Investment Outlook , Published Feb 17, 2019
Indian Author, Commentator and Thought Leader.
India needs gritty politicians to hard-sell market reforms and bring us back to 8% growth path.
We would have been growing at 8% plus rates, if not for the double whammy of a bad start on GST and demonetisation. Favourable demographics, high savings rate and consumption-led economy are bound to take India towards a high growth trajectory. However, for that India needs gritty politicians to hard sell market reforms.
We have the window of opportunity for another 7-9 years to reap the demographic dividend. India needs to get back to the potential GDP growth rate of 8% per annum at the earliest. Unless we grow at that rate, we wouldn’t be able to create sufficient jobs for our large workforce. The Modi Government is partly in trouble for not delivering on the promise of ‘Vikas’, the code word for jobs.
Policy double whammy
We would have been growing at 8% plus rates, if not for the double whammy of a bad start on GST and demonetisation. We were already growing at 8% plus before the 2016 note ban. While the Government initiatives to establish insolvency and bankruptcy code, improve business environment as well as introduce GST reforms were good moves, demonetisation was an utter failure. A ruler’s dharma is never to inflict pain on its people, and is quite the contrary. We do not have the statistics, but telltale data suggests that the informal sector suffered a lot, because of the note ban.
I would give a ‘B’ rating to the current government as far as managing the economic affairs is concerned; ‘B+’ if it had not put up a note ban. Moreover, lot more could have been done in controlling fiscal deficit, improving economic conditions and bringing down inflation.
Surprisingly, the big reforms were given a miss. Export-led growth – a proven growth model of the Far Eastern economies – was given a cold shoulder. In India, the problem is of under-employment and not of unemployment.
Exports have the potential to create the high productivity jobs – as it did for Japan, Korea, Taiwan, Hong Kong and China in the past. Unfortunately, the jobs that are leaving China are now going to Vietnam and we are missing the bus.
Contrary to popular opinion, the world economy has sufficient demand to absorb exports. World trade in goods is a massive $16 trillion, out of which India’s share is a miniscule 1.7%. If we could have taken our market share to 2.5%, ache din in the form of jobs could have certainly come knocking at our doors. BJP was in clear majority in most states and could have easily persuaded the states to focus on job creation.
Alternatively, the current Government could have concentrated on just one sector – housing (which has high multiplier effects) and relentlessly pursued the ‘Housing- for-all by 2022’ mission. Even now, I feel it is not late to do the course correction.
China’s economic success is partly because of its relentless focus on meritocracy. Deng Xiaoping was a senior official in the Mao Zedong Government and he used to maintain a black book in which he wrote names of good civil servants he came across. And when he came to power in 1978, Deng recruited these high-performing civil servants to implement the big bang reforms. Why should it take 15 years to get justice in the Indian court? Pay and performance seldom go hand-in-hand in Indian civil service which is demoralising. Moreover, the Central Government undermined the institutional independence of the CBI. Indian challenges are not economic; rather it is about governance and politics.
The big failure in India is that reformers have not sold the reform. That’s why we are reforming by stealth. The iron lady Margaret Thatcher once said “I spend 10-20% of my time doing the reform and 80% of my time selling it”. She brought big reforms in her second term by reforming the state. She destroyed the ‘Yes Minister’ syndrome and replaced it with responsible bureaucracy.
The people in India still equate market reforms with rich getting richer and poor getting poorer. They associate reforms with crony capitalism whereas it’s actually the opposite. There is a difference between being pro-market and being pro-business. Pro-market encourages competition, drives down costs and prices and raises quality of products. In the process, everyone benefits.
Everybody in the market place is self-interested. And contrary to popular opinion, it’s different from being greedy; the latter suggests selfishness and exploitation. Rather, what is required is a regulatory framework that encourages competition and start-ups, and discourages rent-seeking and corrupt behaviour. To some extent, Modi Government took the ranking (ease-of-doing business) seriously and encouraged competition among states while also cheering start-ups.
No big-bang reforms
The likes of Manmohan Singh, Narasimha Rao, P Chidambaram and Montek Singh Ahluwalia should have actually sold reforms in the country. Unfortunately, none of them did. So we are still reforming by stealth.
I had expected lot more transformative reforms from the Modi Government. However, all progress so far has only been incremental.
Modi is a moderniser, but not a liberal reformer. He didn’t rely much on bureaucracy. He had a strong PMO, but bureaucracy still ruled the roost. He should have had talented people like Arun Shourie and Yashwant Sinha on board. Demonetisation was done without the involvement of bureaucracy and it backfired.
Implementation is more important than strategy. Anyone can have a good idea. Traits like determination are more important than sheer intelligence.
Stuck in the middle
As a democratic nation, we have to prudently balance equity with efficiency. India has law, China has order. In my opinion, both will end up becoming middle income nations. China is ahead of us and its per capita income will go up to be $20,000 over the medium-term, while it will be $8000-10,000 for India. We will inevitably reach that income level.
If China fixes its politics first, then it will race ahead. And if India fixes its governance first, it will be the winner. But, the fact is that neither of the countries will become developed (per capita income of $40,000 or more) as they are bound to be stuck in the middle-income trap.
Investment Outlook 2019