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Different track
India is a country with multiple personalities within each of its social, political
and economic layers. The palpable extreme contrasts, and the day-to-day
decision making and outcomes often appear to challenge logic, but never fail
to confound, amaze or disappoint - sometimes all in a single snapshot. Even
on a good day, there seems to be crisis somewhere in the folds of this chaotic
democracy. On a bad day, one often wonders how it functions at all, let alone
how it evolved to be Asia’s second-fastest growing economy.
But despite its multinational character and the baggage of vast size of
uneducated and poor population, India has defied doomsday predictions.
However, its economic rise has been far from smooth or even, and continues
to have its share of uncertainties. This has more to do with the evolving local
endogenous political cross-currents than with the country’s democratic
foundation. The irony that the world’s largest democracy has a selected - not
popularly elected - prime minister should not be overlooked.
A late bloomer, India’s economic evolution is following a different path
compared to other Asian economies. The differences are underappreciated
and often misinterpreted. Unlike the Asian authoritarian political regimes that
favoured political openness after becoming economically open, India is
moving ahead with the reverse combination, and with the additional liability
of weak coalition governments. To be sure, unlike Deng Xiaoping in China,
Lee Kuan Yew in Singapore or Mahathir Mohamad in Malaysia, India has no
effective visionary reformist-politicians who can ably negotiate political
consensus on reforms. Prime Minister Manmohan Singh, who is in office but
does not seem to be in power, is an accidental reformer at best.
Still, trend economic growth has accelerated despite a lethargic reform
agenda since 2004, when the Congress-led UPA-1 came to power. UPA-II has
been embroiled in corruption scandals and is balancing the trade-off between
environment issues, corruption, growth and vote-bank politics. Admittedly,
the government’s policy paralysis in the last year has added to the cyclical
slowdown, but the attractiveness of a strong structural story does not
eliminate cyclical headwinds. The current challenges with land and labour are
another rude reminder that India’s topsy-turvy approach to reforms has
reformed product markets before fixing its factor markets. It appears ironic
that land and labour, which are both in surplus in India, have become
liabilities for growth but capital, which is scarce, has had a smoother ride.
Unlike other Asian economies, India’s global merchandise export share has
been rising without a comparable jump in FDI, without the aid of a superundervalued
currency, and despite the embarrassing infrastructure deficit.
Living with chronic twin deficits will remain challenging but globalisation is
also forcing Indian governments to do some right things, eventually.
There is nothing pre-ordained about India’s economic rise, despite the scope
for unlocking of the structural tailwinds, which will be affected by the pace
and nature of reforms. The evolving demographic dividend, which has already
been contributing to economic growth, is also fuelling rising aspirations across
rural and urban areas and calls for greater accountability. Governments will
have little choice but to attempt better delivery, or Indians will vote with their
feet. In the final tally, India remains a glass half-full story that cannot be fully
appreciated by assessing it through the lens used for other Asian economies
The curse of government
Government, its delivery mechanisms and their outcomes are the weakest
link in India’s economic rise. Why is government delivery so shoddy in India?
Why is it that Indian governments rarely deliver, fashionably and
unapologetically miss targets, and cannot resolve issues before they become
problems? Why is that India scores high in terms of human talent for a
meaningful portion of its population and its corporate sector stands out in
many ways but the functioning of its governments - irrespective of the
political leaning - is disappointing at best and embarrassing at worst? And
why is it that growth has accelerated over the years despite a disappointing
reform agenda?
The above questions are relevant as all politicians should have vested interest
in ensuring improved delivery as that in turn will increase the probability of
being re-elected. More importantly - and more likely - lack of adequate
delivery will increase the chances of governments being thrown out of office.
Indeed, increasingly at the state level, governments that have delivered have
been rewarded by being voted back.
To better appreciate answers to the questions raised above, it is important to
focus on three factors: (1) sequencing of political and economic openness;
(2) nature of the political framework and its inadequate reformist bias; and
(3) weak acceptability of reforms by voters in general.
