Reality Check: The mixed record of Modi's economic policy. Insights and outlook for international investors and exporters.
From Thursday, April 11th, around 900 million eligible voters in India will decide whether Prime Minister Narendra Modi (of the Hindu nationalist BJP) will rule the country for another five years - or his challenger Rahul Gandhi, leader of the opposition Congress party and scion of the influential and political dynasty of the same name.
general elections wins and forms a government, not only controls the fate of the world's largest democracy and its 1,34 billion inhabitants, but also what will soon be the world's fifth largest economy. The votes will be counted and the results will be published on May 23rd.
The Indian economy at a glance (from the macropperspective)
Modi's landslide victory in 2014 was largely due to his image as a determined economic reformer. With this self-image, he has launched ambitious campaigns such as: “Make in India”, for example, started with the “Demonetization” on financial policy activism, led the nationwide process in an expedited manner Value Added Tax (GST) and thus basically introduced himself Monument.
Now it is time to take a closer look at the results of his economic policy and evaluate whether or to what extent international investors were also able to benefit from them.
The most important indicators at a glance:
- Moderate to solid Economic growth: Annual growth rates during this government period ranged from 6,5 to 8,2 percent (compared to 5,5 to 10 percent from 2009 to 2014). However, the targeted double-digit increases were not achieved. For 2019/2020 says the International Monetary Fund 7,3 percent growth ahead.
- The Unemployment It is virtually impossible to determine in a country where only around ten percent of the population is employed in the “formal sector”. The government has not released official employment data for several years and even canceled the planned release of its latest labor force survey in February. This fuels speculation and doubts as to whether Modi has been able to keep his promise to “create jobs”. The Business Standard newspaper said it had a copy of the Study to have received the highest unemployment rate in 45 years - a great opportunity for the opposition.
- Low Inflation: With official inflation rates between 3 and 5 percent, they have been at a historically low level in recent years. The previous government still had to contend with inflation rates of around 10 percent. A merit of Modi!?
- Exchange rate and trade balance: India continues to suffer from chronic current account deficits, particularly due to energy imports. Weakness rupees does not help the Indian export economy to the same extent that importing raw materials puts a strain on its own currency reserves and current account.
- National debt under control: Loud World bank Annual new debt has been consistently below 2 percent over the last five years. However, thanks to generous election gifts, a noticeable increase in national debt is expected this year. Modi appeared in the 2019/2020 budget as “strong man in donation pants”.
The overall investment climate under Modi
Within the “Make in India” In the 2014 campaign, Narendra Modi set the motto of increasing the share of manufacturing in gross domestic product (GDP) from 16 to 25 percent by 2025 and thereby creating 100 million new jobs.
Not only his voters (who expect jobs) judge him by these words, but also those companies that want to invest in India and set up local production. The Indian economy should be further deregulated and opened up to foreign investors. By reducing bureaucracy and a uniform tax system, business activities should be made significantly easier and India should become an attractive business location.
Make in India: no success (yet).
However, according to the World Bank, the manufacturing sector's contribution to GDP is still just under 15 percent and is not only far behind target, there is also little sign of an upward trend.
But that is not Modi's fault per se. The share of manufacturing in the Indian economy has been declining for over two decades. The reasons for the location's unattractiveness are more likely to be the lack of qualified specialists, poor infrastructure and high energy prices. However, there is positive momentum in the biotech sector as well as the chemical, plastics and automotive industries.
Between FDI and protectionism
At the start of his term, Modi courted foreign investors internationally, sometimes aggressively, and removed several barriers to foreign players in sectors such as manufacturing, retail and aviation.
Germany's direct investments in India have more than doubled to over a billion dollars in the last five years. The total of all foreign investments (Foreign Direct Investments, FDI) was Ministry of Commerce and Industry In 2018, at around $45 billion, it was about twice as high as before Modi took office.
However, foreign direct investment growth has cooled in recent years, falling to below 2017 percent between 2018 and 5. Recent crackdowns on foreign companies, particularly leading online retailers such as Walmart and Amazon, have once again left many unnerved by Modi's unpredictable policies.
Whether various protectionist regulations only send signals to his voters (the... Business communities form a large part of its base) or are strategically motivated, we cannot and do not want to judge at this point.
Ease of doing business..?
In October 2018, the World Bank published its annual study (Ease of) Doing Business. India moved up 23 places in the economic competitiveness ranking and is now ranked 77th (out of 190). Narendra Modi has massively used this ranking for his own PR.
Our study “India Business Climate Index” however, speaks a slightly different language. That's what the majority of German companies call them Bureaucracy in India is by far their biggest problem.
With the Insolvency Act that came into force in 2016 (Insolvency and Bankruptcy Code), and that passed by Parliament in 2018 Arbitration and Conciliation (Amendment) Act The aim was to standardize and modernize Indian business and corporate law.
Goods and Service Tax: India finally as a unified market
The introduction of GST on July 1, 2017 can rightly be described as India's biggest tax reform since independence. It replaces a large part of the previous indirect taxes both at the central government level (Service Tax, Central Sales Tax etc) and at the individual state level (VAT, Entry Tax, Octroi etc) and turned India into a unified market. This has resulted in a massive reduction in bureaucracy, especially when it comes to transport between states. Sales branches of international companies particularly benefit from this Introduction of the Goods and Services Tax.
Even though the introduction of the GST was challenging for many companies, this project - after decades of political discussions - can finally be considered complete and a success.
This tax reform is intended to stimulate investment in the logistics and transport industry and thus sustainably stimulate economic growth and trade in the coming decades.
Indian Economy Outlook: Life After Election
India remains one of the fastest growing economies in the world. A recent United Nations report forecasts that India's economy will grow by 2019 percent in 7,6 and 2020 percent in 7,4.
Regardless of the outcome of the elections, India will continue on the path of economic opening and reregulation. Every government must try to stimulate the economy and bring investors into the country - in order to create growth and jobs (around ten million young Indians enter the labor market every year).
Modi promises growth and jobs in the election campaign. However, it is unclear what (new) accents he wants to set in terms of economic policy and whether he can govern alone again. In any case, the BJP's absolute majority is wobbling considerably.
If Modi is voted out, it is not expected that the Congress party will withdraw essential laws. However, if Congress manages to pull off a surprise and achieve a relative majority, India could become difficult to govern. A stable majority is unlikely due to the Indian party landscape (with over 30 parties in the lower house) and could paralyze India politically.
Ultimately, however, the Indian government's influence on the Indian economy is probably less than Modi and Gandhi themselves would like to believe. The influence of the global economy, a possible recession and trade wars are certainly having a greater impact on growth, direct investment and trade volumes with India.
