keqiang and reading their comments between the lines, particularly when these top leaders themselves are pointing at a problem . I also look carefully at changes of the banks’ cash requirements at the People’s Bank of China and even more when they are loosened. This means normally an official easening of monetary and credit policy, i.e. an attempt to stimulate the economy and growth. Furthermore, the development of the Producer Price Index (PPI) seems to be another good short-term indicator because of its obvious correlation with GDP. Not to forget statistics on transports!

Sure, there are also many long-term challenges for China – such as private and (local) government indebtedness, the avoidance of a late bursting of the real estate bubble, the creation of new competitive industries with advanced technology, sustained social stability, clear improvements of the environment, dealing with demography and the necessary processes of improving institutions, financial markets included. And what about attempts to improve certain international political relations?

Without doubt, we can recognize China as a superpower that has to face many difficult challenges in the forthcoming decade and even beyond. But there is also a China with specified high ambitions and strong strategic objectives, well looking into the future and working actively for good or at least satisfactory GDP growth in the medium and longer run.

The outcome of this balancing act will remain uncertain for quite some time. But we know that the legitimacy of Chinese political leadership continues to be linked to economic progress, i.e. GDP growth.

… and India ?

More recently, GDP growth has been weakening in India as well, first due to decelerating activities in investment and now very obviously by dampened demand from consumers. All this his is certainly not a good message to Prime Minister Narendra Modi and his government. There is pressure on government politicians to work harder for renewed strong economic growth.

Currently, India’s GDP growth is still roughly in line with China’s – but after some time of higher Indian GDP growth than Chinese. 5 percent in y-o-y GDP growth during Q2 in 2019 means the weakest Indian increase since Q1 in 2013. The exact answer to the most probable numerical GDP differential between both countries depends highly on China’s assumed accuracy in national accounting (which we do not know enough about).

Consumers need to become more confident – both in the short and the long run

The currently declining speed of economic growth can be mainly related to skeptical consumers. Consumers’ confidence has been coming down – and, logically, also GDP growth. Future sustainable GDP-trend forecasts at around 8 percent – as often published about two years ago – can certainly not be taken for granted.

Of course, also India has a lot of burdening medium- and long-term challenges. Among them, one can find high governmental fiscal deficits, slowly moving legislation processes, poor infrastructure and environment, lagging human capital formation, political relations to China etc.

However, despite these structural shortcomings: India has two important competitive advantages compared to China – being a democracy and an average population that is ten years younger than China’s; together, China and India count quite equally distributed for more than one third of the global population.

But India can only benefit from this latter advantage if it will be able to give the younger Indians clearly improved conditions for their education. For this conclusion, we have a lot of scientific confirmation.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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India – final conclusions after the elections

Wednesday, May 29th, 2019

India’s enormous elections to the Lower House (Lok Sabha) are over. The big winner is Narendra Modi from the hindu-nationalist BJP who even achieved absolute majority in the new Indian parliament. Modi’s victory did not come as a major surprise – but the way he did it, including his very successful marketing.

During Modi’s previous period as a Prime Minister, the Indian economy already improved but certainly not as successfully as described by Modi’s supporters at home and by major parts of the global financial and corporate sector (which can be read about in some previous blogs of mine on chinaresearch.se).

The shortage of resources

Still a lot of weak issues have to be improved or reduced in the “continent” of India. Institutions (for example, quite a number of the new parliament members are even crime-suspected), poverty, the environment, agriculture with still more than 50 percent of total employment, income distribution, productivity, competitive manufacturing to a quite high extent – just to mention a few areas on a long list.

Looking at all these challenges, the forthcoming five years will not be easy for the BJP, Prime Minister Modi and his allies. Political tensions exist mainly with Pakistan. Relations with China seem to be commercially pragmatic but not very good either (which is demonstrated by India’s more or less total neglect of China’s prestigiously favored Belt & Road Initiative).

For the above-mentioned and quite a number of other reasons, India is certainly a country lagging institutional, educational and particularly financial resources to achieve rapid – i.e. at the same time fundamentally sustained – progress in production, infrastructure and the environment. High public debt on all levels is a frequently neglected impediment to even higher growth and to a more favorable distribution of income.

