Focus on India's long-term potential can offset weak governance and sinking confidence in this time of crisis.
I had the privilege of attending a handful of India conferences over the past couple of weeks both in India and Singapore. There were numerous macro and lateral speakers present at these forums, with the likes of Omkar Goswami, Gurcharan Das, Dr Sanjaya Baru and Shekhar Gupta all discussing their views on elections, reform and economics.
The speakers were all convinced that India would grow at least 5 per cent in 2009-10, and that we would pretty quickly come back on a 7 per cent growth trajectory. While most acknowledged that it will be difficult to come back to 9 per cent growth, 7 per cent was seen as the long-term trend for India. Demographics, rising consumption, surging infrastructure spends and improving domestic productivity were all cited as the reasons why a 7 per cent trend growth rate was realistic. The basic point was, a savings rate of 29-30 per cent can support 7 per cent growth with little need for external capital flows.
I also got a sense that most speakers felt that the assembled investors were too negative on the country and its growth outlook. One of the speakers, when responding to a question on the rising fiscal deficit and poor governance, pointed out that these issues had always existed in India and that we had grown at over 6 per cent for 20 years despite this. Why should it be different going forward?
Another pointed out that economic policymaking had been by and large stable despite numerous government changes, when responding to investor worries about the upcoming elections. His point was, India will grow and has always grown despite the government.
Another speaker could not understand the doom and gloom when more than half the country (rural India) is doing just fine, and is out there spending. This rural demand is a huge stabilising influence which few other countries have.
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Now when one sits down to think about it, maybe the speakers do have a point. If India can grow at 5 per cent even in 2009, when the global economy will actually contract and trade flows decline, that is some achievement. If the speakers are right and we quickly re-accelerate back to 7 per cent then that will also be credible as most of the OECD and many other emerging markets linked to western consumption are unlikely to get back to their normalised growth rates in a hurry. There is also a feeling that in the new world of lower OECD consumerism, trend growth rates across economies are at a lower base level. Given the above, shouldn’t India with its 7 per cent growth be a very attractive investment destination? Should not the country look very attractive to investors?
Yet investors seem clearly unconvinced, India has declined more than most markets in this downturn, and most investors one talks to are underweight on India. There also seems to be no urgency to put money back into the country. Investors seem happy to bide their time.
What accounts for this disconnect? Firstly very few investors are taking a long-term view on anything right now. Survival is topmost on everyone’s mind and no-one can afford the luxury of being too early. The genuine long-term real money folks have liquidity issues, and thus are unable to invest in a serious way either.
Secondly, there is a very strong feeling among investors that we have blown a golden opportunity to correct many of the structural issues afflicting our economy. We had five years of 9 per cent GDP growth and a period where-in tax revenues were extraordinarily buoyant, yet we are exiting the 2009 financial year with a fiscal deficit of 12.5 per cent of GDP, the highest ever. The buoyant tax revenues have been frittered away in populist handouts and non-targeted subsidies. The incoming government will have to take some serious policy action, some hard choices will have to be made. There is great discomfort and disbelief in any Indian government being able to take the hard measures required to get our fiscal house in order. Without the fiscal coming into control, nobody believes that 7 per cent trend growth rates are sustainable.
Third, unlike most of the macro commentators who tried to make the case that governments do not matter, investors don’t buy that thesis and, in fact, are extremely worried on the outlook for elections. The thinking goes that if the outgoing UPA government (with many serious reformers in positions of power) was unable to do much in the past five years, what will a new coalition do? The UPA was unable to do anything because of the constraints of the coalition. When they had serious believers in reform but still could do nothing, why won’t the next coalition be even worse? The fragmentation of our polity seems designed to ensure inaction on the hard economic issues facing the country.
Also the current economic crisis has brought to the forefront the importance of government action and initiative. While governments and their policies may not matter much in a strong global growth environment, today, in the worst global recession most of us have ever seen, government policy action and initiative are both critical. With perceived weak economic governance, India does not inspire confidence.
The fourth factor is the inability even today to find a huge number of ideas which are trading very cheap. The large-cap high-quality companies are not yet dirt-cheap, with a few exceptions. One may argue that things don’t look cheap because everyone is looking at only the downsides, and are not factoring in anything positive. That is, however, the way it is going to be for some time, as investors are still trying to recover from the shock of being down 50 per cent-plus on their portfolio.
Thus it is all about confidence, and how we make investors once again focus on India’s long-term potential. How do we get investors to pay for growth again?
India has two choices.
- We can either wait for global markets to turn, in which case as money returns to emerging markets, India will also get its share. ‘A rising tide lifts all boats’ type of scenario.
- We can move ahead on reform and recreate excitement around the country. Get investors and market participants to feel once again that the country is on the move, and that economic policymaking is back on the agenda. If investors start believing in the growth potential of the country again, then they will be willing to pay for this growth.
Unfortunately, the current despondent mood among investors seems to indicate that we have very little chance of getting a government that can actually reform, and are going to have to go with a rising-tide-lifting-all-boats scenario. A pity, as we had a real chance of breaking out in this time of global crisis.
The hopeful view is that, as usual, the consensus of investors will be wrong, and we will be positively surprised by the new government.