Investors’ attraction to India’s economic rise kicked off only in 2003 but in
the last four years, India also had to navigate the severe ups and downs
trigged by the severe global financial shocks (Figure 1). This is in contrast
to the experience of several Asian economies that had multiyear growth
without external stress. Indeed, ASEAN economies had a great
uninterrupted run between the late 1980s (triggered by the Japanese FDI
boom into the region following the Plaza Accord in 1985) and the Asian
financial crisis of 1997, despite some drivers of growth, such as
overinvestment, becoming unsustainable.
A critical difference between India and other Asian economies when they were
at a similar stage of development is the approach towards political openness.
Unlike several newly independent Asian economies that quickly came under
the fold of strong one-man shows that eventually delivered well in economic
terms, India’s ruling elite preferred adopting democracy after gaining
independence in 1947, despite the widespread poverty and illiteracy.
Consequently, India achieved greater political openness before attempting to
become more open economically, in contrast to the pattern in most of the
other Asian economies. The sequencing in the case of other economies
allowed governments to undertake unpopular but necessary economic
reforms. The authoritarian regimes in many cases also facilitated greater
acceptability of reforms by limiting the resistance to reforms. Indeed, one
wonders how China’s economic rise would have evolved if Deng Xiaoping (or
for that matter Malaysia’s Mahathir Mohamad or Singapore’s Lee Kuan Yew)
had to operate within fractious coalitions in a democratic framework with
active opposition parties, as governments in India have had to do.
The above in no way lessens the adverse impact of some of the wrong bets
by Indian planners, such as continuing with the flavour for Fabian socialism
and the delayed disenchantment with import substitution. It is debatable if
there is merit in having benign dictatorships in the early stages of economic
development to push ahead with economic reforms but India’s path of
political openness is unlikely to be compromised or reversed.
However, political openness is also in some ways India’s key strength in
dealing with the vast socio-economic and political diversity and the resulting
tensions. But it nevertheless affects the pace and nature of economic
liberalization. This trend will continue to be affected by the evolving
endogenous local political flux, which will also affect the popularity and
acceptability of reforms. Indeed, people-state dynamics continue to be
reoriented. For example, there are now different civic interest groups that are
demanding more from the government on issues that affect people.
Globalisation too is forcing Indian governments to often do some right
things, eventually. As Indian markets are opened up, global growth
dynamics and price movements will have more and more impact than before
on local prices and demand, and on the corporate profit cycles. The
government will have little choice but to correct the mispricing across
several sectors, including banking, agriculture, and education. India cannot
participate and benefit from globalisation without being affected by the
positives and the negatives of globalisation.
Can Indian politicians be outsourced?
An important and surprising feature of the world’s largest democracy is that it
has a selected - not popularly elected - prime minister. The real political
power rests not with Prime Minister Manmohan Singh but with the Congress
President, Sonia Gandhi. She reportedly relies on Singh on economic matters,
but appears reluctant to be supportive of reforms that could further unleash a
new wave of growth opportunities even though these would in turn facilitate
her inclusive and redistributive agenda. This dual model has taken a toll on
the economic and political management as Singh does not appear to have
power despite being in office.
In the absence of a crisis, the political backdrop will continue to support
economic reforms at best in a gradual, uneven and uncertain manner.
Gradualism in reforms has continued despite varying political resistance to
specific reforms, and at times frequent changes in government (as in the
1990s), and the handicap of fractious coalition politics.
Trend growth has been accelerating for decades (Figure 2) despite the
incremental reform agenda (1991 reforms were an exception as they
were forced as part of an IMF rescue package). In early 2000s, no one
expected the Indian economy to ever grow at twice the pace of 4.4%
recorded in FY01, let alone close to 10% (FY07: 9.6%). But it did. More
recently, the economy was relatively resilient in the fallout of the global
financial crisis (GFC), partly because of the effective policy response. The
“collapse” in growth to 6.8% in FY09 was not as severe as most
expected. And hardly anyone expected growth to rebound to average
8.3% in FY10-FY11. To be sure, real sector reform initiatives during the
past decade were hardly awe-inspiring to have been a meaningful
contributor to the acceleration in growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Different track
India is a country with multiple personalities within each of its social, political
and economic layers. The palpable extreme contrasts, and the day-to-day
decision making and outcomes often appear to challenge logic, but never fail
to confound, amaze or disappoint - sometimes all in a single snapshot. Even
on a good day, there seems to be crisis somewhere in the folds of this chaotic
democracy. On a bad day, one often wonders how it functions at all, let alone
how it evolved to be Asia’s second-fastest growing economy.
