The Economist examines India's Economic Performance

 From The Economist

In the second week of 2024 business leaders descended on Gujarat, the home state of Narendra Modi, India’s prime minister. The occasion was the Vibrant Gujarat Global Summit, one of many gabfests at which India has courted global investors. “At a time when the world is surrounded by many uncertainties, India has emerged as a new ray of hope,” boasted Mr Modi at the event.

He is right. Although global growth is expected to slow from 2.6% last year to 2.4% in 2024, India appears to be booming. Its economy grew by 7.6% in the 12 months to the third quarter of 2023, beating nearly every forecast. Most economists expect an annual growth rate of 6% or more for the rest of this decade. Investors are seized by optimism.

The timing is good for Mr Modi. In April some 900m Indians will be eligible to vote in the largest election in world history. A big reason Mr Modi, who has been in office since 2014, is likely to win a third term is that many Indians think him a more competent manager of the world’s fifth-largest economy than they do any other candidate. Are they right?

To assess Mr Modi’s record The Economist has analysed India’s economic performance and the success of his biggest reforms. In many respects the picture is muddy—and not helped by sparse and poorly kept official data. Growth has outpaced that of most emerging economies, but India’s labour market remains weak and private-sector investment has disappointed. But that may be changing. Aided by Mr Modi’s reforms, India may be on the cusp of an investment boom that would pay off for years.

The headline growth figures reveal surprisingly little. India’s gdp per person, after adjusting for purchasing power, has grown at an average pace of 4.3% per year during Mr Modi’s decade in power. That is lower than the 6.2% achieved under Manmohan Singh, his predecessor, who also served for ten years.

image: the economist

But this slowdown was not Mr Modi’s doing: much of it is down to the bad hand he inherited. In the 2010s an infrastructure boom started to go sour. India faced what Arvind Subramanian, later a government adviser, has called a twin balance-sheet crisis, one that struck both banks and infrastructure firms. They were left loaded with bad debt, crimping investment for years afterwards. Mr Modi also took office at a time when global growth had slowed, scarred by the financial crisis of 2007-09. Then came the covid-19 pandemic. The difficult conditions meant average growth among 20 other large lower- and middle-income economies fell from 3.2% during Mr Singh’s time in office to 1.6% during Mr Modi’s. Compared with this group, India has continued to outperform (see chart 1).

Against such a turbulent backdrop, it is better to assess Mr Modi’s record by considering his stated economic objectives: to formalise the economy, improve the ease of doing business and boost manufacturing. On the first two, he has made progress. On the third, his results have so far been poor.

India’s economy has certainly become more formal under Mr Modi, albeit at a high cost. The idea has been to draw activity out of the shadow economy, which is dominated by small and inefficient firms that do not pay tax, and into the formal sphere of large, productive companies.

Mr Modi’s most controversial policy on this front has been demonetisation. In 2016 he banned the use of two large-value banknotes, accounting for 86% of rupees in circulation—surprising many even within his government. The stated aim was to render worthless the ill-gotten gains of the corrupt. But almost all the cash made its way into the banking system, suggesting that crooks had already gone cashless or laundered their money. Instead, the informal economy was crushed. Household investment and credit plunged, and growth was probably hurt. In private, even Mr Modi’s supporters in business do not mince words. “It was a disaster,” says one boss.

Demonetisation may have accelerated India’s digitisation nonetheless. The country’s digital public infrastructure now includes a universal identity scheme, a national payments system and a personal-data management system for things like tax documents. It was conceived by Mr Singh’s government, but much of it has been built under Mr Modi, who has shown the capacity of the Indian state to get big projects done. Most retail payments in cities are now digital, and most welfare transfers seamless, because Mr Modi gave almost all households bank accounts.

Those reforms made it easier for Mr Modi to ameliorate the poverty resulting from India’s disappointing job-creation record. Fearing that stubbornly low employment would stop living standards for the poorest from improving, the government now doles out welfare payments worth some 3% of gdp per year. Hundreds of government programmes send money directly to the bank accounts of the poor.

