Reimagining India: Unlocking the Potential of Asia’s Next Superpower (4 page)

Many foreign observers, particularly Western businesspeople, look at India today and despair. The country simply cannot reform at the pace necessary to fulfill its ambitions for growth and progress. Everything gets mired in political paralysis, and the governing class remains committed to a politics of patronage and pandering. This is all true and deeply unfortunate. But it is a snapshot of today’s reality, not a moving picture of an evolving society. In states as disparate as Gujarat, Odisha, and Bihar, state
governments are aggressively promoting economic growth. And this is not simply a story about Narendra Modi, the controversial chief minister of Gujarat. That state of sixty million people has grown faster than China over the last two decades—with three different chief ministers. India itself, for all its problems, has been one of the fastest-growing large economies in the world over that period.

Can the country live up to its potential? If so, it will happen only because of a bottom-up process of protest and politics that forces change in New Delhi. India will never be a China, a country where the population is homogeneous and where a ruling elite directs the nation’s economic and political development. In China, the great question is whether the new president, Xi Jinping, is a reformer—he will need to order change, top-down, for that country.

In India, the questions are different: Are Indians reformers? Can millions of people mobilize and petition and clamor for change? Can they persist in a way that makes reform inevitable? That is the only way change will come in a big, open, raucous democracy like India. And when that change comes, it is likely to be more integrated into the fabric of the country and thus more durable.

I remain optimistic. We are watching the birth of a new sense of nationhood in India, drawn from the aspiring middle classes in its cities and towns, who are linked together by commerce and technology. They have common aspirations and ambitions, a common Indian dream—rising standards of living, good government, and a celebration of India’s diversity. That might not be as romantic a basis for nationalism as in days of old, but it is a powerful and durable base for a modern country that seeks to make its mark on the world.

Ruchir Sharma

Ruchir Sharma is head of the emerging markets equity team at Morgan Stanley Investment Management and the author of
Breakout Nations: In Pursuit of the Next Economic Miracles.

On the new highway into Ahmedabad, the largest city of the western state of Gujarat, the sun sets red in your eyes, just as it does in the polluted industrial zones of China. The city ranks alongside Chengdu and Chongqing as one of the fastest growing in the world. Factories sprout from the farmlands on its outskirts: Gujarat generates about 40 percent of its income from industry, more like China than India as a whole. The state is home to many of the largest ports in India, just as China is now home to most of the largest ports in the world.

Narendra Modi, Gujarati Chief Minister since 2001, is seen as a can-do autocrat, admired by businesspeople but loathed by human rights activists because of the deadly 2002 riots against the state’s Muslim minority. Now touted as a potential prime minister, Modi has inspired fears among many liberal-minded Indians that he would make the country more like China: more growth oriented but also more centrally controlled and possibly less democratic.

But because of India’s natural social fabric, with its incredible diversity and numerous distinct identities, the future of India looks less likely to unfold on the uniform China model than the looser, pluralistic European model—not the debt-strangled Europe of the last two years but the successful Europe of the postwar years, a federation that brought peace, political stability, and widespread prosperity to a diverse continent.

Since India began to grow at a reasonably fast speed in the early 1990s, it has come to see itself as the democratic world’s answer to China, potentially both prosperous and free. It can still achieve that dream, but to do so it cannot go back to the centrally controlled model that failed to produce strong growth in the early decades after independence in 1947.

For India to become what I have called a “breakout nation”—one that grows faster than rival economies in the same per capita income class, and posts consistently higher growth rates than investors expect for economies in that bracket—it must abandon its tendency to become self-satisfied and make excuses. Ever since India left behind the sluggish “Hindu rate of growth” three decades ago, it has portrayed itself as an ambitious nation, with a growing middle class eager to rise up in the global ranks. But as the poorest of the big emerging markets, with a per capita income of just $1,500, India is hardly overachieving; it is always easier to grow fast from a low base. Since the early 1980s, when the government cut back its monopoly on most imports and started easing rules about who could manufacture what and in which quantities, India has finished each decade with an average GDP growth rate about 1 to 2 percentage points faster than the emerging market average. That is unusually consistent but not particularly impressive—it’s standard for emerging nations in India’s low-income class.

After two strong decades, India’s economy has slowed down this decade, ebbing along with the world economy. Once again, India is floating with the global tide, but this is not inevitable. China, Taiwan, Korea, and Japan have shown that it is possible to grow at a near double-digit pace for three or more decades, regardless of whether the global economy is hot or cold. They did so with policies that promoted rapid urbanization and the rise of manufacturing, as India should now. For thirty years after Deng Xiaoping came to power, China pushed reform in good times and bad, outperforming the global economy by a consistently impressive margin, with its economy growing at an annual pace of 4 to 5 percentage points faster than the emerging market average.

India has been typical of most other developing countries, which reform only in a crisis and fritter away the gains when things are going
well. In India, this boom-crisis-reform cycle has followed a steady pattern, going back to the crippling stagflation of the late 1970s, which inspired the first reforms of the so-called license raj early in the next decade. Now the cycle is turning again. As the rupee weakens and ratings agencies threaten to downgrade India’s debt to junk status, India is slipping in the emerging market GDP growth and inflation rankings. That has forced Prime Minister Manmohan Singh—the architect of India’s early 1990s liberalization of the economy—to start reforming again, this time lowering fuel subsidies and further opening sectors such as retail and civil aviation to foreign companies.

It’s not clear these reforms will be enough to put India on a self-sustaining growth path. Singh has tended to dismiss India’s growing problems with corruption and inflation as the natural side effects of rapid growth, even though these problems are much worse in India than in other nations at the same stage of development.