But despite its multinational character and the baggage of vast size of
uneducated and poor population, India has defied doomsday predictions.
However, its economic rise has been far from smooth or even, and continues
to have its share of uncertainties. This has more to do with the evolving local
endogenous political cross-currents than with the country’s democratic
foundation. The irony that the world’s largest democracy has a selected - not
popularly elected - prime minister should not be overlooked.
A late bloomer, India’s economic evolution is following a different path
compared to other Asian economies. The differences are underappreciated
and often misinterpreted. Unlike the Asian authoritarian political regimes that
favoured political openness after becoming economically open, India is
moving ahead with the reverse combination, and with the additional liability
of weak coalition governments. To be sure, unlike Deng Xiaoping in China,
Lee Kuan Yew in Singapore or Mahathir Mohamad in Malaysia, India has no
effective visionary reformist-politicians who can ably negotiate political
consensus on reforms. Prime Minister Manmohan Singh, who is in office but
does not seem to be in power, is an accidental reformer at best.
Still, trend economic growth has accelerated despite a lethargic reform
agenda since 2004, when the Congress-led UPA-1 came to power. UPA-II has
been embroiled in corruption scandals and is balancing the trade-off between
environment issues, corruption, growth and vote-bank politics. Admittedly,
the government’s policy paralysis in the last year has added to the cyclical
slowdown, but the attractiveness of a strong structural story does not
eliminate cyclical headwinds. The current challenges with land and labour are
another rude reminder that India’s topsy-turvy approach to reforms has
reformed product markets before fixing its factor markets. It appears ironic
that land and labour, which are both in surplus in India, have become
liabilities for growth but capital, which is scarce, has had a smoother ride.
Unlike other Asian economies, India’s global merchandise export share has
been rising without a comparable jump in FDI, without the aid of a superundervalued
currency, and despite the embarrassing infrastructure deficit.
Living with chronic twin deficits will remain challenging but globalisation is
also forcing Indian governments to do some right things, eventually.
There is nothing pre-ordained about India’s economic rise, despite the scope
for unlocking of the structural tailwinds, which will be affected by the pace
and nature of reforms. The evolving demographic dividend, which has already
been contributing to economic growth, is also fuelling rising aspirations across
rural and urban areas and calls for greater accountability. Governments will
have little choice but to attempt better delivery, or Indians will vote with their
feet. In the final tally, India remains a glass half-full story that cannot be fully
appreciated by assessing it through the lens used for other Asian economies
The curse of government
Government, its delivery mechanisms and their outcomes are the weakest
link in India’s economic rise. Why is government delivery so shoddy in India?
Why is it that Indian governments rarely deliver, fashionably and
unapologetically miss targets, and cannot resolve issues before they become
problems? Why is that India scores high in terms of human talent for a
meaningful portion of its population and its corporate sector stands out in
many ways but the functioning of its governments - irrespective of the
political leaning - is disappointing at best and embarrassing at worst? And
why is it that growth has accelerated over the years despite a disappointing
reform agenda?
The above questions are relevant as all politicians should have vested interest
in ensuring improved delivery as that in turn will increase the probability of
being re-elected. More importantly - and more likely - lack of adequate
delivery will increase the chances of governments being thrown out of office.
Indeed, increasingly at the state level, governments that have delivered have
been rewarded by being voted back.
To better appreciate answers to the questions raised above, it is important to
focus on three factors: (1) sequencing of political and economic openness;
(2) nature of the political framework and its inadequate reformist bias; and
(3) weak acceptability of reforms by voters in general.