It is a big improvement on the old system, in which most welfare was distributed physically and, owing to corruption, often failed to reach its intended recipients. The poverty rate (the proportion of people living on less than $2.15 a day), has fallen from 19% in 2015 to 12% in 2021, according to the World Bank.

Digitisation has probably also drawn more economic activity into the formal sector. So has Mr Modi’s other signature economic policy: a national goods and services tax (gst), passed in 2017, which knitted together a patchwork of state levies across the country. The combination of homogenous payments and tax systems has brought India closer to a national single market than ever.

That has made doing business easier—Mr Modi’s second objective. gst has been a “game-changer”, says B. Santhanam, the regional boss of Saint-Gobain, a large French manufacturer with big investments in the southern state of Tamil Nadu. “The prime minister gets it,” adds another seasoned manufacturing executive, referring to the need to cut red tape. The government has also put serious money into physical infrastructure, such as roads and bridges. Public investment surged from around 3.5% of gdp in 2019 to nearly 4.5% in 2022 and 2023.

The results are now materialising. Mr Subramanian recently wrote that, as a share of gdp, in 2023 net revenues from the new tax regime exceeded those of the old system. This happened even as tax rates on many items fell. That more money is coming in despite lower rates suggests that the economy really is formalising.

Yet Mr Modi is not satisfied with merely formalising the economy. His third objective has been to industrialise it. In 2020 the government launched a subsidy scheme worth $26bn (1% of gdp) for products made in India. In 2021 it pledged $10bn for semiconductor companies to build plants domestically. One boss notes that Mr Modi personally takes the trouble to convince executives to invest, often in industries where they face little competition and so otherwise might not.

image: the economist

Some incentives could help new industries find their feet and show foreign bosses that India is open for business. In September Foxconn, Apple’s main supplier, said it would double its investments in India over the coming year. It currently makes some 10% of its iPhones there. Also in 2023 Micron, a chipmaker, began work on a $2.75bn plant in Gujarat that is expected to create some 5,000 jobs directly and 15,000 indirectly.

So far, however, these projects are too small to be economically significant. The value of manufactured exports as a share of gdp has stagnated at 5% over the past decade, and manufacturing’s share of the economy has fallen from about 18% under the previous government to 16%. And industrial policy is expensive. The government will bear 70% of the cost of the Micron plant—meaning it will pay nearly $100,000 per job. Tariffs are ticking up, on average, raising the cost of foreign inputs.

image: the economist

So what matters more: Mr Modi’s failures or his successes? As well as economic growth, it is worth looking at private-sector investment. It has been sluggish during Mr Modi’s time in office (see chart 2). But a boom may be coming. A recent report by Axis Bank, one of India’s largest lenders, argues that the private-investment cycle is likely to turn, thanks to healthy bank and corporate balance-sheets. Announcements of new investment projects by private corporations soared past $200bn in 2023, according to the Centre for Monitoring Indian Economy, a think-tank. That is the highest in a decade, and up 150% in nominal terms since 2019.

Although higher interest rates have sapped foreign direct investment in the past year, firms’ reported intentions to invest in India remain strong, as they seek to “de-risk” their exposure to China. There is some chance, then, that Mr Modi’s reforms will kick growth up a gear. If so, he will have earned his reputation as a successful economic manager.

The consequences of Mr Modi’s policies will take years to be felt in full. Just as an investment boom could vindicate his approach, his strategy of using welfare payments as a substitute for job creation could prove unsustainable. A failure to build local governments’ capacity to provide basic public services, such as education, may hinder growth. Subhash Chandra Garg, a former finance secretary under Mr Modi, worries that the government is too keen on “subsidies” and “freebies”, and that its “commitment to real reforms is no longer that strong.” And yet for all that, many Indians will go to the polls feeling cautiously optimistic about the economic changes that their prime minister has wrought.

Which economy did best in 2023?

 From The Economist

image: the economist/shutterstock

Dec 17th 2023

Almost everyone expected a global recession in 2023, as central bankers fought high inflation. They were wrong. Global gdp has probably grown by 3%. Job markets have held up. Inflation is on the way down. Stockmarkets have risen by 20%.

