Monday, May 03, 2010

Making India Work: A Note of Caution

Context: I am back from India, last of my business trips. Unusually, I spent most of the time in Mumbai this time. As usual, I was excited by the possibilities I encountered. But then, I am the glass half-full sort of a person.

Of course, that optimism is only appropriate: The Indian way is to see the possibilities inside a problem. The classic example of the Indian imagination is the perception of an uniquely Indian phenomena which Western tourists jeer at most - the four people Indian family on a scooter - which reportedly triggered the imagination for Tata Nano, a $2000 compact car. This, and many more innovations like this, represent the modern India - of not accepting what has been handed down, but to imagine a different future with confidence and passion.

However, all said, I would also acknowledge that the path ahead for India is fraught with enormous risks. The possibilities are in sight, but the optimism is obscuring the challenges. That will be a big mistake, because India is not yet there and it is wrong to assume that the ascendancy to a developed economy status is certain, a historical inevitability. Far from it: In fact, all of this can go wrong from here and we may lose the momentum to chaos.

Challenges: It is fair to say that Indian story is being oversold a bit, especially by the Investment bankers all over the world. They have their own reasons: They always need a few bright spots to keep the money rolling. The euphoria was then spread by Indian English language media, bought in wholesale by the government ministers and suddenly, everyone seemed to have taken in India's irreversible ascendancy as a given. So much so that the social and economic problems to this day are being treated as a distraction, much to the peril of Indians themselves.

Consider, for example, three pillars of Indian economic optimism - GDP Growth, High Saving Rate and Demographic Dividend.

GDP growth is the current economic mantra, everyone seems to be talking GDP in India. This is the common measure of progress, and the stock markets are euphoric that India seems to be 'scoring' 8%. But, as we know, GDP is only a very partial measure of economic well-being, and in India, which was a very poor country to start with, GDP growth can not be taken as be-all and end-all of progress. Besides, Indian GDP growth is currently coming on the back of less than realistic money being made in the stock markets [which is fuelled by foreign speculative investment] and the real estate, particularly commercial real estate. This does not amount to much, because the spread of wealth is quite limited here. A high inflation rate, coupled with large deficits and high interest rates, keep the government's intervention options quite limited in case of a crisis. While India may be doing better than before, the whole economy is still quite fragile and the country is nowhere near a sustainable 'steady state' economy.

High Savings Rate is something many Indians boast off. Their rationale is that Americans got into trouble because they consumed too much. The underlying assumption is high savings rate will automatically lead to higher capital formation, and growth in income. However, the savings rate does not automatically guarantee anything, because what ordinary Indians save, the Government and Public Sector spend. Besides, India is currently experiencing a more than 10% inflation at this time [more, if you consider urban real estate] which takes the sheen out of savings. This is the reason why, despite a relatively high rate of household savings, domestic capital formation remains weak and infrastructure remains backward.

Also, India has a lot of young people and conventional wisdom is that this is India's demographic moment and everything will go northwards from this point on. But, such population is a two way sword. If India can educate this young workforce, the country will sure develop fast: But, we simply don't have the wherewithal and a good system of education to present productive opportunities to this population. So, instead of going the USA way, we may actually end up in a Soviet style disaster, where the same young population turned on the state after being deprived of opportunities.

Now, add to this the other fragile components of the Indian economy - lack of education and health services, lack of infrastructure, corruption at the very top, poor housing stock, and huge social divide - and one knows that India is not out of the woods yet. Besides, some of these things have continued to get worse despite the GDP growth and all the media excitement. This has resulted in a few unwelcome developments - for example, the growth of extreme left movement in the Indian heartlands, which has accentuated not only the problem of domestic security but also posed serious questions about the sustainability of the India story.

I remain an optimist about India, because as an Indian, I know one is destined to work against all odds and succeed. That is the Indian spirit; that's what propelled us forward despite some atrocious governance over last half century. However, any euphoria goes against the grain of such resolve; in fact, those who underestimate the work that would be needed to turn things around insult the Indian spirit that has carried us till this point. Hence, I shall stay away from making the mistake of assuming that India's ascendancy is a foregone conclusion; however, I shall keep my faith in the Indian spirit, and know that it will prevail in the end.

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