Decoding Global Economic Miracles

The fact that India’s growth fell in line with that of the world as liquidity flows normalised underlines the theory that India was only riding a global liquidity tide

Written by The Indian Express | Updated: September 3, 2014 1:29 pm

The fact that India’s growth fell in line with that of the world as liquidity flows normalised underlines the theory that India was only riding a global liquidity tide and there was nothing unique the country did on its own to propel its growth rates to 8-9 per cent from 5.5 per cent between 2003 and 2007,said Ruchir Sharma. The Head of Emerging Markets at Morgan Stanley Investment Management and author of Breakout Nations: In Pursuit Of The Next Economic Miracles was speaking at the latest edition of Express Adda — a series of conversations with those at the centre of change — in Mumbai on Saturday. Uday Kotak,Vice-Chairman and Managing Director of Kotak Mahindra Bank,co-hosted the session with Shekhar Gupta,Editor-in-Chief,The Express Group. As is now customary,the evening was attended by a cross-section of the financial capital’s who’s who,including Godrej Group Chairman Adi Godrej,billionaire investor Rakesh Jhunjhunwala,Executive Director and Group CFO,Mahindra & Mahindra Ltd,Bharat Doshi,Edelweiss Chairman and CEO Rashesh Shah,Star India CEO Uday Shankar,and SKA Advisors Chairman Sunil Alagh. Excerpts from the interaction:

On what transpired across the globe over the last decade:

If you look at the past decade,every single emerging market did very well. The average growth rate of emerging markets used to be about 3.5 per cent in the ’80s and the long-term average was just under 5 per cent but there was an exceptional period,between 2003 and 2007,when every single emerging market did well. So there was something very exceptional going on in this period and that was happening to India as well. India’s growth rate used to be about 5.5-6 per cent and all of a sudden it accelerated to 8-9 per cent and a lot of us believed that it had to do with something special in India. Of course,I think India is special and there are many good things in India but we mistook that boom to believe that it was all about India,not realising that it was the rising tide of global liquidity that was lifting every single developing country and the peak was 2007. And then in 2010,I think the mania got to a new level when we thought 9 per cent was going to be the new trend line for India and we are going to benefit from the demography and the low base. We were destined to go where we were in the 17th and 18th centuries,when we accounted for 20 per cent of the global economic output.

On what has gone wrong with the India story:

We are not seeing such a massive surge of capital flows,investors globally are more risk-averse,banks and financial institutions in the West are more reluctant to lend and we ourselves have become much more complacent. So,to me,what happened to the India growth story was that expectations got too high and we mistook the boom of 2003-07 as being something unique to us.

On optimism about Indian states:

Growth is coming out of states increasingly and the quality of governance is improving there,but at the Centre it still remains very poor. I think the India story lies in its states and my reason for optimism about India is that it is going back to being like the country that it was — India was a geographical term rather than a country. The story is unfolding state by state and that pressure is increasing.

On bringing money to India for investments:

I have an emotional chord with India and would like to bring as much money as possible,but not at the cost of clients. The more time you spend in Delhi and Mumbai,the more pessimistic you get and the more time you spend in the states,the more optimistic you tend to feel. In Mumbai,in many meetings with businessmen,people are increasingly saying that they are finding it more and more difficult to do business in India and they would rather take that money out as it’s easier to set up a cement factory in Indonesia,or buy a resources company in Africa. If the opportunity here is so good,which it actually is,then why do we need to go outside? We may take something out in order to diversify but not at a frantic pace.

On things that India needs to do right:

What the reforms in the ’90s did was that when we got the global boom in 2003 we were able to benefit from that. Had we not opened the economy at that point of time we would not have benefited from it. If we go the China way and reform a lot,we can grow at 9-10 per cent. We need to open up further,more FDI,better labour laws,need to reduce government spending. The problem with most of the emerging economies,why they are not able to break out,is that they do not reform until they have their backs to the wall. And we don’t get the sense from Delhi as yet that we have our back to the wall.

On why India looks closer to Brazil than China:

The comparison between India and Brazil started culturally. Brazil had a great decade in the ’60s,it grew at 9-10 per cent then and it was the China of that era. But all of a sudden Brazil’s growth rate began to fall from the ’70s onwards. And one of the biggest problems was that they created a welfare state prematurely. We all want to be welfare states because nobody likes poverty,nobody likes people to be living hand to mouth. Brazil made a mistake as it instituted a welfare state much too early and decided to spend much more heavily,prematurely,and that was the primary reason for the slowdown in the ’70s and even ’80s when it grew at just 2 per cent. Much of the mistakes that we are making are like Brazil. Look at China’s model,they did not believe in a welfare state at all,it was ruthless capitalism.

On crony capitalism:

Wealth needs to be celebrated,we need to celebrate the billionaires who have created wealth because they create jobs for people. But you need society to back economic reforms,and when they think that only a few billionaires are taking away too much wealth,an impression tends to go around that the opening up of the economy or reforms are only benefiting a few people. In Korea and Taiwan,the share of billionaires (their wealth as a percentage of total wealth of the economy) is relatively low and the population feels that it is fair. But in a place like Russia,the size of the economy is two trillion dollars and yet it has the second highest number of billionaires in the world and Moscow has the highest number of billionaires in any city in the world. In India,if there are too many billionaires coming out of sectors like real estate,mining or something where you think that those people have made their money largely because of the government’s help or because of their proximity to the government,then it sets the stage for a backlash against economic reforms.

On Indian investments abroad:

We made a lot of mistakes in 2007,in the number of investments we made abroad and in the kind of assets that we bought in the developed world.

The history is short and data points are not enough,but some of the investments that were made abroad are smart. But in 2007,the kind of investments that we made did not make us look too smart. In 2007,they bought trophies and hopefully now we are getting smarter and doing it more systematically. I remember when a top Indian businessman made a leading acquisition,how policymakers in Delhi were congratulating him and that ended up in a big problem with the kind of debt they had to deal with for many years after that.


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