But this aggregate performance conceals wide variation. The Economist has compiled data on five economic and financial indicators—inflation, “inflation breadth”, gdp, jobs and stockmarket performance—for 35 mostly rich countries. We have ranked them according to how well they have done on these measures, creating an overall score for each. The table below shows the rankings, and some surprising results.

Top of the charts, for the second year running, is Greece—a remarkable result for an economy that was until recently a byword for mismanagement. Aside from South Korea, many of the other standout performers are in the Americas. The United States comes third. Canada and Chile are not far behind. Meanwhile, lots of the sluggards are in northern Europe, including Britain, Germany, Sweden and, bringing up the rear, Finland.

Tackling rising prices was the big challenge in 2023. Our first measure looks at “core” inflation, which excludes volatile components such as energy and food and is therefore a good indicator of underlying inflationary pressure. Japan and South Korea have kept a lid on prices. In Switzerland core prices rose by just 1.3% year on year. Elsewhere in Europe, though, many countries still face serious pressure. In Hungary core inflation is running at around 11% year on year. Finland is also struggling.

In most countries inflation is becoming less entrenched—as measured by “inflation breadth”, which calculates the share of the items in the consumer-price basket where prices are rising by more than 2% year on year. Central banks in places like Chile and South Korea increased interest rates aggressively in 2022, sooner than many others in the rich world, and now seem to be reaping the benefits. In South Korea inflation breadth has fallen from 73% to 60%. Central bankers in America and Canada, where inflation breadth has dropped even more sharply, can take some credit, too.

Our next two measures—growth in employment and gdp—hint at the extent to which economies are delivering for ordinary people. Nowhere fared spectacularly well in 2023. But only a small minority of countries saw gdp decline. Ireland was the worst performer, with a drop of 4.1% (take this with a pinch of salt: there are big problems with the measurement of Irish gdp). Britain and Germany also performed poorly. Germany is struggling with the fallout from an energy-price shock and rising competition from imported Chinese cars. Britain is still dealing with the consequences of Brexit.

America did well on both gdp and employment. It has benefited from record-high energy production as well as the effects of a generous fiscal stimulus implemented in 2020 and 2021. The world’s largest economy may have pulled up other countries. Canada’s employment has risen smartly. Notwithstanding its war with Hamas, Israel, which counts America as its largest trading partner, comes fourth in the overall ranking.

You might think that the American stockmarket, filled with firms poised to benefit from the revolution in artificial intelligence, would have done well. In fact, adjusted for inflation it is a middling performer. The Australian stockmarket, filled with commodities firms managing a comedown from high prices in 2022, underperformed. Share prices in Finland have slumped. Japan’s firms, by contrast, are experiencing something of a renaissance. The country’s stockmarket is one of the best performers this year, rising in real terms by nearly 20%.

But for glorious equity returns, look thousands of miles west—to Greece. There the real value of the stockmarket has increased by over 40%. Investors have looked afresh at Greek companies as the government implements a series of pro-market reforms. Although the country is still a lot poorer than it was before its almighty bust in the early 2010s, in a recent statement the imf, once Greece’s nemesis, praised “the digital transformation of the economy” and “increasing market competition”. While underperforming Finns can console themselves this Christmas by drowning their sorrows in their underwear (or getting päntsdrunk, as it is known locally), the rest of the world should raise a glass of ouzo to this most unlikely of champions. 

Economics Essay 78: Ownership and Control of Firms

Discuss how the divorce of ownership from control may affect both the conduct and performance of firms.

Key terms:

1. Divorce of ownership from control: This refers to a situation in which the individuals who own a company (shareholders) are not the same individuals who manage and control the company's day-to-day operations (managers). In many large corporations, shareholders are dispersed and have limited influence over the decision-making process, while managers make strategic and operational decisions.

