India’s Slowing Economy and Ruchir Sharma

It started with India’s own chief economic adviser Kaushik Basu. Basu expressed his doubt about any reform coming before 2014 election. Soon after came the bomb blast from Standard & Poor. It was followed by Moody’s dismal remark about Manmohan’s government: “(Manmohan) Singh is an ageing technocrat who now appears tired of the rough and tumble of Indian politics. This leaves the national reform process in limbo.” Moody’s Analytics termed the national government as the “single biggest drag” on business activity and named Congress’ first family behind the failure. Soon thereafter, IMF also cited governance concerns and the tardy pace of project approvals for a moderation in economic growth.

But more shocking but interestingly refreshing were the views of Ruchir Sharma, Global Head, Emerging Markets, Morgan Stanley Investment Management, and author of ‘Breakout Nations: In Pursuit of the Next Economic Miracles’, for which Fareed Zakaria, Editor-at-Large, Time magazine has said, “This is the best book on global economic trends I’ve read in a while.”

In last week, Ruchir and his book got the maximum media coverage in India. India’s middle class and intellectuals listened to his views about India’s economy and its prospect to be an economic power with immense interest and concern.

I watched a NDTV programme on ‘Breakout Nations’ anchored by Pranay Roy with Ruchir Sharma in the presence of YV Reddy, the former governor of RBI, Montek Singh and Sunil Mittal of Bharati Airtel. Ruchir Sharma went on with his revelations made in ‘Breakout Nations’ and the others agreeing quietly with his inferences. After the idea of BRICKs propounded few years ago, Ruchir has come out with a list of prospective ‘Breakout Nations’. The book has a chapter on India too, but it also has many other nations among the probables such as Turkey, Indonesia? But here I present some of his views on India’s economy:

‘It was the rising tide of global liquidity and not anything unique to India that accelerated its growth rate from a level of around 5.5 per cent to 8-9 per cent between 2003 and 2007.’ Will it make any difference in the attitude of the present government?

“The history of economic development says that unless you systematically reform, you cannot grow in a sustained manner, which is what China has done,”

Anything less than 7-8 percent growth will not make India a `breakout nation’. On the per capita front, while for a country like Korea with a per capita income of over $20,000, it would feel like a boom if it grows at 4-5 per cent, for a country like India with a per capita income of $1,500 it would feel like a recession.” Will the government work hard and try to find ways and means to go for the growth shaking off its complacency?

Amongst the BRIC nations, India is most likely to break out since it has the advantage of low per capita income of $1,500, more unproductive resources in the economy, more unemployed and under-employed people who can be brought up in the urban areas. Despite such advantages, India is not the fastest growing economy in the world today. His worries centre around the government’s rising expenditure and the slow pace of economic and social reforms.

According to Sharma, businessmen were finding it more and more difficult to do business in India and would rather take their money out. “My confidence in India will increase a lot when I see domestic businessmen willing to invest lot more at home rather than diversifying,”

According to Sharma, “Growth is coming out of states increasingly and the quality of governance is improving there, but at the Centre it still remains very poor. And the reason for India being a ‘breakout nation’ is its states.”

India’s growth fell from 8-9 per cent to 6-7 per cent and its market fell 35 per cent in dollar terms — so, ‘expectations’ are key.

‘China has more billionaires than India, which is to be expected, but the net worth of China’s billionaires is 4 per cent of its GDP — it is 17.2 per cent for India.’

Basically, a lot of churn among wealth generators is desirable. Preferably, these billionaires are come up in non-government-related sectors (tech, for instance) and there’ll be no backlash.

India had a lot of churn and that seems to have stopped now. 9 of the top 10 Indian billionaires in the 2010 Forbes list were holdovers from the 2006 list. The top 10 Sensex stocks account for two-thirds of its total value; in the case of the Dow this is half.

According to Ruchir, India has a 50:50 chance to get in as breakout nation. However, many states of India are breaking out, while the Centre isn’t.

India will have to take risks. In the 1990s, India did things that paid off. Keep doing them, not doing anything is wrong. Don’t do MGNREGA that keeps people on the farm.

‘The country has a high chance of becoming a “breakout nation” only if it does not grow complacent, avoids becoming a welfare state, brings reforms systematically and globally, and commodity prices fall.’

Even a lay man can suggest something that this government is not doing. Why is Prime Minister not taking the country men in confidence? Why is he not talking with a core group of young economists instead of consulting only the old guys with set ideas? Why is the government trying for a wider consensus on the second generation of reforms to keep the economy on a 9% growth path?

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