Other Indian policy makers explain away the government’s failure to pursue economic reform as consistently as China by saying that a democracy can’t command change the way an autocracy can. But plenty of democracies have gotten reform right, including Poland and the Czech Republic since they broke free of the Soviet empire. The general rule is clear: In the 124 nations that, since 1980, generated growth faster than 5 percent a year for at least a decade, about half were democracies and half were authoritarian regimes. Democracy is no excuse for a failure to act.

Still others claim India can’t sustain tough reform because its people are not disciplined and predictable like the apparently dull East Europeans. Indians are more chaotic, colorful, and moody. But economists used cultural explanations to write off Mao’s China in the 1960s as a Confucian society too wedded to traditional ways to modernize fast, and look how that turned out.

India tends to overreact to both good times and bad. It seriously
misread the strong growth of the 2000s as a sign of sure prosperity to come. In fact, this was a highly unusual decade, when virtually all the emerging economies started to grow quickly as they recovered from the serial financial crises of the 1990s, with a huge boost from easy money flowing out of the United States and Europe. India was lifted by this global boom, not by the managerial genius of New Delhi. History shows that only a third of all emerging nations are likely to post growth faster than 5 percent in any given decade, much less for two or three decades. The longer a boom lasts, the less likely it is to continue. The result is that over time, emerging markets are not “catching up” to the rich, as many seem to think. Their average incomes are the same relative to rich nation incomes as in 1950.

In the last decade, some of India’s policy moves reduced the likelihood of another good decade. The ruling elite focused its energy on trying to build a welfare state that India can’t really afford. The Congress government has been throwing money at expensive populist schemes like the one that guarantees every poor Indian at least one hundred days a year of paid work. Over the past decade, even after adjusting for inflation, government spending has doubled—a trend that is simply not sustainable.

It’s no accident that, despite its steady GDP growth, India has fallen dramatically in rankings of the size of government deficits and inflation rates, the cancer that has killed growth in many star economies of the emerging world. On the IMF ranking of nations by rate of inflation, India plunged to 122nd in 2012, from an average ranking of 65 between 1980 and 2010. This isn’t a natural side effect of fast growth, as Singh would have it. Low inflation has been the hallmark of sustained economic success from Japan in the 1960s to China in recent times, because strong investment creates the capacity that allows the economy to meet rising demand without higher prices. India now spends a relatively healthy 7.5 percent of GDP on investment in infrastructure, but mostly by the government, which hardly does a great job of building capacity.

Another manifestation of this increasingly top-heavy central government is the spread of crony capitalism. Indian politicians often dismiss
this problem, too, as a standard and expected offshoot of growth, but it is possible to judge whether a country is abnormally corrupt. Corruption should decline as a country gets less poor, yet on various international surveys, corruption appears to be getting worse in India, which has fallen on the Transparency International rankings from seventy-second in 2007 to ninety-fourth in 2012. The rise of crony capitalism is also reflected on the
Forbes
lists of top billionaires, which shows very little turnover in recent years, with most of the newcomers emerging from politically connected industries like mining and real estate.

Headlines often celebrate when Indian companies “go global,” but this may also suggest that businesses are fleeing a corrupt and stagnant market at home. The signals are mixed for India, but at least two key indicators send a warning: Indian firms are investing more heavily in foreign markets, and spending much more to acquire foreign firms, than foreign companies are investing and spending in India. With its vast and largely untapped consumer market, India should be much more attractive to investors, Indian and foreign. It is particularly important for India to generate more investment in manufacturing—the foundation for job growth in most emerging economies. Manufacturing represents an anemic 13 percent of the economy, at least 6 percentage points below where it should be at India’s stage of development.

India’s current administration has been in power nine years, the point at which even some of the best governments tend to lose their way as economic managers. For inspiration, leaders in Delhi should be studying how an increasing number of smart, dynamic chief ministers are using the power granted to them since the fall of the license raj to ignite state economies. Voters are rewarding these leaders with multiple terms in office. There are now about half a dozen chief ministers who have been in office at least three terms—a feat virtually unheard of in the 1980s and 1990s—and they are returning India to its natural condition: a federation of diverse states like Europe. This was the state of affairs in the
seventeenth century, when what we now call India was at the height of its Mughal power—an empire of many autonomous states.

Before independence in 1947, India was divided into eleven large provinces and hundreds of princely states, all with varying degrees of autonomy. Afterward, independence leader Jawaharlal Nehru tried to unify a nation riven by secessionist movements and deep poverty by imposing Soviet-style central planning. He got unity, but with desperately inadequate economic growth of just 3 percent a year. Thankful to the founding Nehru-Gandhi dynasty and its Congress party for liberating their nation, Indians resigned themselves to enduring poverty.

But times changed. The advent of satellite TV and the Internet began feeding Indian aspirations for a richer life. Slow growth made it difficult for India to earn the foreign currency it needed to pay for imports, leading to the financial crisis in 1991 that forced the Congress party to start lifting central controls—which gave state leaders more freedom to push economic development. Before this turn, the chief ministers had focused on building political support through appeals to religion and caste, the touchstones of Indian identity. Afterward, they realized that they could create a more enduring support base by catering to rising economic aspirations, which cut across caste boundaries. Now, these mass-based regional leaders are building strong state economies from Gujarat on the Arabian Sea all the way to Bihar on the Nepalese border.

The successful ones are pursuing economic growth strategies that fit the unique competitive advantages of each region. In Odisha, Naveen Patnaik is building steel industries on the local deposits of iron ore and bauxite. In Bihar, Nitish Kumar is focused on improving the yields of the state’s fertile soil and moving up the chain from growing food to processing packaged food for a higher price.