2. Conduct of firms: The conduct of firms refers to how firms behave in terms of their strategic choices, pricing decisions, production methods, investment decisions, and interactions with competitors. It encompasses the actions taken by managers to maximize the firm's objectives, such as profit maximization or market share expansion.

3. Performance of firms: The performance of firms refers to the outcomes achieved by firms, such as profitability, efficiency, market share, innovation, and customer satisfaction. It reflects the extent to which a firm is successful in achieving its objectives and delivering value to its stakeholders.

The divorce of ownership from control can have significant implications for the conduct and performance of firms:

1. Conduct of firms:

   • Agency problems: The separation of ownership and control creates agency problems, as managers may prioritize their own interests over those of the shareholders. Managers may engage in self-serving behaviors, pursue personal goals, or make decisions that do not align with shareholders' interests.
   • Risk-taking behavior: Managers may be more inclined to take excessive risks when their personal wealth is not fully tied to the company's performance. They may pursue ambitious projects or make risky investments that could negatively impact the firm's financial stability.
   • Managerial discretion: Managers, in the absence of close monitoring by shareholders, have more discretion in decision-making. They can shape the firm's strategies, set executive compensation, and determine resource allocation. This discretion can influence the firm's conduct, including its competitive behavior and investment choices.

2. Performance of firms:

   • Shareholder value: The divorce of ownership from control can result in a divergence between the interests of shareholders and managers. This misalignment can lead to suboptimal firm performance and a failure to maximize shareholder value.
   • Managerial incentives: Managers may prioritize goals other than profit maximization, such as personal reputation, job security, or firm growth. This may lead to decisions that do not optimize the firm's financial performance or long-term sustainability.
   • Accountability and monitoring: Without effective oversight and monitoring by shareholders, managers may face less accountability for their decisions and actions. This can impact the firm's performance by reducing the incentives for managers to perform at their best or make efficient use of resources.

It is worth noting that the impact of the divorce of ownership from control can vary across firms and industries. Some firms may implement governance mechanisms, such as independent boards of directors or performance-based compensation, to align the interests of managers with shareholders and mitigate the negative effects. Additionally, the extent to which the separation affects conduct and performance depends on factors such as the degree of competition, market conditions, industry regulations, and the specific managerial practices implemented within the firm.

Overall, the divorce of ownership from control can introduce agency problems and influence the behavior and performance of firms. Addressing these challenges through effective governance mechanisms and aligning the interests of managers with those of shareholders is crucial for maintaining sound conduct and improving firm performance.

The Dead Cat Strategy - A Good Way to Overcome Poor Performance

Nadeem F Paracha in The Dawn

On January 27, 2022, former prime minister Imran Khan alleged that the co-chairperson of the Pakistan Peoples Party (PPP), Asif Ali Zardari, had hired assassins to kill him.

Outside Khan’s hardcore group of followers, very few treated the allegation with any seriousness, even though, understandably, the PPP was not amused. Ever since his ouster in April last year, Khan has been churning out one bizarre claim after another in his daily addresses and press talks.

Of course, being a classic populist in the mould of Donald Trump and Brazil’s Jair Bolsonaro, Khan hardly ever provides any compelling evidence to back his allegations. Like his populist contemporaries, he too is more interested in remaining in the news and in Twitter trends. The other reason is to deflect the media’s attention away from the plethora of scandals involving his immediate family, his party personnel and himself.

These scandals have begun to engulf him, now that he doesn’t have the kind of protection that he once enjoyed from the military establishment and the judiciary when he was PM. The scandals have dented his self-styled image of being ‘incorruptible’.

By delivering speeches almost on a daily basis that are studded with sensationalist claims and allegations, Khan is using what has come to be known as the ‘dead cat strategy’ or ‘deadcatting’. Both these terms were first floated in 2013. They are derived from a theory of a political strategist who has a history of working for right-wing parties. This is also the reason why deadcatting is often seen as a strategy that has mostly been applied by right-wing politicians and contemporary populists.
 
