After the Election: What s Ahead for the Indian Economy?

Transkript

1 After the Election: What s Ahead for the Indian Economy? Prof. Dr. Michael von Hauff Kaiserslautern University of Technology World economic outlook: New directions for economic policy? 90 th International Business Cycle Conference September 2014 in Berlin

2 Topics I. Introduction II. Reforms since 1991 III. Further reforms needed 2014 IV. Narendra Modi: Mandate for change (?) V. Summary

3 Introduction May 26, Narendra Modi sworn in as the new Prime Minister of India. His party (BJP) won an absolute majority in the Lok Sabha (lower house of Indian Parliament). The election result begs the question: How can we explain this overwhelming electoral victory? The answer is clear: The victory represents a mandate for change.

4 Introduction Two key reasons for the election result are: Declining economic growth Many corruption scandals under the previous government. Is the will for political reform from 1991 gone?

5 1991: Start of the era of reform (1) The economic crisis lead to a new Indian government in the summer of Prime Minister Narasimha Rao appointed Manmohan Singh as finance minister. Comprehensive economic policy reforms: Internal liberalization Liberalization of foreign trade Elimination of many controls and licensing regulations Currency devaluation

6 1991: Start of the era of reform (2) The result: a strong economic upswing (increasing growth rate) the BJP leading coalition candidate wins. The government managed to maintain the economic status quo, but made no further progress Manmohan Singh returns to power and a new period of reform is expected. Singh must consider the expectations of the coalition partners.

7 1991: Start of the era of reform (3) Still, in the following years, impressive growth rates of eight to nine percent were achieved. In recent years, significant deterioration in the economic situation and the growth rate fell below five percent. Some reforms have been made since Example: Establishment of Special Economic Zones (exemptions from duties and taxes) along the lines of the Chinese model. Hundreds of SEZ approved.

8 1991: Start of the era of reform (4) Many protest movements against the expropriation of land. Conclusion: The reform deadlock of recent years has resulted in the economic problems. Source: Luidold, Antrekowitsch 2012, p. 34. Wirtschaftliche Bedeutung und Versorgungsrisiko unterschiedlicher Rohstoffe für die EU

9 The need for reform before the election Macroeconomic objectives: Combat inflation, Strengthen growth and employment. Is there a conflict between monetarism and Keynesianism? Necessary public investments and programs lead to a Crowding-out effect, Increase in fiscal deficit, Growing inflation. Some experts argue: Reducing inflation leads to more overseas investments (FDI).

10 The need for reform before the election (2) Greater macroeconomic stability increases borrowing capacity in the capital markets. The share of fiscal deficit in GDP increased to 6% by ; and has decreased in the last few years to 3.9 %. Labor market reform: The demand for jobs is rising much faster than the creation of new jobs. The high growth rates have had only a limited positive impact on the job market. Since 2007, the employment numbers have experienced a slight decline.

11 The need for reform before the election (3) Positive effects from: The expansion of the infrastructure, The expansion and improvements in the health and education systems, The fight against corruption, New regulation of the labor market. Problems for government after 2009 re-election: The fiscal deficit and national debt could not be decreased, The bureaucracy is paralyzed, Social programs are less effective.

12 Narendra Modi and the mandate for change The latest victory may be explained by dissatisfaction with the economic development, in particular, among the younger voters. Expectations: Revitalize the country s lagging economic growth, including banking reforms; Improve the infrastructure; Reduce the energy constraints; and Reduce corruption.

13 Narendra Modi and the mandate for change (2) Modi governance plan: 10 priorities 1. Removing hurdles to economic growth 2. Reforms for investments 3. Time-bound implementation of policy 4. More freedom and empowerment for bureaucracy, encouragement for innovation 5. Providing people-oriented government and governance

14 Narendra Modi and the mandate for change (3) Modi governance plan: 10 priorities 6. A system to resolve inter ministerial issues 7. Stability and sustainability of government policy 8. Encourage transparency 9. Priority to water, road, education, health, and infrastructure 10. Reforms of infrastructure

15 Narendra Modi and the mandate for change (4) What is to be expected: On the first day, PM Modi created an investigative team to find tax evaders. Estimated: 2 trillion US$ are tucked away, untaxed in India. Nearly 500 billion dollars have been illegally taken out of the country since independence. Improve efficiency of the state bureaucracy. Foreign policy moves strongly towards foreign trade policy. Fighting the corruption (especially negative effect on those living in poverty).

16 Narendra Modi and the mandate for change (5) Risks: Extremely high expectations on the new government (too high?). The campaign platform of the BJP contains little about future economic and social policy. In the attempt to apply the Gujarat model to all of India (may neglect areas such as education, health, and poverty reduction).

17 Narendra Modi and the mandate for change (6) Further challenges for the economic policy of India: Create good quality jobs and break of the demographic divide (approx. 90 % of the workforce is employed in the informal sector). Expand the transportation network, especially in rural areas. Expand of the energy supply (adapt to economic development). Improve the quality of the education and health facilities.

18 Narendra Modi and the mandate for change (7) Further challenges for the economic policy of India (cont d): Expand the university sector to meet the growing demand for skilled labor. Improve the water supply. Economic development also depends on an effective environmental policy.

19 Summary There is no doubt: The new government of India has initiated the change. What reforms can be expected? Too early for an assessment. There will be obstacles, as already familiar from the New Political Economy: Self-interests of the bureaucracy, Self-interests of the stakeholder organizations, Self-interests as part of the social structure. The Indian population has elected a new government and it should be given a chance.