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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.

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A Level Economics 22: Labour Markets and Supply Side Economics

Supply-side performance refers to the overall productivity and efficiency of the production factors, including labor, in an economy. It represents the ability of an economy to produce goods and services efficiently, meet demand, and achieve sustainable economic growth. Issues in the labor market can significantly impact the supply side performance of an economy. Here are a few examples of how labor market issues can affect the supply side of an economy:

1. Labor Shortages: When there is a shortage of available labor in the market, it can constrain the supply side performance of the economy. For example, if a country experiences a decline in the working-age population due to demographic factors or emigration, there may be insufficient labor to meet the demand for goods and services. This can lead to production bottlenecks, reduced output, and slower economic growth. A shortage of skilled labor, particularly in critical sectors, can also limit productivity and hinder the economy's ability to capitalize on growth opportunities.

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3. Skills Mismatch: A skills mismatch occurs when there is a gap between the skills demanded by employers and the skills possessed by the available workforce. If the labor market lacks workers with the necessary skills and qualifications to meet the demands of emerging industries or technological advancements, it can hinder the supply side performance of the economy. The inability to match labor skills with evolving market needs can limit productivity, innovation, and the competitiveness of industries. Conversely, a well-matched and skilled workforce enhances productivity, stimulates technological progress, and drives economic growth.

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5. Low Labor Force Participation: Low labor force participation refers to a situation where a significant portion of the population is not actively engaged in the workforce. Factors such as high unemployment rates, discouraged workers, or a lack of job opportunities can contribute to low labor force participation. This can limit the supply side performance of the economy by underutilizing human resources and reducing the overall output potential. It also results in missed opportunities for economic growth and development. Encouraging labor force participation through targeted policies, training programs, and inclusive growth initiatives can enhance the supply side performance.

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7. Informal Economy: A large informal economy, characterized by unregulated and unregistered employment, can hinder the supply side performance of an economy. Informal workers often lack access to social protections, formal training, and productive resources. This can lead to lower productivity levels, lower-quality output, and reduced innovation. Additionally, the informal sector may evade taxes, leading to revenue losses for the government, which can further impact the economy's supply side performance. Formalizing the informal economy and providing support for workers in the transition can improve productivity and contribute to overall economic performance.

8. 
   

9. Labor Market Rigidities: Labor market rigidities, such as excessive regulations, high levels of unionization, or inflexible labor laws, can impede the supply side performance of an economy. These rigidities make it difficult for employers to adjust their workforce according to changing market conditions, hindering their ability to optimize production levels. Excessive labor regulations can also increase labor costs, reduce labor market flexibility, and discourage investment, thereby limiting economic growth. Creating a more flexible and adaptive labor market environment can foster productivity, innovation, and competitiveness.

10. 
    

11. Wage Growth and Income Inequality: Excessive wage growth or widening income inequality can affect the supply side performance of an economy. Rapid wage growth that outpaces productivity gains can lead to cost-push inflation, reducing the competitiveness of industries. On the other hand, significant income inequality can limit access to resources, education, and opportunities, hindering human capital development and innovation. Striking a balance between fair wages, productivity growth, and equitable income distribution promotes a healthy supply side performance and sustainable economic development.

Addressing these labor market issues is crucial to enhance the supply side performance of an economy. Policies aimed at improving labor force participation, promoting skills development, reducing skills mismatches, fostering labor market flexibility, and ensuring inclusive growth can help overcome these challenges and promote sustainable economic performance. By creating a conducive environment for labor market dynamics and efficiently utilizing the available workforce, economies can enhance their supply side performance and achieve long-term prosperity. 

A Level Economics 4: Production Possibility Frontier

Consider an economy that produces both cars and bicycles, and it is currently operating at point A on its PPF curve, producing 100 cars and 200 bicycles. Explain the difference between a movement along the PPF and a shift in the PPF using this scenario. Additionally, discuss the implications of these changes on the economy's production possibilities.

A movement along the PPF refers to a change in production quantity of one good relative to another caused by reallocating resources within the existing production capabilities. On the other hand, a shift in the PPF represents a change in the overall production capabilities of the economy, resulting from factors such as technological advancements, changes in resources, or improvements in productivity.

In the given scenario, let's explore the implications of both movements along the PPF and shifts in the PPF:

1. Movement along the PPF: Suppose the economy decides to produce 150 cars and reduces bicycle production to 150. This movement along the PPF curve signifies a reallocation of resources from bicycles to cars, leading to a change in the production quantities of both goods. This movement does not expand or contract the overall production possibilities of the economy but reflects a choice to produce more cars at the expense of fewer bicycles.

2. Shift in the PPF: Now, imagine that the economy experiences a technological advancement in automobile manufacturing, leading to increased efficiency and productivity. As a result, the PPF curve shifts outward, indicating an expansion in production possibilities. The new curve would allow the economy to produce more cars and bicycles than before, reflecting an increase in overall production capabilities. For instance, the economy could now produce 120 cars and 250 bicycles at point A on the new PPF curve.

