China Research

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
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