India is out of the woods but a long way from safe

December 4, 2013 5:18 pm

India is out of the woods but a long way from safe

By David Pilling

The optimism of recent years when Indians talked of growing faster than China is of another era

New Delhi is no longer in panic mode. After a few really dicey months this summer when the rupee was sinking and the government was taking measure after ineffective measure to hold the line, an uneasy calm has been restored in India. The currency is 10 per cent above its September lows and stocks are 15 per cent higher.In Mumbai Raghuram Rajan, the new central bank governor, rode in like some Bollywood hero on a white steed. He raised interest rates and came up with a wheeze to attract investments from non-resident Indians, netting a cool $34bn in a few months. Arguably almost as important as anything Mr Rajan was up to, the US Federal Reserve stopped its unhelpful talk about early tapering of its asset purchases. The fear had been that, if US rates began rising, hot money might rush for the exit from India, precipitating a new phase of crisis.

That danger has receded, although it could conceivably return when the Fed does eventually begin to taper. Yet, even as things stand, India’s economy looks decidedly shabby. True, the current account deficit has narrowed, but the budget deficit remains as wide as the Ganges. Consumer inflation is in double digits, a matter of grim import for the many Indians living in poverty. Growth in gross domestic product has dropped below 5 per cent for four straight quarters, a dismally low number for a poor economy supposedly in its take-off phase. The starry-eyed optimism of just a few years ago when Indians talked excitedly about growing faster than China is as though from another era.

Before the economic picture became quite so bleak, a lively debate had developed about the sort of growth to which India should aspire. The schism was personified in the views of Amartya Sen, a Nobel economics laureate, and Jagdish Bhagwati, a professor of economics at Columbia University. To oversimplify, Professor Sen argued that India’s high growth rates were meaningless unless they brought measurable benefits to poor Indians. That meant better access to health, education, nutrition and gender equality – all measures where India has scored badly, even compared, for example, with much poorer Bangladesh. If social indicators did not improve, asked Prof Sen, what then was growth for? Prof Bhagwati, who recently co-authored a book called Why Growth Matters, argued conversely that rapid growth was a precondition for poverty alleviation. Only by expanding the economic pie would India have enough resources to pay for the things Prof Sen wants.

In some ways, the differences between the two economists, though expressed with the intensity of a feud, are ones of emphasis and sequencing. Prof Sen would not dispute the need for growth and Prof Bhagwati would not object to the idea of improving the living conditions of as many people as possible. India, however, has neither fast growth nor social justice. That makes Prof Sen and Prof Bhagwati like captains of a ship arguing whether to turn to port or starboard. As they carry on their dispute, the sad fact is that the steering-wheel is broken.

Of course, growth may pick up from its current uninspiring levels. Palaniappan Chidambaram, finance minister, predicts it will rise to 6 per cent in the next fiscal year, 7 per cent in fiscal 2015 and 8 per cent thereafter. Most private economists forecast a point lower in each case.

Even if things do improve, though, India’s economic model looks shakier than before. Not only has it failed to turn GDP into social justice, the basis of growth itself looks less certain. India has not turned itself into a serious manufacturing centre. Investment has stalled. Several would-be foreign projects, including a $12bn steel plant that was to have been built by South Korea’s Posco, have rumbled on fruitlessly for years. The state has no legitimacy, neither to convince affected communities that such developments are in their interest nor even to bulldoze them through over their objections. That leaves everything in limbo. The biggest beneficiaries of the status quo are the crony capitalists who have been permitted to extract rent to no one’s obvious interest but their own. Pankaj Mishra, writing in The New York Review of Books, argues that high economic growth has only served to “empower an insular, selfish and antidemocratic elite in an unequal society”. Now India does not even have high growth to boast about.

This is the backdrop against which next year’s general election will be fought. No wonder even liberal Indians, who would normally be horrified at the thought, are turning reluctantly to the idea of Narendra Modi, a divisive Hindu nationalist, as a possible saviour. Some are hoping – often against their better judgment – that Mr Modi can replicate at a national level the sort of growth rates he has achieved in Gujarat, where he is chief minister. “Stab me a thousand times, but ‘Modi’,” was how one educated Indian put it dramatically when asked who she wanted as the next prime minister. It is not exactly a ringing endorsement. It does reflect, though, the sense of gloom that is now pervasive.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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