The implications of these changes on the economy's production possibilities are as follows:

• Movement along the PPF: This decision involves a trade-off between cars and bicycles within the existing production capabilities. Producing more of one good means producing less of the other. It demonstrates the concept of opportunity cost, as the economy sacrifices the production of bicycles to increase car production (or vice versa).

• Shift in the PPF: A shift in the PPF curve indicates a change in the economy's ability to produce both goods. It represents economic growth and expanded production possibilities. With the outward shift, the economy can produce more cars and bicycles than before, leading to increased consumption and potential economic benefits.

In summary, a movement along the PPF reflects a reallocation of resources between goods within the existing production capabilities, while a shift in the PPF represents a change in the overall production possibilities of an economy. Both movements along and shifts in the PPF have implications for production quantities, trade-offs, opportunity costs, and the economy's capacity to produce goods and services.

Britain is the Dorian Gray economy, hiding its ugly truths from the world. Now they are exposed

From Tony Blair to George Osborne, our rulers painted false pictures of success while real wealth and wages withered away writes Aditya Chakrabortty in The Guardian 

You know the central conceit of Oscar Wilde’s The Picture of Dorian Gray, of course you do. A lad of sun-kissed beauty is presented with a stunning likeness of himself. Disturbed at the notion that he will grow old while the painting doesn’t, he locks it away – where it is the portrait that ages and uglifies while Dorian stays boyish and beautiful. But perhaps you’ve forgotten what happens next.

The story has come to my mind many times, as the foulness of British politics becomes ever harder to ignore. Genteel liberals wonder how their land of cricket whites and orderly queues could be ruled by a grasping liar such as Boris Johnson and I hear a whisper on the wind: Dorian Gray. The New York Times and Der Spiegel report in bewilderment on a country with pockets of deep poverty and unslaked anger, and again rasps that hoarse voice: the horror was hidden here all along.

Now it’s all out in the open. In one of the richest societies in human history, inhabitants are starting to twig that by 2030 or thereabouts they will earn less per head than the Poles they so recently patronised. Whatever the politicians and pundits may argue, this debacle owes nothing to Jeremy Corbyn or Brexit or any supposedly un-British “populism”. It is homegrown and has deep roots.

Like Dorian Gray, Britain has for too long presented one face to the world while concealing the awful truth. The author of that novel, Oscar Wilde, was the son of an Irish nationalist and a graduate of Oxford, where he became a fine student of the British upper classes and their mellifluous hypocrisy. He would have recognised much of the mess we’re in, because it grew among shadows and cover-ups. From Tony Blair’s Cool Britannia through to George Osborne’s “march of the makers”, our rulers have trumpeted every false success, while ugly facts have been waved away as anomalies: from the former manufacturing suburbs and towns turned into giant warehouses of surplus people, to the fact that 15% of adults in England are on antidepressants. We’re winning the global race, claimed David Cameron, even as the population’s life expectancy fell far behind other rich countries. We shan’t stunt future generations with debt, he boasted, as our five-year-olds became the shortest in Europe.

Or take the housing bubble that politicians pretended was true prosperity – until this week, as the Bank of England hiked rates for the 13th time in a row and the prospect of it bursting began to terrify them. Yet the Westminster classes blew their hardest into that bubble. As soon as estate agents were out of lockdown, Rishi Sunak gave up £6bn of taxpayers’ money for a stamp duty holiday – an act as prudent as pouring petrol on a fire. Many of those he lured up the property ladder will be hardest hit by rising mortgage rates. Analysis done for me by UK Finance suggests that 465,000 house purchases during that tax break were financed with two- or three-year fixed rate mortgages – the very ones running out right now. In other words, nearly half a million households took the chancellor’s inducement; many will plunge into dangerous financial straits; some face losing their homes. They were mis-sold a dream by Sunak. Still, at least the Tories enjoyed a bounce in the polls.

Helmut Berger stars in the 1970 film adaptation of The Picture of Dorian Gray. Photograph: Sargon/Kobal/Rex/Shutterstock


“Sin is a thing that writes itself across a man’s face,” Dorian is told by his portraitist Basil Hallward. “If a wretched man has a vice, it shows itself in the lines of his mouth, the droop of his eyelids, the moulding of his hands even … But you, Dorian, with your pure, bright, innocent face and your marvellous untroubled youth – I can’t believe anything against you.” The picture of Dorian, which would have revealed the grotesque truth, is hidden away. So, too, has the UK avoided admitting its ills. Even now, in a country where patently so little works for people who rely on work for their income, commentators and frontbenchers still blame supposedly all-powerful interlopers: Boris, Nigel, Jeremy. And from Sunak to Starmer, all push growth and jobs as the remedy for what ails us.