However, the economy of India has the potential to improve further during a long period of time. Macroeconomic growth data alone, however, remain an insufficient analytical tool – a reality that many (Western) analysts to not apply the way they should. Not to forget India’s demographic potential which – theoretically – is much more favorable than China’s in the forthcoming decades.

“Theoretically” because India also must create the necessary institutional and financial resources. And here we come back to the shortage issue of necessary resources …

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

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India election 2019 – the economy and Modi versus Gandhi

Wednesday, April 17th, 2019

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Indien – maktkamp mellan Modi och Gandhi i det pågående valet

Svensk sammanfattning

Det stora och komplicerade parlamentsvalet i Indien pågår för närvarande för fullt. Sittande premiärministern Narendra Modi rankas alltjämt som favorit. Gandhi-dynastin är dock på väg tillbaka. Många eller rentav flertalet västerländska finansmarknadsaktörer verkar tydligt starkare sympatisera med Modi än med Gandhi. Vissa ekonomiska framgångar har Modi också uppnått. Dessa är dock inte riktigt i linje med alla västerländska applåder. Behovet av omfattande strukturförändringar kvarstår som mycket stort.

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The big election event

India is currently heavily occupied with its ongoing election for the federal government, the Lok Sabha (“House of the People”). 900 million people have the right to vote but as much as 300 million of them are illiterate. The result of this major event is expected for May 23. “Major event” seems even underestimating the magnitude of the Indian election with its 11 million public election workers and more than 1 million polling stations in 29 federal states and 7 territories – in all respects also an enormous logistic challenge. Election costs are estimated at incredible USD 10 billion.

In PPP terms, total Indian GDP is already the third largest economy in the world after China and the U.S. (but, of course, not when measuring as GDP per capita). India has indeed developed into a global player in the past 10-15 years or so. On the other hand, comparing India’s total GDP to China’s also shows that India – with almost the same population as China but a younger one – not even reaches half of China’s GDP. Regarding this fact, India’s current GDP growth of around 7 percent is not particularly high as India’s former central bank governor and outstanding economist – Raghuram Rajan – has been pointing at more lately.

More about the political background

Certain economic and political background information was already given in my blog from February 26 this year, including the probable need of a broader majority in parliament – both with re-elected Prime Minister Narendra Modi (BJP) or with Rahul Gandhi from the oppositional Congress Party as the new Prime Minister.

There is no doubt: The Gandhi Dynasty is moving forward again. More recently, this is true of Rahul, the son of assassinated former PM Rajiv Gandhi and grandson of assassinated former PM Indira Gandhi. But Rahul Gandhi’s charismatic and empathic sister Priyanka Gandhi right now is gaining new sympathy points even faster than her brother. Many observers see her as a future prime minister. This time, however, a potential Rahul Gandhi-led coalition must find extremely strong support from Modi opponents. On the other side, the BJP suffers from sensitive losses in two important federal state elections at the end of last year. Generally spoken, Modi’s overwhelming victory from 2014 will not be repeated this time even if he remains in office.

When it comes to foreign policy, Modi achieved obviously some improvement of India’s relations to the U.S. and to China. However, tensions with Pakistan escalated more recently again, including some exaggerated noise from India.

Remaining homework

Going back in history 20 years or so, there is no doubt that India has achieved remarkable economic progress. When I came to India for the first time in the early 1990s, India was in many respects a different country. Progress is visible at least in the urban areas. Modi managed, for example, the implementation of a unified VAT system (after attempts during many years before him), revised bankruptcy laws, achieved re-capitalization of banks, FDI reforms and improved water (toilet) quality. However, the puzzling money reform was not really successful and damaged many small companies.

Altogether, reform needs are still enormous, partly because of India’s mostly very slow legislative procedures through all the federal states. Provided the assumption that no very negative exogenous or domestic shock occurs any time soon, reform velocity between a Modi or a Gandhi government will not make any dramatic difference. This means continued moves forward but in most cases cautiously and relatively slowly. In other words: the remaining homework is substantial.

Finally, some examples of areas that need real improvements (the sooner the better):

¤  institutions (corruption, etc)

¤  infrastructure,

¤  education on a broad scale,

¤  youth unemployment (also for academics) and other job creation,

¤  agriculture (employs still around half of the working population),

¤  conditions for small businesses,

¤  energy,

¤ national health,

¤  tax system and government finance/debt,

¤  efficiency of the political system.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

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