India election 2019 – the economy and Modi versus Gandhi

April 17th, 2019


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.


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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Russia – visible disparities in regional growth

April 3rd, 2019

Many countries in the world are characterized by regional production and growth disparities, both when it comes to advanced and to emerging market countries. Sometimes regional growth statistics may be characterized by good quality, sometimes the quality of officially calculated growth numbers seems to be less illuminating. Regional disparities can also mean different conditions for (foreign) corporate investors what concerns demand and size of the market (for sales), wage levels (for production costs) and educational quality (for access to human resources, better innovation and research and, thus, corporate development).

Regional developments in China and Russia

In China, for example, the addition of all provincial growth results mostly shows higher accumulated economic growth rates than the corresponding weighted numbers for China as a whole. The reason for this discrepancy is frequently explained by better possibilities for the professional promotion of provincial political leaders when good economic results can be shown for the own geographical area of responsibility. Obviously, the central political leadership tries now to change this approach (somewhat), for example by considering environmental improvements as well. However, more exact results in this specific approach still seem to be unknown – at least to me.

Recently, I found very interesting results for the economic performance of Russian regions, published by BOFIT (The Bank of Finland Institute for Countries in Transition) and originated at the Russian Federal State Statistics Service (Rosstat). The graph published in the link above shows clearly the outstanding positive role of Moscow, the Moscow and the Central region, also compared to St. Petersburg and to the North-West region and even more clearly compared to the Volga and Ural regions. Despite visible improvements in manufacturing production and investments, retail sales still remain sluggish almost over the whole country after the sharp drop in 2015 – with the Moscow region giving a brighter picture also here.

One can also single out by these statistics that the above-mentioned regions counted in 2018 for 81 percent of all Russian manufacturing production and for 70 percent of all fixed investments and retail sales – which certainly can give some guidance for (foreign) corporate planning.

It could be added that BOFIT publishes a lot of interesting news and research, particularly on China and Russia. I never omit their BOFIT Weekly and their other publications.

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

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China improves transparency at the National People’s Congress – talks about problems

March 18th, 2019


Kina visar mer transparens vid Nationella Folkkongressen – många problem påtalas

Svensk sammanfattning

Nyligen avslutades Kina sin 13:e Nationella Folkkongress, närmare bestämt sin andra sittning under innevarande mandatperiod. Detta är en betydelsefull sammankomst med närmare 3000 delegater från hela landet. De viktigaste bidragen kom från partichefen och presidenten Xi Jinping och premiärminister Li Keqiang. Deras tal, kommentarer och ordval borde regelbundet granskas av svenska och alla andra utländska Kina-analytiker.

Man kan nog definiera Nationella Folkkongressen som Kinas parlament med en enda årlig sammankomst under den 5-åriga mandatperioden, det vill säga varje vår (i mars) under 10-14 dagar.     

Årets resultat av sammankomsten kan klassificeras på följande vis efter egen sökprocess (hittade exempel och formuleringar är i den engelska versionen):

  1. med relativt konkreta resultat och/eller uttalanden
  2. med något mindre konkreta resultat och/eller uttalanden samt uppmaningar
  3. med uppmuntran eller uppmaning till snar bättring
  4. med mer allmänna slutsatser och/eller uttalanden.

Denna kategorisering visar mer konkret att det faktiskt togs upp en hel del kritiska framtidsfaktorer vid Nationella Folkkongressens senaste möte. Ett nämnvärt antal obesvarade frågor kvarstår emellertid, exempelvis

¤  hur långt man har  kommit med uppfyllelsen av de viktigaste målen från Tredje Plenumet i oktober 2013 (med utvärdering 2020),
¤  hur en hel del målkonflikter kan komma att bemötas och hanteras,
¤  hur sänkningarna av bankernas kassakvoter och därmed eftersträvad större utlåning kan matchas med den enorma privata och offentliga skuldbördan.    

Det lätt reducerade BNP-tillväxtmålet för 2019 (6-6 ½ %) kommer siffermässigt att klaras. Jag tippar på 6 ¼ %. Även under 2020 kommer tillväxten knappast att underskrida 6 %. Men hur kommer den verkliga eller underliggande tillväxten att se ut? Kommunistpartiets 100-åriga jubileum år 2021 tillåter inget annat än goda statistiska resultat även vid slutet av perioden. Vid officiell beräkning av BNP enligt köpkraftsparitet är Kina redan världens största ekonomi – skäl nog att skärpa den svåra Kinaanalysen.

