Dr. Surupa Gupta on India’s Economic Growth

Surupa Gupta is Associate Professor of Political Science and International Affairs at the University of Mary Washington. She has a PhD in International Relations from the University of Southern California, Los Angeles, CA. She teaches international political economy and courses on South Asian and Indian politics. Her research focuses on: Indian foreign economic policy; India’s role in global governance in economic issues; politics of trade liberalization and agricultural policy reform in India; and comparative study of the process of trade policymaking in Brazil and India. She has been invited to lecture on Indian foreign economic policy in Brazil, Denmark, India and the US.

India’s economic growth has been quite robust recently.  What are the key drivers of the growth?

Yes, India's economic growth has been robust, but it has not been uniformly so. India was the fastest growing economy in 2016, with real GDP growth at the end of 2015 at 7.3 percent. Then it dipped the following year. It has regained that position in the past couple of weeks, but it is important to note that there was a big dip and growth rates fell to about 6 percent. The economic primary driver in the early period of the Modi administration was low energy prices – that seemed to drive a lot of the growth. More recently, the manufacturing and service sectors have seen modest improvements due to global growth. Some of the recent growth is also driven by increased government spending on infrastructure and in the government's attempts to make capital more available.

Prime Minister Modi's speech at Davos, especially his goal of lifting the size of the Indian economy to $5 trillion by 2025, has received a lot of attention abroad.  How has it played in India? What is the background to Prime Minister Modi’s declaration of this ambitious goal?

The immediate reaction to this speech was mostly positive. An Indian Prime Minister addressing the World Economic Forum was seen as positive, given that the Chinese President addressed the same body last year. There was a buoyancy surrounding the positive economic performances of India, China, and Asia as a whole. That said, in a democratic country like India, there are always critics. The larger problem is with one of the messages in the speech, which was criticizing growing protectionism. There are really strong protectionist forces within India, a significant proportion of which are in Prime Minister Modi’s own base. This calls into question how sincere his endorsement of open markets is.

India was the fastest growing, large economy at the beginning of 2016, then at the end of 2016 the Indian government carried out its demonetization policy.  In 2017, it rolled out a huge tax reform introducing the Goods and Services, or GST. Collectively these two initiatives led to a sizable drop in India’s GDP growth. Modi argued that these two initiatives made India more prepared for digital transactions and to function as a singular market. That was a critical part of his message. He wanted to make the point that despite this drop in growth rate, these reforms are leading India in a positive direction. This was a signal to the world that India’s economy continues to provide a huge opportunity for investors. He was also speaking to his domestic constituents and signaling that India was still on the growth path that he promised when he ran in the 2014 elections.

How realistic is this objective, which implies doubling the size of the Indian economy in seven years?  What will be needed for India to reach this goal?

For India to double its GDP in seven years, it requires a sustained real growth rate of about 7 percent and a nominal rate of about 10 to 11 percent between now and 2025. Other than during the mid-2000s, when global growth was steady and markets tended to remain fairly open, India has never seen sustained growth rates at such a high level before or since that period. That makes one a little skeptical. Moreover, this projection is built on the assumptions that existing reforms are going to put India on this trajectory. There is one report that argues that the digitization of the economy, through measures such as GST, the opening of rural bank accounts, and promoting access to mobile phones could lead to this level of this growth. Economists have argued that among these various reforms, the GST may have a positive impact on growth in the long term by removing existing tax related distortions in the economy. However, that is in the long term. There is no indication that it will have a short or medium-term positive impact on growth. It's quite unclear what the exact impact the other reforms will have. The final point is that for India to achieve that goal, global markets have to remain open and buoyant for India to increase exports. The government’s own research estimates that India needs 15 to 20 percent export growth to achieve an 8 to 10 percent GDP growth rate. For sustained growth, the Modi government will need to initiate reforms to land and labor markets, maintain high rates of foreign investment, and improve the functioning of India’s capital markets. Indian land reforms are politically difficult, and this government has not shown a huge amount of leadership in negotiating reforms in these areas. The domestic banking sector needs substantial reform, but here there has been some progress. Foreign investment flows have increased over the last few years. They need to remain high. So are these objectives realistic? I would give it a 50/50 chance, conditional on these factors.

Modi has been in power since May 2014. What is his record in reaching his pledged policy objectives?

Leading up to and just after the 2014 election, Modi gave a number of speeches, including his August 2014 “Make In India” speech, in which he promised several things: economic development, job growth, making India a manufacturing hub, making India a hub of creativity and design, and so on. None of these goals has really materialized. Job growth has been rather stagnant. The unorganized sector which employs many of people at the fringe of society took a big hit during demonetization and the GST rollout. Manufacturing growth has remained fairly anemic, and even the overall growth rate, which everyone applauds and the Modi government publicizes quite often, is  suspect. Many economist that I have read and the Financial Times seem to suggest that there is a certain level of overestimation due to the questionable methodology that the government uses. In terms of reaching pledged policy objectives, so far he is not a huge success.