Yet growth in this country is falling and not because of Ukraine or Covid or Brexit. Since the 1950s, the growth rate adjusted for inflation has been on a gentle but insistent downward slide. Our economy has become ever more stagnant and dependent on debt. It is fatuous to pretend this is going to turn around through magicking Britain into an AI free-for-all or a jolly green industrial giant. Employment? One in four employees are on low weekly wages – either because the pay is too low or the hours aren’t enough – while the average real wage has flatlined for many years.

Much of this analysis comes from a new book, When Nothing Works, written by a team of scholars. Although specialising in economics and accountancy, what they have produced is an essential text for understanding British government: the polarised politics of a highly unequal and increasingly stagnant society.

Take the issue at the top of today’s agenda: wages. Why can’t you and I take home more money? Because of a lack of productivity, politicians will say. Yet the researchers point to how labour has got a smaller and smaller share of economic output since the 1970s.

If the same share of GDP was paid out in wages today as in 1976, the average working-age household would have an extra £9,744 a year. We haven’t lost that 10 grand a year through laziness at work but because politicians from Thatcher onwards smashed up trade unions, undermined labour rights, and crowed over the result as a “flexible labour market”. What they really created was a low-wage workforce, in a low-growth country ruled by politicians with low ambitions for everyone bar themselves.

“The prayer of your pride has been answered,” Basil counsels Dorian, when he finally sees the portrait and its horrific truth. “The prayer of your repentance will be answered also.” When Nothing Works will inevitably be termed pessimistic, but it is no such thing. Realism comes from facing who we are and dropping the pretence that a growth miracle is just around the corner. Instead of trying to boost “the economy”, it is high time to boost our people: to ensure they have the basics they need to live a life free from indignity and free to flourish. This will come from redistribution rather than growth, from replacing extractive businesses with fair ones. Such ideas will not go down well in SW1, where both Tory and Labour are increasingly hostile to pluralism and brittle in their dogmatism. Self-knowledge is the hardest knowledge, as one of the book’s authors, Karel Williams, says. And self-delusion leads eventually to disaster.

Unable to face his loathsome self-image, Dorian slashes that portrait. He is found by servants. “Lying on the floor was a dead man, in evening dress, with a knife in his heart. He was withered, wrinkled and loathsome of visage. It was not till they examined the rings that they recognised who it was.”

Economics Essay 42: Financial Sector Benefits

 Evaluate the extent to which the UK’s financial sector is beneficial to the UK economy.

The UK's financial sector has historically played a significant role in the country's economy, contributing to its growth and prosperity. However, evaluating the extent to which the financial sector is beneficial requires considering both its positive contributions and potential drawbacks. Let's examine the benefits of the UK's financial sector:

1. Economic Contribution: The financial sector contributes significantly to the UK's GDP and employment. It generates substantial tax revenue, which supports public services and infrastructure development. The sector's activities, including banking, insurance, asset management, and financial technology, create jobs, attract talent, and stimulate economic activity.

2. Global Financial Hub: London, as a global financial hub, attracts international businesses, investors, and professionals. The presence of a robust financial sector facilitates capital flows, investment, and financial services both domestically and internationally. It bolsters the UK's status as a preferred destination for financial transactions and headquarters for multinational companies.

3. Access to Capital: The financial sector provides access to capital for businesses, enabling them to grow, invest in innovation, and create jobs. Through initial public offerings (IPOs), venture capital, and various financial instruments, companies can raise funds to expand their operations and drive economic development.

4. Financial Innovation: The UK's financial sector has been at the forefront of financial innovation, introducing new products, services, and technologies. Innovations such as contactless payments, peer-to-peer lending, and digital banking have transformed the way people conduct financial transactions, enhancing convenience, efficiency, and financial inclusion.

5. Expertise and Professional Services: The financial sector in the UK has a wealth of expertise and a strong professional services industry. Highly skilled professionals in areas such as finance, law, accounting, and consultancy support businesses and individuals in making informed financial decisions. This expertise enhances the overall competitiveness of the UK economy.

However, it is important to acknowledge the potential drawbacks or challenges associated with the financial sector:

1. Concentration of Wealth: The financial sector's success can contribute to wealth inequality and a concentration of economic power. High salaries and bonuses in the sector can exacerbate income disparities, potentially leading to social and economic imbalances.

2. Systemic Risks: The financial sector is exposed to risks, including financial crises and market volatility. These risks can have widespread consequences, impacting the broader economy and causing disruptions in employment, investment, and consumer spending.

3. Regulatory Challenges: The complexity of financial markets and the need for effective regulation pose ongoing challenges. Balancing the need for robust oversight with promoting innovation and competitiveness requires continuous regulatory adaptation and supervision.

4. Vulnerability to External Factors: The UK's financial sector can be sensitive to global economic conditions and geopolitical factors. Changes in international regulations, trade agreements, or financial market sentiment can influence the sector's performance and stability.

Overall, while the UK's financial sector has substantial benefits, its impact is not without challenges and potential risks. Continual monitoring, effective regulation, and efforts to address any negative consequences are crucial to ensuring that the sector continues to contribute positively to the UK economy while managing potential drawbacks.