India’s much touted growth story has lost its fizz. In his best-seller titled Breakout Nations, Ruchir Sharma is even more scathing; he terms it “the Great Indian Rope Trick” and stops short of terming India’s performance the world’s greatest illusion; awarding India the Oscar for the emerging-market levitation act of the decade.
But are things really that bad? Is India sliding back to the pre-1991 era with its growth stalled by strong headwinds of corruption and crony capitalism, fractured mandates and regional satraps unwilling to see the bigger picture, crippling violence in its tribal heartland and a disabling ecosystem of subsidies?
Sharma’s colourful and picaresque style of writing makes this debate lively, but ironically, he does not write off India. On the contrary, he gives it a 50:50 chance of success. Historian Ramachandra Guha, in an earlier book titled India after Gandhi, also gave the country similar odds. Both authors use a favourite tagline of a hot-selling snack called ‘50-50-part savory part sweet’. But then India has always been pigeon-holed in this double-facedness; a nation that is at once old and new.
How then is one to tread on this terrain? Especially when Kaushik Basu, the outgoing chief economic adviser to the Indian government, joined the chorus of those who feel India is in danger of losing its way. Predictably his observations sparked a huge uproar, but a second reading of Basu’s statement reveals that he has actually drawn attention to irreversible positive changes in the economy.
First to the fundamentals. The country’s current account deficit has ballooned, the fiscal deficit is well past the danger mark, the rupee has fallen precipitously and growth rates have dropped alarmingly. It comes as no surprise that rating agencies have given India a thumbs down — below investment grade. Despite this, Basu makes a very strong case to put the fizz back in the India story.
Basu’s central thesis is that the economy can dig itself out of this hole, but he does hedge his call with caveats. Reforms are required and they are needed now, the window will not remain open indefinitely. He bases his optimism on hard facts and chooses a few select indices to support his line. He also hints at overdue reforms being around the corner.
Basu cites three key performance factors to tell us that the slide back to the pre-1991 era is unlikely. India has ramped up on investments — both inward and outward — and exports. India is a high investment country — over 35 per cent of its national income gets invested compared to the East Asian countries at their peak. Hence, all this tepid soda imagery is totally overblown.
Foreign direct investment (FDI) has increased from a previous high of $41.9 billion (Dh153.77 billion) in 2008-09 to $46.85 billion in 2011-12. Next, the country is a major player in net overseas purchases, upping its rank to fifth in the world behind the US, Canada, Japan and China. Outward flow of FDI is a robust sign of confidence, though Basu concedes that this trend is indicative of the high cost of doing business in India. India’s growing strength in exports is also remarkable — though not by China’s standards. From 2004-05 to 2011-12, exports grew annually by 21.90 per cent, and this is a record!
All these impressive statistics, however, cannot hide the slowdown over the last six months. A litany of corruption scandals, misgovernance and a general policy paralysis pervading the ruling alliance have added to the gloom. The growth rates for 2011-12 and particularly for the fourth quarter of the fiscal year are dismal. And the euro crisis and the global slowdown further darken the horizon.
Notwithstanding Basu’s exhortations and prescriptions for bucking the downward spiral, allowing FDI in multibrand retail and administrative reform to overhaul the economy, what are the ground realities? Are these pious outpourings of a departing policy wonk? With Assam burning, the Anna Hazare movement planning to enter politics and Congress allies playing truant, can this government actually move boldly? Is that silver bullet, Reforms 2.0, around the corner?
‘Never let a crisis go to waste’ though clichéd has a powerful appeal. Will India use the crisis mode to repeat its 1991 act of pulling its chestnuts out of the fire? We have at the helm the same man who steadied the ship the last time around. Prime Minister Dr Manmohan Singh does have a predilection of letting a crisis reach a point of no-return only to stem the tide at the last minute; the nuclear deal of 2006 was a cliffhanger, but he pulled it off.
The India story will always have a different narrative to other emerging markets. Comparison with China is invidious and the recent power outage — the longest in history is a sign of that. The ride will be bumpy, but those prepared for the endurance marathon will eventually taste the fizz.
Ravi Menon is a Dubai-based writer working on a series of essays on India and on a public service initiative called India Talks.