16 November 2014

Is hubris raising its head in India, again?

Is hubris raising its head in India, again? India’s economic growth rate might be edging closer to or may exceed China’s in 2016 but that is not the same as our economy matching the size of China’s 

V. Anantha Nageswaran 

Christopher Wood of CLSA is a well-known Indophile. In his recommended portfolio, his allocation to Indian stocks is thrice the recommended weight of the benchmark he follows. In the most recent edition of his weekly newsletter, Greed & Fear, he calls India the best stock market in Asia, among emerging stock markets and probably in the world. His words made me nervous. What am I afraid of? I am afraid of too much short-term portfolio capital chasing the Indian structural growth story, giving rise to hubris and complacency on the part of governments in India, the private corporate sector and investors. Exuberance will, as it has often, be its own undoing. Signs of it are beginning to emerge. 

The Indian stock market has done rather well this year. It is one of the best performing stock markets worldwide simply because India presents an irresistible bet in a world of low growth and weak leadership. Therein lies the danger, however, because Indian stock market gains far outpace the real economic turnaround. The gulf between the stock market and the economy might widen further because there is a high chance that the US does not engage in any meaningful tightening of monetary policy in the course of 2015. Further, with both Japan and the euro zone picking up the quantitative easing (QE) baton from the US, there is a constant flow of abundant liquidity looking for investment destinations. Hence, asset price bubbles everywhere might reach grotesque proportions. From such levels, it will be a spectacular burst when the crash inevitably comes. 

For all the euphoria in the stock market, cyclical indicators of the economy such as industrial production and production in core infrastructure sectors do not appear to be in any hurry to turn around. Yet, the front-page story in the Friday edition of The Economic Times is that India might be a hair’s breadth away from China by 2016. The newspaper cites the Organisation for Economic Growth and Development for this caption. It is misleading. India’s economic growth rate might be edging closer to or may even exceed China’s in 2016 but that is not the same as Indian economy matching the size of China’s.

Let us get some perspective on the numbers. As of 2013, China’s real gross domestic product (GDP) at 2005 prices was around $4.86 trillion. India’s real GDP was around $1.46 trillion. China’s nominal GDP was around $9.2 trillion and India’s was around $1.9 trillion. China’s per capita real GDP is around $3,583. India’s is around $1,167. China has had a real GDP growth of around nearly 10% for over 35 years since its economic restructuring started in 1979. India’s annual average real GDP growth since 1990—when serious economic reforms began—has been around 6.4%. China has problems with bad loans in banking and so does India. China’s air, water and soil are polluted. So are India’s. In short, India has China’s problems but not China’s economic achievements. 

The Indian growth story of 2004-08 was considered a structural growth story. At that time too, many commentators were jubilantly predicting Indian economy’s outperformance over China’s. Those expectations proved premature. In fact, subsequent events proved that economic growth of that period was a classic case of overheating as many sceptics, including this columnist, were pointing out. Despite the present government’s good start, lot of work remains to be done to secure the foundations of sustainable economic growth in the country. India’s power generation and distribution remain complex knots waiting to be untied. The first steps have been taken with the auctioning of coal mines but a lot remains to be done. Bank recapitalization and governance changes brook no delay. The hurdles placed in the way of land acquisition have to be removed urgently. By most accounts, India has lost another six months on top of the previous half century on human resource development. Further, too much availability of capital has always resulted in its misallocation. In the haste to validate the stock market, measures that would result in short-run growth acceleration at the risk of causing long-term damage could be pursued. That is what happened in India in 2004-08. Presently, the government and the corporate sector are now pressing for lower policy rates in India. However, it would be a good sign that the lessons of the United Progressive Alliance regime’s mistakes have been well learnt if the government quietly (or otherwise) prodded and backed the Securities and Exchange Board of India and the Reserve Bank of India to curb and discourage speculation and to ensure that capital is not misdirected to the most speculative and the least desirable investment options. Like happiness, growth must ensue and not be pursued. With the stock market tempting India with short-term gains and instant gratification, India has an opportunity to prove to itself and others that it is in the game for the long haul, it can be patient and that it can raise its head slowly. India cannot afford a second failure in the new millennium so quickly. V. Anantha Nageswaran is co-founder of Aavishkaar Venture Fund and Takshashila Institution. Comments are welcome at baretalk@livemint.com. To read V. Anantha Nageswaran’s previous columns, go to www.livemint.com/baretalk

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