Monday, August 21, 2017

Assessing India's economic growth prospects

Ruchir Sharma offers a nice dose of realism about Indian economy, the relationship between economics and politics, government's contribution to growth and more. He makes some interesting points. 

1. Lower growth rates are the new global normal. There is not a single region in the world which is growing faster now than a decade back. Exports, which provided the boost for the last two decades of growth has been stagnant this decade. To that extent, any growth rate above 5 per cent should be good for India. 

2. India has been out-performing its emerging market peer basket by about two percentage points for 2-3 decades, and that out-performance is likely to continue. It helps that the country's GDP per-capita at $2000 is only a fifth or so of the peer basket average, and therefore the boost from low base is significant. 

3. Empirical analysis of state elections shows that even in the past decade, anti-incumbency has been the dominant trend in Indian politics, even when states deliver impressive economic performance. Anti-incumbency has only marginally declined from 65% to 58% in the past decade.

4. The findings of the World Values Survey over the past 2-3 decades show that among the major countries India shows the highest increase in public preference for authoritarian leaders (as against one more answerable to the Parliament and favours more democracy). 

5. Economic growth in recent years has been driven by consumption than investment, as reflected in the buoyant performance of consumer stocks as against the poor performance of manufacturing and infrastructure sector stocks. To the extent that the former is less dependent on government policies than the latter, the government role in contributing to the high growth rate is marginal. 

6. The arrival of a new leader in emerging economies is associated with elevated stock market performance for 2-3 years, with an out-performance of 20-30%. Over the past three years, Indian stocks have out-performed emerging market peers by 10-15%. 

7. The quality of private sector companies, in terms of having consistently delivered 15% or more earnings growth on a steady basis for more than five years, driving equity markets in India is the best in the world. This is encouraging sign both for the sustainability of the bull market as well as for future growth. 

He writes,
The path has been one of incrementalism for a very long period of time and that is the path that we should expect over the next few years and therefore... to pay attention to politics in India is, from an economic perspective, is really a waste of time... this is a country... that consistently disappoints both the optimist and the pessimist. And so, that realism is what we need. You can always be an optimist and always say that this is going to happen. But for me, that is a money losing strategy and that is one thing which is also, we have not appreciated that if you look at what has happened over the last three years, had you bet on the government to deliver, look at it from a pure stock market perspective, you would have been a loser... the evidence suggests that there is really no connection between politics and economics in this country. On the other hand, it is this sentiment of nationalism and you see this, you see this across social media, you see it across television channels, it is this sentiment towards nationalism and stride at hyper-nationalism at times, it is this sentiment which is what is buoying Modi and the current administration... 
if you look at what has worked in the stock market over the last three years, you will find that there is nothing to do with the government or politics. The best performing sector since May 2014 has been the consumer staples sector. This reflects the fact that what is really driving the Indian economy over the last three years has been consumption. As we know from instances across the world, that the government really doesn't have much of an impact on consumption as much it has on investment. Investment is what the government can really drive by creating the investment environment for investment to pick up or pushing that. Instead if you look at investment related stocks in India, those have done quite poorly on a relative basis especially over the last three years.
And this is interesting and I agree,
So, my simple point being here that the connection between politics and economics in this country is rather limited and the stock market's behaviour over the last three years since this government came to power has only reinforced that notion. If you look at both the internals of the market, in terms of what has done well and also the overall market, neither the pessimists nor the optimists on the Modi government would have made any money based on a political view. So, in this country if you want to do well you have tune out the politics and be an internal exile as far as politics is concerned because that only interferes with sort of making money in this nation.
But, in favour of the government, it has to be argued that the counter-factual is impossible to have. To its credit, the government has not done any harm, and has largely been pursuing stable fiscal and macroeconomic policies. This is more than can be said of governments, not just in India previously, but also globally in emerging markets. 

It is here that I disagree with Ruchir, 
There are countries like China, Korea, Taiwan which have been able to grow at 10 percent plus. But my point has always been that to expect big bang reforms in India, to expect that some major big bang reforms will take place in India has always been a bad bet because that never happens. Our culture is one of incrementalism. We do things in incremental steps and I think that is what should be the operating assumption.
I do not think that there are big-bang reforms in India's context. When we talk of big-bang reforms, we think of one-off decisions like deregulation, privatisation, promulgation of new laws, and so on.  Take a decision and you are done. The sort of stuff like privatisation of banks and public sector units, while necessary, on their own, are unlikely to unlock massive growth energies.

The real reforms in India's context, as we laid out in our book, Can India Grow?, are more in the nature of steady and focused accumulation of human, physical and institutional capital, whose base is astonishingly low for an economy of India's size. Deficiencies in these are the binding constraints to sustainable high growth rates. No amount of big-bang can make up for them. For sure, there are some big-bang stuff there, as we outlined, but those are not the stuff the markets associate with big-bang reforms. They are in the nature of pulling complementary levers and persistent follow-up for long periods to address deep-rooted problems.

They would include reorientation of school education single mindedly towards learning outcomes; restructuring of UGC, MCI etc; facilitating the development of financial savings  instruments and enabling access to them, so as increase the savings rate; transition to outcomes-based financing in health care, away from line-items health funding; policies to provide tenure stability and address politicisation of officials postings; across the board standardisation, e-procurements, and third party quality audits; reforms to address decision paralysis and so on. Not the sexy stuff like repeal of Section 25N of Industrial Disputes Act 1947 or the privatisation of Air India or Indian Railways!

1 comment:

Anonymous said...

"To its credit, the government has not done any harm....." . This isn't exactly true! #Demonetisation