Hubert Fromlet                                                                                                      Affiliate Professor at the School of Business and Economics,
Linnaeus University (Linnéuniversitetet)


English version

The 13th National People’s Congress (NPC) with its second session – a very important political event in China – has been concluded on March 15. The NPC is a kind of parliament and to some extent a legislative institution. The term of the NPC lasts for five years with one big annual convention every spring (March) in Beijing, gathering around 3000 invited delegates from all over the country.

For China analysts, it becomes increasingly important to analyze the comments and statements by China’s top politicians, particularly those made by the President of China and also General Secretary of the Communist Party of China, Xi Jinping, and by the Prime Minister Li Keqiang. This includes reading their messages also between the lines – which indeed is tricky but can be very fruitful. Li certainly has a great deal of economic competence.    

Main focus on the economic development and outlook

The 13th National People’s Congress and its second session discussed actually a broad range of topics – topics, however, that were clearly dominated by concerns about the economy. Not everything was referred to Trump’s protectionism. Indeed, many bothering economic problems were described as homemade. Other topics that were taken up – with direct or more indirect links to the economy – by important Chinese political leaders were, for example, education, high-quality development in different areas,   environment protection (health), poverty, urbanization, corporate tax reliefs, etc.

In a summarizing comment, Prime Minister Li Keqiang stressed that externally generated risks remain on the rise and that the real economy faces many difficulties. He added that there still exist many hidden dangers in the financial and other sectors. Altogether, these concerns express quite clearly the worries China’s political leadership currently feels about the economy – and it could also reflect a limited move to more transparency. This latter angle should be checked up more frequently in the future.

Classification of applied communication

Below, I make an attempt to collect different comments or statements by prominent Chinese decision-makers during the NPC (mainly by the President of China, Xi Jinping, quoted here as Xi, and by Prime Minister Li Keqiang, quoted here as Li; others are not quoted by name). Translated into the corporate language, Xi can be described as the chairman of the board and Li as the CEO of China. To get some organization in the comments and statements from the NPC, I have divided them in the following four different groups:

Communication with relatively concrete details:

¤  “Main tasks for 2019”: cutting corporate burdens by reducing VAT, reduced corporate social insurance contributions, shortened list of FDI impediments, RMB 2600 billion investments in road, waterway and railway projects, increasing expenditure on education, cheaper rates for mobile internet services… (Li)
¤  “China plans to reduce sulfur dioxide and nitrogen oxide emissions by 3 percent in 2019 …” (Li)
¤  … credits by state-owned banks to SMEs should increase this year by 30 percent … (Li)

Communication with at least partial concretization:

¤  “The standard for poverty reduction is to ensure that poor people have access to food and clothes and by the basic public services of medicine, education and housing …” (Xi)
¤  “… increasing downward pressure (on the economy) …” (Li)
¤  … continued preferential policies for new energy vehicles … (Li)
¤  … foreign firms will be able to transfer profits easily …

Communication stressing encouragement or urgent improvement:

¤  “There should be no retreat until a complete victory (against poverty) is won …” (Xi)
¤  “We must crack down on those who try to contaminate poverty     alleviation …” (Xi)
¤  “… promotion of China – U.S. trade negotiations …” (Li)
¤  SMEs still have too limited access to money and the speed of innovation is still too modest … (Li)
¤  “Get fully prepared for the 2022 Olympic and Paralympic Games …” (Li)                                                                                                     

Communication with general comments and statements:    

¤  “Financial sector will open further …”
¤  “Local governments are not allowed to raise new “hidden” debt” …
¤  “Farewell to GDP as only performance indicator …”
¤ The government should build a fair, transparent and legal  environment and create a good atmosphere for the development of private companies …” (Xi)  .
¤  “China wants to build world-class SOEs …” (Xi)
¤  “Environmental protection and economic development are closely integrated …” (Xi)
¤   “Social sciences workers should do more field research …” (Xi) 
¤  “Companies should have more time for their business instead of dealing a lot with bureaucracy …” (Li)                    

In certain cases, the borderline between the four groups may be nebulous. However, this is not a decisive point in this context. The main objective is to find out to what extent political comments from the NPC may have become more applicable for corporate (financial) decision-makers, analysts and academics with different kinds of interest in China.

