India

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
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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
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Re-visited – will China or India be the long-term winner?

August 22, 2016, by Hubert Fromlet, Kalmar

About ten years ago, I wrote an article in a British journal (Economic & Financial Review, 2005) about the topic whether China or India would be the economic winner in the longer term. I come to the conclusion that India would catch up, but not really take the lead – at least not before positive demographic trends should favor India more structurally and, thus, add visibly to potential GDP growth. This will take time.

As India’s main competitive disadvantages compared to China I identified then infrastructure, lower average education levels, slower public decision-making, weaker entrepreneurial incentives and ambitions to reform the economy as a whole. India showed instead more advantages in the higher quality segments of research and education, banking/financial markets, transparency, certain other institutional conditions and – which the Indians still strongly emphasize – democracy and the rule of law.

I also pointed a decade ago at forthcoming structural changes in production patterns that obviously were to come: an increasing share of services at the expense of manufacturing in China and the contrary development in India.

In the meanwhile, China has clearly increased the role of services in its economy, whereas India’s efforts to achieve substantially more production in competitive manufacturing – also in value-added terms – turned out to be more modest.

Consequently, experts on the Indian economy start to raise the question whether it may be too late for India to become a manufacturing superpower. This may be true to a certain extent. However, it also could be beneficial for India that it now – when applying experience from China – has a chance to avoid the establishment of a gigantic industrial overcapacity as China did in a number of sectors.

This latter phenomenon may also be one of the reasons why China currently seems to note slower economic growth than India. On the other hand, China has at least on the paper more economic reforms in the pipeline than India does. However, we still have no idea of the future results of Chinese reform policy. We have to wait for improvements of transparency also in this specific respect.

Consequently, it is still too early to make a prediction on the long-run winner in the global competition between China and India.

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
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