India

No miracles in India – but improvements

June 7, 2017, by Hubert Fromlet, Kalmar

India’s GDP grew by 6.1 percent in the first quarter of 2017 compared to the first quarter last year. This was below expectations and the average annual GDP growth from the second quarter of 2016 until the first quarter in 2017 (7.1 percent).

Both private consumption and investment contributed to the slight downsizing of the Indian economy. Many analysts see the enormous reduction of the money supply last fall being responsible for this development (objective: combating corruption)

This may have been partly the case. But in my view the Indian economy is not as strong as it currently is described by many economists. Still India’s institutional shortcomings are too much of a growth burden.

However, there have happened institutional improvemens in India in the past two decades or so. Thus,  potential growth in India has grown. But it would be the wrong analytical way to continue to compare the ongoing Indian GDP changes with the Chinese ones (which often is done). These countries are in many – or even most – respects completely different.

Pure GDP-growth numbers do not teĺl us too much about the medium-term outlook for the Indian economy either.

Therefore, I also look very much at the annual publication of the World Bank called “Doing Business”. Here we can read quite a bit about institutional changes in different countries – institutional changes that to a high extent determine economic long-term conditions in both China and India (and other countries).

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

 

Back to Start Page

Modi’s victory – India is awarding its PM

March 16, 2017, by Hubert Fromlet, Kalmar

India’s Prime Minister Narendra Modi and his governing, hindu-nationalist party BJP (Bharatiya Janata Party, BJP) is currently celebrating happy days after the strong victory in the regional elections in the 220-million people state of Uttar Pradesh. This overwhelming result was not really expected after the chaotic currency reform last fall when the government abruptly invalidated almost 90 percent of the circulating bank notes. This measure was taken in order to make people to deposit money visibly at the bank – and, consequently, to combat corruption and black money.

In other words, Modi benefited even from this monetary/institutional reform, expressed by substantial popularity gains. Hopefully, Modi uses his current strong personal ranking for accelerating economic reforms, particularly since his chances of winning the next general elections in 2019 seem to be increasing. So far, Modi’s (and his coalition partners’) reform record is not really convincing. Much more must be done to improve, for example, (youth) unemployment, education, infrastructure, the environment and productivity. At the same time, it is obvious that many Indians still have high expectations that Modi is the man to move their huge country forward.

For 2017 and 2018, a GDP-growth rate around 7 percent seems to be achievable (if major global distortions can be avoided). One should not forget that India’s international trade exposure should be less sensitive to American and global trade distortions than China’s. Indian GDP-growth seems to develop (somewhat) faster than the Chinese in the next few years. Such a comparison is, however, not quite fair since China started its accelerated modernization and restructuring process much earlier than India did.

But India has now an improving chance to catch up!

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

 

Back to Start Page

India’s attempt to escape from corruption and low taxation ethics

November 21, 2016, by Hubert Fromlet, Kalmar

What a surprise to the Indian people when Prime Minister Modi two weeks ago without notice banned people from using the most popular 500- and 1000-rupee notes, making these notes worthless on the spot in retail trade, services etc. Some GDP damage – probably short-term – cannot be ruled out. A distorting shortage of cash showed up immediately in this gigantic cash-using country. The total enforced withdrawing of 84 percent of India’s cash currency created directly a severe chaos, despite the still existing possibility of changing the old notes into new ones by year-end and/or of opening deposit accounts, based on the currently commercially invalid bank notes.

Two – on the paper plausible – reasons led to this drastic decision by the Indian government. First, it is regarded as an important step against India’s enormous corruption. Second, the attempt to move more and more financial transactions to credit cards and bank accounts is aiming at improving tax-paying honesty which really is extremely low in India (i.e. in a country where only 3 percent of the population prepare tax bills and just 1 percent is paying taxes in reality). The institutional shortcomings of corruption and the black economy are really severe.

The main question, however, remains: to what extent can the recently taken measures contribute to fundamental institutional improvements? I see these note eliminations rather as symptomatic steps. History from the 1970s reminds us that similar steps at the time definitely were not successful.

However, the world has received a reminder by the Modi government of the major need to improve India’s fundamental institutional conditions – one of the major assumptions for sustained high growth rates. The globalized world is changing continuously in many respects. But many or most principles of economics are still in place – institutional economics most certainly included.

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

Back to Start Page