What are Prime Minister Modi’s signature reforms? How effective have recent economic reforms been in raising the growth performance of India's economy?

Demonetization was the banning of high-value notes and subsequently replacing them with new notes. Initially the goal was to reduce corruption, though eventually the message was that this effort would lead India's economy to a higher level of digitization and an economy that is less cash-reliant. While its short term economic impact was largely negative, I have not seen any credible source articulate a longterm positive impact that justifies the short term pains.

The GST is a major reform because it replaced a highly fractured tax regime that relied on excise taxes, sales taxes, and other kinds of taxes, with a value added tax on goods and services. Adopting a GST regime has been in the works since the early 2000s. This is an area  where Modi can only claim partial ownership of the reform, whereas in demonetization, the policy was purely the product of his government. In addition, he can take credit for a couple of other initiatives, like the financial inclusion project by increasing the number of unique bank accounts available. Collectively and in the short term, the growth impact of these reforms has been negative by as much as 2 percentage points. This is something that India’s government publications, including the Finance Ministry’s Annual Economic Survey, have pointed out.

The GST is still going through the rollout phase, working out inherent problems. Some observers and analysts observe that in a large country such as India, a reform of that proportion needed to be introduced as a pilot project first and then rolled out in the entire country second, but that was not done. The GST has created challenges in many different sectors. Exporters are going to push for some kind of mechanism that allows them to bypass GST policies that have forced them to surrender a lot of their capital to a slow exemption process, a process that is more complex than the tax filing process the previous tax regime. If the government is serious about accomplishing export growth they will have to address this concern.

A key factor determining the future performance of India’s growth is export performance.  Could you describe the improvement in India’s export performance and tell us about further reforms that are required to accomplish Modi’s goal of raising India’s exports to $900 billion a year by 2020, a mere two years from now?

That goal sounds a little too ambitious given that there has not been recent sizeable improvement in India’s export sector. In fact, there has not been much export growth at all. That is largely because the external markets were not conducive to significant export growth, particularly in the service sector which India relies on quite a bit. There have been protectionist sentiments and policies almost everywhere. To that extent we cannot really speak of an improvement in India’s export performance yet. What the government could do is diversify its exports both in respect to the destinations of Indian exports as well as what is exported. They could also rationalize the tariff regime. As it stands, there are far too many complicated export promotion schemes. Some trade economists have argued that you can slightly increase the tariff but remove the trade promotion regimes while simplifying the process to create export growth, and perhaps that would stimulate India’s export performance. The last two are factors that would increase India’s overall competitiveness: one is improving domestic infrastructure and the other is bringing in factor market reforms in land and labor.

Another key factor is infrastructure development, a chronic problem in India.  How much progress has Modi’s government made in improving India’s infrastructure in the last four years?

This is an area where this government has done quite a bit, especially in building roads, telecommunications infrastructure, and internet access. There have been improvements in all of these areas, but it has done relatively little to address the structural problems affecting this sector. I will give you two examples. One example is that when you increase the level of electrification, you also have to support the generation of electric supply to keep electric distribution companies viable. In large parts of the country, electricity is promised at very low or zero cost, and so the viability of this distribution comes under question. The second problem is that for there to be further sustained infrastructure improvement, the government needs to come up with a public private partnership model that can fund these infrastructure projects. In this area there is a model available proposed by a government appointed panel.  But the government has not done anything with the panel’s recommendations.

Compared with his predecessors, what kind of grade would you give to Prime Minister Modi in terms of economic performance?  Why?

At the moment I would give him a solid C, which I should remind you is an average grade, though my students don’t seem to like Cs very much. He has been successful in some areas of policy making, and has largely failed in others. Given Modi’s image as a decisive leader and his parliamentary majority, there were expectations that there would be more far-reaching structural reforms of the economy. This includes factor market reforms, like labor and land reforms. However, the government has shown little stomach to pursue these kinds of reforms. It has accomplished other things that you may describe as low-hanging fruit, but will still have a positive impact. The GST rollout has been the major positive development, in addition to a few smaller things that the government has done, such as the implementation of a bankruptcy code and building a crop insurance scheme for farmers. However, when it comes to large reforms the government has demonstrated a lack of political will. That is why I wouldn’t give it anything over a C. Finally, from the view of the average voter, employment generation is the key consideration, and the government has failed to do much in that area. In terms of what is holding Modi back from factor market reforms, this is my read: when the government first came to power and attempted these reforms, they misjudged the extent to which they needed to negotiate with opposition parties and state governments to bring about these big-ticket reform items. It was a lack of effort to effectively negotiate. In many cases, such as in land reforms, some of the opposition came from the upper house of the legislature; Modi’s party has a large majority in the lower house. That largely restricted whether those reforms could be initiated. I would not describe it not only as a lack of political will, but also a lack of appreciation for the complexity of the Indian economy and its stakeholders.

Tobin Hansen '20Student Journalist

Featured Image by Fresh News Administration at World Economic Forum in Davos.

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