Monday, May 7, 2012

What ails India

(First published in The Pioneer dated May 6, 2012)

Author: Ruchir Sharma
Publisher: Penguin
Price : Rs 599
Ruchir Sharma says there are a handful of countries that in the coming years will break away from the pack of emerging economies and surge far ahead of the rest. He, however, believes India has a 50-50 chance of being a ‘breakout’ nation, writes RAJESH SINGH

Ruchir Sharma is possessed with great persuasive skills. If he didn’t have them he would not be the trailblazing investment banker that he is. (He heads Emerging Market Equities and Global Macro at Morgan Stanley Investment Management.)
In this greatly publicised book that he has written and which has taken experts and lay readers by storm, he throws around statistics with the easy authority of a punter who has spent a lifetime laying bets and getting them right most times. He uses the material to persuade you into buying his theory, or at least considering it with respect. He believes that there are a handful of countries that will in the coming years break away from the pack of emerging economies and surge far ahead of the rest. Also, there are nations whose economies will stabilise, if not stagnate, at far lower levels than over-the-top optimists have projected.
For the Indophile, Ruchir offers mixed hope: He believes that India has a 50:50 chance of being one of those “breakout” nations. And, based on the distillation of all the impressive material that he has gathered over the years, he comes to a few startling conclusions, going to the extent of indicating that BRICS is really a sinking ship. But, as he rips apart established perceptions and questions conventional wisdom on the growth of ‘emerging’ economies such as Russia, India and China, Ruchir offers a philosophical emollient: He quotes scientist Antoine Lavoisier, “Nothing is lost, nothing is created, everything is transformed.”
The author discusses the coming transformation for a clutch of countries which possess those emerging economies. His analyses are interesting not just because they are based on experience and hard facts but also because he refrains from being politically correct and is stridently unrepentant about his views. He seems to say: Consider them as a wake-up call for course correction or ignore them and pay the price that many countries have after being in a similar situation.
On why he is hesitant to be more endorsing of India’s growth potential, Ruchir is clear-headed. Although he does not subscribe to the view that everything about the country’s economic rise is an illusion — like the Great Indian Rope Trick — he finds many problems in categorising India as a “breakout” country. One of them is erratic political decision-making. He points out that, while India does not have a “command and control” economic system in place that places the state in charge of even micro-management of business, the political structure of the Congress which manages the country’s economy is very much the ‘command and control’ type, where all decisions are taken by a clutch of people that comprise the so-called high command. We all know that in the Congress’s lexicon, ‘high command’ essentially means party president Sonia Gandhi and her son Rahul Gandhi.
The author takes a gentle swipe at the situation when he remarks, “The Gandhis have demonstrated a great capacity for reinvention over the years, such that many see 41-year-old Rahul Gandhi as the contemporary face of India.” The resultant undermining of central leadership, he remarks, has led to States being more powerful and to some extent making it more difficult for New Delhi to “champion breakthrough reforms”. He adds, “Indian is again starting to look like a commonwealth of States with distinct identities and waning national conscience.”
But, politics aside, the author points to two very specific factors that he believes are not good for an economy such as India’s, which aspires to be among the world’s top three in the coming decades. The first is the UPA Government’s populist but wasteful schemes, like the Mahatma Gandhi National Rural Employment Guarantee Scheme, and the second is the rise of crony capitalism. The two by themselves may not be the principal contributors, but they are indicators of what is going wrong with the economic thinking of the Government. He reminds us that “welfare schemes (he is referring to the likes of MNREGS) create a perverse incentive for villagers to stay on the farm”. Such measures, he warns, “backfire against economic growth because it involves running up deficits”. He backs this contention with the fact that over the past five years Government spending has grown “at a 20 per cent annual pace, much faster than the economy”. Ruchir explains that, while the Government can get away with such deficit spending when the going is good (although even then such spending is not advisable), it is suicidal to do so when the economy is slowing down. Unfortunately, the basic logic that the author lays down does not seem to have percolated down to the UPA Government.
Crony capitalism is being much talked of today in the country. The author has a simple formula to address the issue: Keep track of the list of billionaires and the billions that they are making, and you get a fair idea of the direction in which the economy is heading to. He remarks, “This information provides a quick bellwether for the balance of growth. If the country is generating too many billionaires relative to the size of its economy, it’s off balance.” And this lack of balance, he adds, can lead to stagnation and the growth of crony capitalism. Is this what we are seeing in India? Going by Ruchir’s hypothesis, we have some reason to worry. In 2000, no Indian figures in the world’s top 100 billionaires; now there are seven. The author says this is more than in all but three countries: The US, Russia and Germany. China has just one and Japan none.
But more important than the numbers is the manner in which these people have made their money that will show if crony capitalism has been at work. Like Ruchir says, if all that wealth has come largely from Government patronage rather than “productive new industries”, it points to a disaster for the economy. Moreover, if there is no ‘turnover’ in the list of billionaires, it means competition is slacking and the hold of crony capitalists is growing. Ruchir points out that “nine of the top 10 Indian billionaires on the 2010 Forbes list are holdovers from the 2006 list, while the 2006 list had only five holdovers.” Of course, this can also be interpreted as the success of Indian billionaires to consolidate businesses and stay ahead. Perhaps a deeper study of the phenomenon can unravel more conclusive material, either way. But, cronyism is not limited to capital; it also extends to the country’s politics. Ruchir quotes from a 2010 book by author Patrick French, to point out that “every member of the Lower House of Parliament (Lok Sabha) under 30-year-old was a hereditary MP”. Also, “in the ruling Congress the situation was more extreme: Every Member of Parliament in the Congress under the age of 35 was a hereditary MP”.
After rattling the senses, Ruchir leaves the readers with a prophesy sounding like that of Nostradamus. In his final chapter titled, ‘The Third Coming’, he concludes the following: One, “China’s looming shadow is about to retreat to realistic dimensions”; and, two, “it’s impossible for countries like India and China to break out when expectations exceed the maximum possible growth rates of the relevant income group”. If all of this seems like an obituary of the world’s favourite emerging markets, the author doesn’t intend it to. His book informs, fascinates, shocks and outrages. And, yes, it does also warn without sounding pessimistic.

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