India – challenges after the general elections

February 26th, 2019 by Hubert Fromlet, Kalmar

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Indien – utmaningar efter det stundande valet 

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I april/maj går närmare 900 miljoner röstberättigade indier till val. Det förefaller tveksamt om den nuvarande konservativa (religiösa) och nationalistiska regeringskoalitionen National Democratic Alliance (NDA) med Bharatiya Janata Party (BJP) och premiärminister Narendra Modi i spetsen åter kan klara egen majorität. Opinionsmätningarna pekar snarare på behovet av en bredare NDA-koalition. Oppositionens United Progressive Alliance (UPA) med Kongresspartiet i täten befinner sig opinionsmässigt alltjämt i ett tydligt underläge. Likväl råder i Indien – världens största demokrati – för närvarande påtaglig politisk osäkerhet.

Makroekonomiskt ligger Indien ganska hyggligt till med en – visserligen lätt avtagande – BNP-tillväxt kring 7 %, väl underbyggd av den expansiva servicesektorn. Inflationen kring 2 ½  % är acceptabel för en emerging market (om än något låg) liksom bytesbalansunderskottet nära 3 % av BNP. Oroväckande är emellertid fortfarande centralstatens och delstaternas samlade budgetunderskott kring 9 %. Samma siffra fanns redan för 20 år sedan, när jag började resa till Indien. Det offentliga skuldläget innebär fortfarande begränsningar för framtida, mycket kostsamma struktursatsningar.

Det är samtidigt viktigt att inte stirra sig blind på BNP-tillväxten. Stora utmaningar väntar den nya regeringen. Områden som bör förbättras är bl a hälso- och sjukvårdssystemet, arbetsmarknaden, infrastrukturen, miljön, bankväsendet och många institutioner (korruptionsproblemet). De politiska spänningarna mellan Indien och Pakistan utgör tyvärr en permanent riskfaktor.

Under det kommande åren torde Indiens BNP kunna stiga med 6-7 % per år, troligen bäst bland stora emerging markets. Åtminstone potentialen borde ligga på dessa höjder. De globala handelskonflikterna berör Indien mindre än Kina. Som positiv framtidsfaktor ter sig – i motsats till Kina – speciellt demografin. Icke att förglömma: Indiens enorma storlek som land med åtföljande enormt stora absoluta tal vad gäller möjligheten inom forskning och utveckling, speciellt avseende IT, AI och många service- respektive verkstadsprodukter. Och last but not least: Jämfört med Kina har Indien fler ”sympathy points” i väst.

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English version

In April and May this year, India – often called the largest democracy in the world – will hold Congress elections. There are almost 900 million potential voters to find their favorite representatives for their central parliament in Delhi named Lok Sabha.

Currently, India is ruled with absolute majority by a conservative and religious/nationalist coalition called National Democratic Alliance (NDA) under the leadership of the Bharatiya Janata Party (BJP) and its Prime Minister Narendra Modi. The opposition is represented by United Progressive Alliance (UPA), led by the previously long-time ruling Congress Party (the political domicile of the Gandhi family).

Right now, speculations and forecasts show up frequently, trying to single out whether the NDA will continue to govern India after the forthcoming general elections or not. The so-called “Modi wave” has been cooling down. Doubts have increased after a couple of losses in state elections last year – at least as regards the continuation of the current composition of the government. Most observers, however, believe that the current coalition can continue to rule – but has most probably to be widened for the survival of the NDA. There is a general belief that such an enlarged coalition will focus more on social improvements.

Good growth is not all  –  budget deficits remain worrisome

GDP in India is currently growing by around 7 % – which is good compared to other major emerging countries but reflecting some downsizing from previous growth rates (“Modi average” 2014-2018: 7.3 %). Inflation has been brought down to slightly above 2 % which may be even too low for an emerging market. Positive conclusions can be drawn about the balance on current account with deficits still around 3 % of GDP – but the slightly weakening development should be observed further.

Most reason for concern still comes from the permanent political tensions with Pakistan and the public budget deficit. The latter topic is not so much taken up by the Indians themselves. In many publications, numbers like 3.5 or 4 % of GDP are mentioned which, however, only summarizes the debt of the central government and does not include the even higher indebtedness of the federal states (5-6% of GDP). Altogether, the total Indian government debt at around 9-10 % remains very negative and sets certainly limits to many future-oriented public investments. Goal conflicts will be inevitable. By the way, debt ratios of this size existed already more than 20 years ago when I started to visit and analyze India (meeting there – mostly – very skilled economists). This is another example of the fact that India in most cases does not move very quickly in the right direction. 

Reforms – results and future needs  

Economic policy of the Modi government is mostly described as relatively liberal and open for globalization. To what extent this really is the case in a Western sense could be a matter of discussion. However, a number of policy moves in the right direction could be noted in the past years of the Modi administration. Some progress has been achieved – e.g. in macroeconomic stabilization and improvements of conditions for foreign direct investments (FDI). However, much more has to be done by the next government coalition which according to many Indian experts will go more strongly for social improvements – both in the case of an enlarged NDA or an UPA government. So far, Modi has been working for downsizing of social costs.

So, what should be done by the next government? Many areas of improvements and reforms can be recognized, such as

  • the labor market,  
  • SME problems from demonetization (cash circulation sharply reduced),
  • the banking system,
  • the high public indebtedness,
  • health care,
  • the environment,
  • infrastructure,
  • institutions (corruption).

Conclusion

India is much more difficult to analyze than the currently good GDP growth may reflect. Quite a number of – so far neglected – reform areas should be tackled by the next government. Check out regularly what really happens! Remember that India still has more “sympathy points” in the West than China –regardless your own opinion in this respect.

Hubert Fromlet

Affiliate Professor at the School of Business and Economics, Linnaeus University
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