Subir Gokarn: Heightened scrutiny

The larger the number of people to whom the India growth story is credible, the more the story is likely to turn out to be true.

For the past few years, my colleagues and I have spent the couple of weeks following the Budget talking to groups of clients, potential clients and anyone otherwise interested in our views both in India and outside. Over the three years that we have had these interactions outside the country, the number of events, the level of participation and the intensity of engagement have all increased considerably.

I remember from the eighties, a then rare front-page story on India in the Wall Street Journal's US edition beginning with the words "India is more interesting than important..." That is most certainly not the case now. From a global investment perspective, it is both very interesting and very important.

However, and this is the point of this article, along with greater interest comes greater scrutiny. Even as the India growth story percolates into the strategising of a widening range of investors, both in the direct and portfolio categories, increasing attention is being paid to the phenomena that collectively pose a threat to the sustainability of the current momentum.

This is all the more evident among investors who visited India, many for the first time, whom I have talked to during the last several months. To them, even as the strength of the long-term growth drivers is visible, be it in the hordes of young people, the huge amount of construction activity or the soaring aspirations of the businesspersons that they talk to, equally visible and worrisome are several pitfalls and roadblocks.

None of the issues that most frequently come up in discussions is new or unfamiliar to those engaged in the ongoing policy and development debate in this country. By my estimation, the four concerns that are most frequently expressed are the state of the country's infrastructure, the degree of inequality and deprivation, the weak alignment of the partners in the ruling coalition on economic issues, and the tensions in South Asia, particularly between India and Pakistan, and their likely impact on economic performance.

It is obviously unreasonable to dismiss or even downplay the importance of all these as potential threats to sustainability. However, it is necessary to view them in an appropriate context which allows us to move from the mere facts of each issue to a reasonable judgment about its impact on economic performance. On all these issues, while the threat perceptions have some basis, it is also possible to see existing or emerging mitigations. The question, of course, is whether these are strong enough to ease concerns relatively quickly.

On infrastructure, the tussle is between the despair that people feel when confronted with the daily evidence of unmet demand and collapsing systems and the steady, even though small, steps that are taken everyday. The airports in Mumbai and Delhi, the successful bids for the first two 4,000 MW power plants (though one appears to be in trouble), and the feasibility of privately-owned freight rakes operating on the railway system are among examples of an unmistakable swing towards the facilitation of commercially viable investment by the private sector. As agonisingly slow as the process may appear, it appears to be gaining momentum, which can only be reinforced as the benefits from these early initiatives are realised.

On the issue of inequality and deprivation, at one level, one could argue that, as a society, we have a remarkable tolerance for them, meaning that they are not likely to be hugely destabilising forces in and of themselves. This is difficult for people from affluent countries to accept and it may well be wishful thinking on our own part. But, what cannot be challenged is the obvious contradiction between the perception that the "demographic dividend" is a predominant reason for optimism about growth and the fact that hundreds of millions of people are at subsistence levels of income and face a difficult climb up the ladder to prosperity.

The need for organised manufacturing to absorb far larger numbers of people than it currently does is recognised but the sheer magnitude of the challenge is daunting. For most investors, the Chinese experience in this regard is a significant contrast with that of India and leads to some scepticism about the replicability of the Chinese consumer boom here.

Again, one can cite the role that several rapidly growing services have played in generating employment at all levels of the skill hierarchy and, from the perspective of employability, the increasing role of the private sector in providing education at all these levels with high levels of market sensitivity and rising accountability to the consumer. But, whether this is large enough and fast enough remains an issue, along with fundamental questions about the mass affordability of quality private education.

The issue of coalitional instability is a little easier to answer on the basis of historical experience, with less dependence on hope. The persistence of the reform process in the face of many changes in regime makes for a persuasive argument that it is both robust and broadly acceptable. Despite both confusion about discordant noises within the coalition and impatience about the pace of decision-making and implementation, investors from democracies accept that adversarial public positions amongst supposedly collaborating politicians are part of the game and do contribute to outcomes that are credible and sustainable.

The last issue, regional instability and conflict, is a little less tractable. From a number of conversations, I have got the impression that this is a serious issue, even to the point of imminent conflict, which will unquestionably weaken, if not destroy, the prospects for growth sustainability. To this, my response is that, while signs of low-intensity conflict are visible all over the place, there is also a continuous process of diplomatic, cultural and commercial engagement, which helps to keep things in some kind of balance.

Speaking generally, the increasing intensity of investor scrutiny and the conclusions, both positive and negative, that they draw from it are a useful input into the domestic policy debate. It helps us to re-examine our premises, priorities and inclinations, to tackle difficult problems. The larger the number of people to whom the India growth story is credible, the more the story is likely to turn out to be true. Persuading investors, whether at home or abroad, requires a combination of both sensible actions and effective communication. The sophistication of the message must match the sophistication of the audience.

The author is chief economist, Crisil. The views here are personal