Investors’ attraction to India’s economic rise kicked off only in 2003 but in
the last four years, India also had to navigate the severe ups and downs
trigged by the severe global financial shocks (Figure 1). This is in contrast
to the experience of several Asian economies that had multiyear growth
without external stress. Indeed, ASEAN economies had a great
uninterrupted run between the late 1980s (triggered by the Japanese FDI
boom into the region following the Plaza Accord in 1985) and the Asian
financial crisis of 1997, despite some drivers of growth, such as
overinvestment, becoming unsustainable.
A critical difference between India and other Asian economies when they were
at a similar stage of development is the approach towards political openness.
Unlike several newly independent Asian economies that quickly came under
the fold of strong one-man shows that eventually delivered well in economic
terms, India’s ruling elite preferred adopting democracy after gaining
independence in 1947, despite the widespread poverty and illiteracy.
Consequently, India achieved greater political openness before attempting to
become more open economically, in contrast to the pattern in most of the
other Asian economies. The sequencing in the case of other economies
allowed governments to undertake unpopular but necessary economic
reforms. The authoritarian regimes in many cases also facilitated greater
acceptability of reforms by limiting the resistance to reforms. Indeed, one
wonders how China’s economic rise would have evolved if Deng Xiaoping (or
for that matter Malaysia’s Mahathir Mohamad or Singapore’s Lee Kuan Yew)
had to operate within fractious coalitions in a democratic framework with
active opposition parties, as governments in India have had to do.
The above in no way lessens the adverse impact of some of the wrong bets
by Indian planners, such as continuing with the flavour for Fabian socialism
and the delayed disenchantment with import substitution. It is debatable if
there is merit in having benign dictatorships in the early stages of economic
development to push ahead with economic reforms but India’s path of
political openness is unlikely to be compromised or reversed.
However, political openness is also in some ways India’s key strength in
dealing with the vast socio-economic and political diversity and the resulting
tensions. But it nevertheless affects the pace and nature of economic
liberalization. This trend will continue to be affected by the evolving
endogenous local political flux, which will also affect the popularity and
acceptability of reforms. Indeed, people-state dynamics continue to be
reoriented. For example, there are now different civic interest groups that are
demanding more from the government on issues that affect people.
Globalisation too is forcing Indian governments to often do some right
things, eventually. As Indian markets are opened up, global growth
dynamics and price movements will have more and more impact than before
on local prices and demand, and on the corporate profit cycles. The
government will have little choice but to correct the mispricing across
several sectors, including banking, agriculture, and education. India cannot
participate and benefit from globalisation without being affected by the
positives and the negatives of globalisation.
Can Indian politicians be outsourced?
An important and surprising feature of the world’s largest democracy is that it
has a selected - not popularly elected - prime minister. The real political
power rests not with Prime Minister Manmohan Singh but with the Congress
President, Sonia Gandhi. She reportedly relies on Singh on economic matters,
but appears reluctant to be supportive of reforms that could further unleash a
new wave of growth opportunities even though these would in turn facilitate
her inclusive and redistributive agenda. This dual model has taken a toll on
the economic and political management as Singh does not appear to have
power despite being in office.
In the absence of a crisis, the political backdrop will continue to support
economic reforms at best in a gradual, uneven and uncertain manner.
Gradualism in reforms has continued despite varying political resistance to
specific reforms, and at times frequent changes in government (as in the
1990s), and the handicap of fractious coalition politics.
Trend growth has been accelerating for decades (Figure 2) despite the
incremental reform agenda (1991 reforms were an exception as they
were forced as part of an IMF rescue package). In early 2000s, no one
expected the Indian economy to ever grow at twice the pace of 4.4%
recorded in FY01, let alone close to 10% (FY07: 9.6%). But it did. More
recently, the economy was relatively resilient in the fallout of the global
financial crisis (GFC), partly because of the effective policy response. The
“collapse” in growth to 6.8% in FY09 was not as severe as most
expected. And hardly anyone expected growth to rebound to average
8.3% in FY10-FY11. To be sure, real sector reform initiatives during the
past decade were hardly awe-inspiring to have been a meaningful
contributor to the acceleration in growth.
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