India faces best fifteen years ahead

1st March 2010, ECONOMIC TIMES No country in the world has willfully adopted democracy ahead of capitalism and constitutional liberalism. This contrarian act is akin to traveling up on the ‘down’ escalator! India’s journey does appear confusing, but the direction is surely upwards.

1st March 2010, ECONOMIC TIMES

No country in the world has willfully adopted democracy ahead of capitalism and constitutional liberalism. This contrarian act is akin to traveling up on the ‘down’ escalator! India’s journey does appear confusing, but the direction is surely upwards.

I am no astrologer to write with such a Holi-appropriate, colorful title, though I can be accused of being an incurable optimist.

All of India uniquely gets caught up in budget frenzy around B-day. The hysteria is comparable to a pop star’s show. I neither understand nor enjoy the hysteria any more. Earlier at least there was an eloquent Palkhivala to listen to.

Some years ago, (4Apr 2003, Economic Times) I used extracts from the budget statements of four Finance Ministers to challenge the reader to guess the year in which the statement was made. Naturally most could not guess; some readers thought that the matters being contemporary, the statements must be recent. They were wrong. FMs have some evergreen statements.

Please guess the author and year of two budget statements: “The annual budget is now something more than a simple account of government’s housekeeping” and “Investment expenditure in infrastructure is being raised steeply so that bottlenecks coming in the way of further growth are removed.”

Answers: Morarji Desai, 1960 and HM Patel, 1979.

This article has been written before the 2010 budget speech, which will undoubtedly contain its own evergreen statements.

It is good to take a longer term perspective.

Through a survey among thinking people, I sought a response to the statement, “What is the probability that India will experience the best economic progress in the next 15 years?”

The most common number was, hold your breath, 80 percent! Not one person gave less than 70 percent. The somewhat depressing signals reported every morning would not have warranted such a level of optimism.

Reflect on the revolution in communication and personal transportion in the last 15 years: zero to half a billion cell phones in use, almost nil to 40 million PCs, and 22 to 90 million registered two wheelers.

Rural employment too has transformed: the RNAE annual growth rate (rural non agricultural employment) doubled from 2.7% in the 1990s to 5.3% in the 2000s.

With the passing of the distinguished Raj Krishna, the “Hindu rate of growth” has also passed. It is really exciting that India is set to break into a game-changing trajectory. I hope to be around in 2025 to see if I am right.

Here are the underlying factors, expressed in lay language.

For two centuries, the engines pulling the global economy have been Europe and America. These engines are sputtering and are unable to pull the current increased load of bogies. The global financial system is frighteningly fragile. The developed nations have far too much debt. As The Economist recently warned, “Last year it was the banks. The economic crisis is once again in full swing as the threat of sovereign debt looms.”

Further, the developed nations can neither afford to continue nor to discontinue the stimulus. The developed nations are caught between the Scylla of joblessness and the Charybdis of indebtedness.

That is why the global economy needs new locomotives. David Rhodes and Daniel Stelter of BCG report that the world will be a two-speed world with America, Europe, Japan and Russia experiencing a “structurally subdued growth” while India, China and Brazil will “soon approach their original trend-growth paths.”

India has some accelerators going for it—and a few brakes as well.

Firstly, India is a trillion dollar economy which is set to double every 7-8 years. This is no pipe dream, and recent performance supports the probability. The current savings rate and capital output ratio suggest that an annual 8 percent growth is a ‘slam dunk’.

Secondly, consumption expenditure constitutes an impressive percentage within India’s GDP. When the per capita gdp in ppp terms moves above $3500, the demand for all sorts of goods and services takes off: food, eating out, personal transportation, housing and so on. And we are experiencing such consumption already.

In the next 15 years, India’s per capita gdp in ppp terms will move up from the current level of about $3000. This was the starting level before the great American growth of the 1950s and 1960s. So the tipping point is within sight.

Thirdly, India’s connectedness with the global economy is good, but not risky. India’s import-export trade or dependence on foreign capital is less aggressive than China’s.

Fourthly, India will reap the advantage of the demographic dividend. Europe reduced the replacement fertility rate from 5 to 2 over 130 years, Korea did so in 20 years, India will do so only by 2030.

Albeit in a meandering way, Indian economic policies have promoted productivity, renewal and globalization among Indian firms. If you compare the rankings of top companies in 1990 and today, the survival rate is only 20-25%. Yesterdays giants like Escorts, Spic, and Modi Rubber have dropped off the charts. Todays giants like Bharti, Suzlon and Essar Oil did not exist in 1990.

Aside from the economic factors, there are political factors at play. No country in the world has willfully adopted democracy ahead of capitalism and constitutional liberalism. This contrarian act is akin to climbing up on the ‘down’ escalator! India’s journey does look confusing, but the direction is surely upwards.

Indian democracy has huge fault lines: caste politics, the demand for more states, agitation for regional employment, tribal uprisings and so on. But do recall that at the equivalent stage of democratic evolution, the USA had a civil war!

The country has matured with respect to coalition politics. The previous NDA government lasted a full term with clear goals and accomplishments. The present UPA government too has entered its second term.

Despite the aberrations, there are positive social factors at play. Recall that after the shameful Gujarat riots, there has been no major communal trouble in the country. Religious diversity is an accepted character of Indian society.

Slightly under half of the daily 10,000 pilgrims to the Khwaja Moinudeen Chishti’s dargah at Ajmer are non- Muslims. The Ayappa temple at Sabarimala is thronged not only by Hindus, but also by Muslims and Christians like Yesudas, who was inspired by Sabarimala. The Wednesday Novina at St Michael Church, Mahim, is routinely thronged by non-Christians.

“Tolerance is the homage which the finite mind pays to the inexhaustibility of the Infinite” as Dr S Radhakrishnan stated. Although not in our consciousness, India’s economic progress receives a boost by the nation’s openness and its ability to communicate and work with other cultures
So does this mean that India is home and dry? That it does not matter what the government does?

Not at all.

If the government gets its act together, much more can be achieved. The action agenda on “direct” economic determinants like industry, energy and infrastructure automatically get the attention of government and the chambers of commerce.

Is there a wish list of “indirect” determinants, drivers which the government can uniquely act upon and which an entrepreneurial private sector cannot do on its own? Yes, better governance in one word.

The HELP list is:

  • Health: provide safe drinking water and health care
  • Education: overhaul primary education and skill development
  • Law: address the injustice of delayed justice
  • Pakistan: find a way to coexist with the neighbor

These indirect issues need greater and more urgent focus..