We have a long, hard road ahead of us, so we must not get complacent
It is now widely acknowledged in investing circles, at least among emerging market investors, that India is one of the better long-term stories out there. Chris Wood of CLSA has for years now highlighted India as his single-best long-term bet in Asia. He makes the point about entrepreneurship, focus on domestic consumption in the economic model, and greater respect for capital among corporate houses as his reasons for being bullish. The emerging market (EM) strategist at BCA also highlighted India as his single-best idea over the next five years at a recent seminar that I attended. He talks of India being a severely under-invested country which, despite the under-investment, is showing good productivity growth. He makes the point that India has now begun to invest, and betting on a country which is under-invested but is now investing because of rising domestic savings normally leads to profitable outcomes.
Jim Walker of Asianomics is another noted economic commentator who is quite bullish on India for the long term, and has very high regard for our economic policy-makers in general and the Reserve Bank of India (RBI) in particular. Consistent with the above, he expects far less capital destruction in India than in other Asian markets, and far better capital discipline and a more pronounced domestic orientation in our growth strategy.
Everyone is, of course, aware of the famous Goldman Sach’s BRIC report, and its contention that India will grow faster for longer and has the best longer term growth outlook among the four economies.
I could, of course, go on and there are many more equally famous market observers who have made similar comments. Thus, one can understand why everyone in India may be getting a little complacent and even smug. It is almost as if investors and policy-makers are convinced that this rosy outlook is baked in the cake, so to speak. If it is going to happen and India is going to march ahead anyway, why take hard decisions? Does one really need to battle vested interests when 8 per cent or even 9 per cent long-term growth is assured?
In this context I had some very interesting meetings over the last few weeks, with some very savvy and seasoned global investors who had an interesting perspective on this issue.
They first of all made the point that there are many instances of countries growing strongly for a period and then stalling. Brazil was cited as the most obvious instance, where, after a period of strong economic performance, the country totally stalled in the 1980s and 1990s. There have been only 12 or 13 countries which have been able to grow at 8 per cent or faster for at least 25 years. Of this number, at least half have little relevance being single-resource dependent or city states. India, therefore, cannot take its current success for granted, only four countries (of a reasonable size) have been able to do what India aspires to. What investors are assuming is a done deal is actually extraordinarily rare.
The second point made was the increasing politician-industrialist nexus. To these investors, parts of India were beginning to resemble Russia, with the same characteristics of crony capitalism and huge wealth transfer from state assets to private ownership. India may not like hearing it, but in certain sectors, its institutions are too weak to face off against corporate interests.
An additional point was made on the inability to take decisions and build consensus. Why would a country go on agonising over foreign education providers when there is such an obvious shortage of capacity in higher education? Even if you get foreign institutes to come in, they will only supplement the domestic institutions and just scratch the surface in terms of meeting unfulfilled demands. This was cited as another example of a total unwillingness on the part of the government to take on vested interests. It was surprising to one of the investors how even small sections of society can seemingly hold back progress and the whole country to ransom. In a country like India with a general resistance to change, any progress requires vested interests or rent-seekers to be pushed aside, and an unwillingness to do so severely impairs progress.
These investors also felt that India had an intractable problem on the fiscal front, as any progress would be frittered away in poorly designed or executed social sector give-aways. This genie has now been let out of the bottle, and no government will be able to resist the temptation to keep spending. Spending has now got strongly associated with winning elections. India may have got away with it right now given the poor fiscal situation globally, but the country has a structural propensity in recent years towards populism. This poor fiscal discipline will ultimately lead to structural crowding out and inflation issues.
There were additional points made on the extremely poor supply-side response in infrastructure, and as to how this was a systemic issue related to land and process and not to funding or capacity constraints. Being a systemic issue, it was not likely to get resolved. What would cause it to change today which could not have been done years ago? Infrastructure deficit was now binding, and unless it was resolved, it would not permit the desired growth.
There was concern around India’s demographics, with the fear of this being a demographic disaster, rather than dividend. Given our levels of vocational training, higher education and labour market rigidities, questions were asked on how would the country move hundreds of millions of people off farms and improve their productivity? They were surprised at the very low levels of political noise around job creation compared to China, where the government has an almost single-point agenda around creating 20 million jobs per annum.
India’s huge dependence on global capital flows was also highlighted. One investor went so far as to say that India was the most leveraged market to global capital flows and hence risk appetite in the world. Without strong foreign capital flows, the growth story did not stand, was the simple point.
There was concern around governance, or the lack of it. And, India as an investment destination was perceived to be a tug of war between a good micro-company-specific story and very poor and worsening governance.
It was to put it mildly a sobering series of conversations. While one does not necessarily agree with all the points made, it does go to show that maybe we should not get carried away. We can potentially have a strong growth trajectory, but it will require strong political will to implement long overdue fundamental changes. These required changes are well known but still do not get implemented. Someday soon this has to change. We have a long hard road ahead of us, we must not get complacent. Maintaining growth will require decisive action, determination and a clear head. We cannot let ourselves get diverted.
The author is the Fund Manage rand Chief Executive Officer of Amansa Capital