Conclusions from the 13th NPC

¤  Altogether: more pragmatism and transparency at this year’s NPC – necessary also in the future.

My own understanding is that the latest NPC obviously turned out to be more open and transparent than all the previous sessions I have watched them since the early 1990s. This time, a number of problems and necessary improvements were taken up more or less distinctly by China’s most influential political leaders. This hopefully starts a new trend which could mean some kind of progress. For this reason, it will be interesting to observe whether this recent impression has to be regarded as a temporary phenomenon or rather as a visible initial step towards more (economic) transparency – indeed a change the world outside China would appreciate.

¤  Make a difference between short-term and long-term developments!     

Certain comments in Sweden and abroad concluded recently – also during the NPC – that current economic worries about China generally have been overdone and also the specific reactions on financial markets. This may have been – and probably is – a correct interpretation for the near future in a sense that no major economic accidents most probably will be reported from China any time soon. It also seems to be the right conclusion that China really tries to work for a solution of the trade war with the United States, as recorded from the NPC. However, it would be wrong to play down all the (other) risks and challenges that China will be facing in a longer perspective. These more distant fears were also expressed at the NPC and should be included in any well-founded analysis of the Chinese economy – the debt problem certainly included.

¤  The Chinese model needs adjustments.

Only one year ago, Chinese political leadership still pronounced the superiority of their economic model with its politically determined term of a “socialist market economy”. However, functioning improvements of marketization also assume more pluralism in different decision processes. Probably, China has to work more strongly in this direction – also in a social context. Legitimacy for the political system in the past two or three decades was very much – and too much – related to achieved and expected high GDP-growth rates.

In the foreseeable future – when GDP growth necessarily is confronted more clearly with the “new normal” of growth. Dampened GDP development and expectations alone cannot satisfy major parts of the Chinese people anymore. Instead, social issues will increasingly gain momentum such as improvements of the environment, better institutions (less corruption and bureaucracy), better social insurance and health care, acceptable pensions, future-oriented education, better food quality, etc. All this factors will become increasingly important. Thus, a positively adjusted Chinese model for the future will have to include sizeable social progress – and still the ability to deliver reasonable GDP growth in order to keep unemployment roughly under control and to finance necessary social reforms.

I would guess that really visible and felt social progress could be a major part of China’s and Xi Jinping’s way to a considerably revised content of the old legitimacy mandate which mainly – or even only – was based on very strong economic growth. It is certainly not by serendipity that Xi Jinping strongly has been singling out – also at the NPC – that poverty has to be combatted as efficiently as possible. It can be added that current official urban unemployment at around 5 percent does not look so favorable. And what about rural unemployment?    

¤  Improvements for the corporate sector – but more is needed.
It can be noted that China’s political leadership at this year’s NPC has been increasingly focusing on conditions for the Chinese corporate sector, including lower taxes and social contributions but also better conditions for FDI. State-owned banks have been encouraged to lend more money to SMEs which so far have been depending too much on fresh money from the so-called shadow banks. Local governments are now expected to give better financial support to startups. These plans are certainly positive. However, considerably more has to be accomplished, particularly when it comes to private companies – and preferably more efforts and money should regularly flow to improved corporate conditions.

¤  Financial reforms may be delayed further.                                                       China’s financial markets have been reformed in recent years – but not very quickly. Focus should remain on further improvements of the domestic financial markets which – according to my own reading – has not been clearly emphasized during the NPC. Current problems in the Chinese economy should also mean that the complete opening-up of cross-border financial flows should – and most probably will – take time. This conclusion should be particularly applied to cross-border trading of treasury bills, bonds and stocks. Full convertibility of the RMB (yuan) is still not recognizable.  

¤  Trade deal with the U.S. remains difficult to achieve
Sure, China wants a trade deal with the U.S. since China’s exports really show a negative trend – but not at any price as explained repeatedly at the NPC. Financial markets should become more cautious with their spontaneous comments on American-China trade news. We may be more far away from a sustainable trade agreement between the two largest economies in the world than many (financial) analysts pretend these days. Who knows?

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

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