India

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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India moving forward and sometimes back – now again higher tariffs on certain imports

Monday, February 19th, 2018

India is not always easy to understand. At the World Economic Forum some weeks ago, Prime Minster Shri Narendra Modi presented himself as a dedicated supporter of free trade – more or less in the same way as China’s leader Xi Jinping did a year ago at the same place shortly before President Trump’s inauguration. For a couple of months, Xi was celebrated as a kind of new global defender of free trade and antipole to protectionist Donald Trump. During 2017, however, China was again accused more strongly of protectionism by the U.S. government, particularly because of its enormous subsidies to certain industries. Consequently, cross-border trade mood between the Trump administration and China deteriorated further in the course of 2017.

These American-Chinese tensions may partly explain Modi’s efforts some weeks ago in the Swiss mountains to back up free trade. Modi is, of course, aware of the increasing role that India plays in the world economy. India is already the seventh largest economy in the world – and even number three on a Purchasing Power Parity (PPP) basis. India’s GDP growth is right now in line with China’s. Demography, digitalization and the growing middle class give India good potential in theory –  “but the quality of education is still a serious concern”, as one can read in chapter 47 of the new budget.

On February 1, the Indian Minister of Finance Arun Jaitley introduced the central budget for the fiscal year 2018-2019 (i.e. from April 1 to March 31). India’s next general election has to be held by 2019. For this reason, the Indian budget for 2018-2019 is observed with quite critical eyes. Certain comments – also from abroad – have judged the overall picture of the Union budget document as populistic. In my view, this grading may be too strict. Many structural needs and concrete measures are announced in 61 pages. There is quite a lot of supply side policy in it. Check it out, use this link:

https://www.s-ge.com/sites/default/files/cserver/article/downloads/india_budget_speech_2018.pdf

So, what’s the reason for the criticism of being populistic? It is indeed – certainly surprising after the Prime Minister’s speech in Davos – that India introduces protectionist measures concerning a number of import goods which made the Trump administration very upset. Higher customs duties are proposed on, for example, imported juices, vegetable oils, furniture, parts of cell phones, and auto components. The reintroduction of long-term capital gains on stocks also surprises many observers.

Sure, India is a complicated country for economic policy since most central measures have to be accepted by the 29 different states of India (when they are affected by a central law). As an example, it took years to implement the necessary move to more indirect taxation by a so-called Goods and Services Tax (GST) – but now it is there nationally since July 1, 2017. Economic policy is easier in China than in in India – the latter country often regarded as the largest democracy in the world.

The recent tariff hikes announced in the budget on certain imports were obviously not a very wise decision, and one may wonder how many Indian jobs will be saved or created this way. The psychological damage may be considerably larger in a global economic climate where India indeed had gained credibility in recent years. Unfortunately, it will be widely concluded that moving back in economic policy remains an Indian option also in the future.

Thus, it is not the velocity of economic reform policy that really counts in the country analysis of India but the steadiness of moving forward. Also smaller moves back can do harm!

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

 

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No miracles in India – but improvements

Wednesday, June 7th, 2017

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

 

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