Overwhelming presence of public sector holding back economy: Ruchir Sharma

Says its share in India's banking industry is 2/3rd, which is way above average of 1/3rd in EMs

Ruchir Sharma, chief global strategist with Morgan Stanley Investment Management, says the public sector's presence in India's economy is both overwhelming and a holding-back factor, citing the example of state-owned banks.

Delivering a lecture on leadership, organised by business chamber Ficci to mark its 90th anniversary this year, Sharma said the public sector's share in banking was two-third, way above the average of one-third in emerging markets.

He outlined 10 rules for assessment over five years to determine an economy's current and future outlook. These parameters are what he described as politics, role of the state, income inequalities, concentration of wealth from a geographical standpoint, investment, inflation, the exchange rate, debt, demographics, and the 'curse of the cover story'.

 

In India, the state remains meddlesome, he said. Thus, India has a low rank of two to three on this, on a scale of one to 10.

Sharma said a country's economic performance tends to deteriorate when those at the helm of politics hold on to power for too long. It has been noted that reforms tend to be taken up in the initial two to three years of a new government; the momentum then slows. On this count, India ranks six, he said.

According to Sharma, India has fast gained ground as it has lots of 'good billionaires', who made their fortune by creating new businesses, as opposed to those who became 'bad billionaires' by multiplying their wealth with the help of government and political connections. Therefore, he rated India a seven in this arena.

From a geographical standpoint, emergence of new cities and urbanisation are needed for distribution of wealth. However, in India for two to three decades, no new cities have come up and there is great disparity in the wealth of states. Hence, Sharma ranked India at three of four on this.

He said manufacturing played a key role in the success of a country but a commodity-based economy would do well in only the short term. In this area, India's track record has been a mix, he said.

High inflation is bad for any economy and India has greatly improved its ranking over the years. Under the second UPA (United Progressive Alliance) government (2009-14), the inflation rate was at an all-time high but that has moderated, he said.

A currency that feels cheap and competitive is usually one that has been allowed to find its market value. So, a high exchange rate is not favourable for stable investment, he said.

In India, 6,000 domestic millionaires left the country last year, as against 4,000 a year before. However, with foreign investments on a rise, India stands at a moderate standpoint.

The growth of private debt is one indicator of development and India's debt levels are currently fine, which offers scope for growth. Sharma said a sharp increase in debt can be worrisome, as is in the case of China. India, he added, fares well in this regard.

India has the demographic dividend with a young working population but this needs to be channelised effectively to make it work in our favour, he said.

Any country that ends up on the cover of a leading magazine is likely to have peaked and was bound to have a bad time in the future. Sharma said this is so because a positive story makes the leaders complacent; trends do not last for long.

On this parameter, India is somewhere in the middle rank, as it is neither gearing towards big-bang reforms nor doing poorly, he observed.