Both the terms are associated with the Australian political strategist Lynton Crosby. Crosby strategised the British populist Boris Johnson’s campaign for the 2008 London mayoral election that Johnson won. Crosby was first appointed by Johnson’s Conservative Party (CP) during the 2005 parliamentary elections, which the party lost.

But after working successfully with Johnson during the 2008 mayoral election, Crosby became the CP’s central strategist. In a 2013 article for the Daily Telegraph, Johnson excitedly explained Crosby’s strategy. He wrote that one of Crosby’s tactics included, (figuratively speaking) throwing a dead cat on a dining table on which people sat talking about an issue that was detrimental to the interests of a politician. So, once they see the dead cat, their attention is drawn away from the issue and towards the dead cat. Now the dead cat becomes the issue.

‘Dead cat issues’ are thus sensationalist, formed to draw the people’s and the media’s attention away from the issues that have become increasingly problematic for a politician. Johnson continued to apply this strategy when he was appointed PM in 2019. As PM, he went on deploying dead cat issues to divert the media’s attention away from the many holes that he kept digging and falling into.

But deadcatting has its limits. There are but so many dead cats one can throw on the dining table. In 2022, becoming increasingly controversial, Johnson was forced to step down as PM by his own party. The media had stopped talking about dead cats.

In 2019, the populist president of Mexico Andrés Manuel López held a press conference to announce that he had written letters to the Pope and the Spanish government, demanding that they should apologise for invading Mexico… 500 years ago. This out-of-the-blue declaration surprised many. Why was a president who had vowed to resolve Mexico’s many problems, now suddenly talking about a 500-year-old invasion?

According to the British political journalist and author Andrew Scott, López had made a sizeable number of promises, which included introducing widespread land reforms, poverty alleviation and the elimination of Mexico’s deadly drug mafias. Failing to deliver on any of the promises, López deployed the dead cat strategy. The ploy was absurd, but it did catch the media’s attention.

However, not everyone was impressed by the president’s ‘bold’ initiative to get the Pope and the Spanish government to deliver an apology for a centuries-old invasion of Mexico, whose main victims were the country’s indigenous Indian communities. The famous Peruvian novelist Mario Vargas Llosa suggested that the letters should have been delivered to López himself, because he had done absolutely nothing to better the conditions of the impoverished Indian communities, except churn out populist slogans and display meaningless stunts.

In the early 1980s, when India’s Bhartiya Janta Party (BJP) was largely a fringe far-right Hindu nationalist outfit that had no mentionable economic programme, it started to encourage groups who had begun to plan building a temple on the site of a 16th century mosque in Ayodhya. The BJP turned the mosque into a ‘national issue’.

This was BJP’s dead cat that provided it mainstream traction. And so are the claims by the current BJP government, which uses these to keep the media’s attention focused on the so-called existentialist ‘threat’ to India from Pakistan and by India’s Muslims.

Imran Khan has been deadcatting ever since his government started to unravel from 2020 onwards. Some of the favourite dead cats of Pakistani politicians are ‘issues’ of morality and faith. As a PM who was struggling to deliver the grandiose promises that he had made, and facing increasing criticism, Khan decided to declare himself as the leading crusader against Islamophobia.

He started to write letters to the United Nations and other leaders of the ‘Muslim ummah’, urging them to facilitate his idea of formulating a blasphemy law which could be applied internationally. His ministers jumped in, claiming that he was fighting an international ‘jihad’ against Islamophobes and should be hailed for this.

When this dead cat could not distract the media enough, Khan threw in a bigger dead feline, by claiming that the US was conspiring to oust him from power. After being shown the door by a no-confidence-motion in the parliament, he’s been tossing dead cats with increasing frequency.

Recently, one also saw the current finance minister, Ishaq Dar, deploy the dead cat strategy after being castigated by the media for failing to stabilise the economy. He had been brought in as a miracle worker, but his performance has been rather dismal.

Being a Pakistani, he of course began to tweet verses from Islam’s holy scriptures, indirectly suggesting that the failing economy was due to the mysterious ways of cosmic forces. Ironically, rather than diverting attention, this dead cat ended up magnifying his failings.