India’s attempt to escape from corruption and low taxation ethics

Monday, November 21st, 2016

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
Editorial board


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

Monday, August 22nd, 2016

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
Editorial board


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India – changing or not?

Monday, December 21st, 2015

I have been analyzing India since the late 1980s. Consequently, I feel quite familiar with most of the structural changes in this big country and the economic development that could be noted in the past twenty years. India of today is certainly very different from India of the early 1990s – at least in most economic respects. India has been changing.

Improvements have been achieved in many areas – but not in all. There are still important bottlenecks for the efficiency of reforms.

First, India remains a slowly moving country. Indian colleagues and journalists still tell me regularly that this phenomenon mainly can be explained by the fact that democratically based changes often need time-demanding compromises (which China does not need to consider, Indian experts usually add).

Second, the different states in the federal system of India make the conditions for unified reforms over the whole country many times very difficult or in certain cases even impossible. This situation can also be regarded as very different from China.

Third, lndian capitalism is softer than, for example, the more ruthless capitalist part of the Chinese economic model. Sympathy for the first or the second version of these two capitalist applications may differ among foreign observers. Western analysts and companies dislike in this context many times the inflexibility on Indian labor markets.

Anyway, India belongs obviously to the group of emerging markets where foreign country analysis tends to focus insufficiently on the strong  relationship between politics and economic development. This is a decisive shortcoming.

Expectations were indeed high when Narendra Modi from the conservative Bharatiya Janata Party (BJP) in 2014 became India’s new prime minister. In the beginning, reform plans looked promising. Today, however, historical reality seems to be back – i. e. the usual reality of delayed moves forward. Sure, prime minister Modi and his plans and strategies for economic policy still seem to be supported by the Indian corporate sector. But political opposition in Indian parliament(s) gets tougher and tougher.

Today, for example, the political opposition works against the introduction of a new goods and services tax for in the same way as the current government did during their time in opposition. Furthermore, plans of more relieved rules for purchases of land by companies and the liberalization of many tight labor market rules have also been canceled from the near-term agenda.

Altogether, India is changing into the right direction – and at the same time it is not. Policy orientation itself toward better structural growth conditions seems to be in place – but the tools to speed up the processes of implementation are still too inefficient or even absent.

Here we the key to many promising future structural economic reforms in India!


Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board


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