MARKET PERSPECTIVE

By J Mulraj

Sep 2- 8, 2023

Unless tackled, India won’t become a developed economy

According to Bernstein, a reputed sell side research and brokerage firm, India is 16.5 years behind China. India is 21 years behind China in patents (in 2021 India got some 31,000 patents, a twentieth of what China got), 19 years in forex reserves and 17 years in exports. Along with other criteria, it is 16.5 years behind.

The Chinese Government focuses on the technologies it wishes to develop, and its companies file patents for them.  After being accused, initially, of stealing intellectual property, it began developing them, and, in 2021 it received 37% of global patents, the largest granted to any country. It leads the world in 29 out of 36 fields! An impressive achievement, the result of focus and perseverance. India, sadly, does not display that.

As pointed out in the previous column, ‘How do you solve a problem like Chi-ee-na’, India, which had a similar per capita income to China till the 80’s, fell behind once China, under Deng Xiao Ping, opened up the economy. That was a decade before India did, under Manmohan Singh, after the intemperate remark of outgoing P. M., V P Singh, declaring that the coffers were empty.

It was this decadal delay in opening up India’s economy, and freeing up its industry from the suffocating licensing policies, that is the cause of a 16.5 year lag behind China. There were other laws which stunted the growth of our industries.

Licenses to set up a manufacturing plant imposed a condition to borrow from one of three lending institutions, viz IDBI, ICICI or IFCI, who, combined with 3 investing institutions, LIC, UTI and GIC, provided long term loans for projects. The six lending institutions forced, in their loan agreements, a one sided option to convert 20% of the rupee loan into equity, if they chose to. Through this they acquired sizeable chunk of corporate ownership.

Companies were also stunted by an inability to price their shares, in a public offering, by virtue of control on pricing exercised by a Government authority called Controller of Capital Issues (CCI). CCI used an antiquated formula to arrive at an offer price that compelled the issuer to give them at a deeply discounted price. This skewed the capital structure in favor of debt, and denied entrepreneurs the incentive to grow their business honestly, and benefit from an IPO reflecting the true price. That stunted industrial growth.

Industrial growth was further stunted by acts like MRTP (Monopolies and Restrictive Trade Practices Act) which considered large companies as giants to be tamed when they were, in reality, global pygmies. In 1967 PM Indira Gandhi passed the Cement Control Order, giving Government the power to control price and allotment of cement. This, inevitably, led to corruption, and stunting of growth of the industry. A year later, the Gold Control Act was passed, which did not diffuse demand for it, but encouraged the smuggling of it. The network of smugglers, owing no allegiance to the nation, then became the network of terrorism, smuggling arms instead of gold.

Such insanely restrictive policies stunted the growth of industry, which sought, and got, protection from foreign competition, through high import tariffs. The Indian consumer suffered, paying high prices for shoddy products.

It took an inane, but true, confession of coffers being empty to drive into the heads of our myopic polity that their stupid policies of stunting, instead of encouraging, industrial growth, weren’t working. The 1991 economic reforms led to the windows being opened to the fresh air of competition. But, in that decade, India lagged far behind China. But even after that, things haven’t really improved, as India now lags, according to Bernstein, 16.5 years behind.

The two main reasons for the drag are continuing corruption and an abysmally slow, hence inefficacious judicial system. Both are indicative of ineffective governance. Until these are tackled with urgency and dedication, India cannot hope to narrow the 16.5 year gap, or become a developed nation. For, the cancer of corruption will eat away the growing wealth created by the law abiding taxpayers.

The India story has a lot going for it, otherwise. An article in Harvard Business Review, HBR, asks ‘Is India the World’s Next Great Economic Power?’ and explains why it can be. Goldman Sachs predicts India can be #2 economy by 2075 (after China). It’s young, 1.4 b population has myriad unmet needs, so domestic consumption, and the investment needed to fulfill it, will drive growth. Foreign companies like Netflix (regional language content) and McDonalds (vegetarian options) are localizing their offerings to meet Indian demands.

The huge energy needs of this growing economy will involve a green transition.  India is already world #4 in installed renewable capacity. This will create 50 m new green economy jobs, according to WEF.

The Government is investing heavily in infrastructure, building 10,000 kms a year (this years target 16000) as also dedicated freight corridors in which freight trains don’t need to wait till passenger trains pass them.

India is #2, after China, in digital infrastructure, with 880 m users, and leads the world in terms of digital transactions. This is thanks to the India stack.

Global awareness to reduce dependency on a single source, China, for its supply chain, after the zero-tolerance for Covid induced lockdowns disrupted them fully, has led to increased FDI in manufacturing. Apple, the most high profile company, will make 20 m IPhones in India, providing 50,000 jobs.

India’s successful Chandrayan mission to land on the dark side of the moon, the first country to do so, has further demonstrated India’s abilities in space exploration, that, too, at a fraction of the cost of global competitors.

The fruits of all these achievements will rot unless the two weaknesses, unending corruption, and judicial delays, are tackled with seriousness.

Corruption is facilitated by the ease of converting black money into white, passing it through the laundry of agricultural income. Being free of tax, corrupt politicians, industry leaders, professionals, declare their undeclared income as farm income. This income grows at a prodigious rate generating, on paper, phenomenal crop yields. It should be simple to query the successes of such people by asking how their agri income doubled, on the same land area, year after year.

Several videos are posted on social media revealing heaps of currency notes displayed in an income tax raid, but no news of the action taken thereafter.

Mr Modi, please follow the steps of Lee Kwan Yew, whose early clampdown on corruption has made Singapore one of the richest countries. At $ 82,000 per cap, Singapore is 34 times that of India. Why can you not clamp down on corruption?

Corruption makes a mockery of our claim to be a representative democracy. If political parties break away, mid term, (after being herded to resort hotels lest they be bribed not to split) is it representative of the electoral mandate? The split faction are doing so because of lucre and political power, not for principles.

Can the independent Election Commission not pass a mandate to penalize such behavior?  By, say, imposing a cut of 20% of the votes they garner in the next election, as a penalty for abusing the people’s mandate? Isn’t democracy for, of and by the people?

Enough has been written about the 50 m. pending cases, a disheartening symptom of judicial delays, even as victims continue to suffer. For example, victims of the NSEL Ponzi scam, have not got recovery after ten years. In the first year, the Government declared that it had seized assets of defaulters, enough to cover 100% of the loss. If true, why, after ten years, have the assets not been liquidated and the money distributed to the victims? Is this, and other similar Ponzi schemes, not a reflection of poor governance?

So, for India to become a developed economy, which it can, Mr Narendra Modi’s Government must take stern and urgent steps to root out corruption and, together with the judiciary, cut judicial delays.

Last week the Sensex closed at 66553, up 1166 points.

Both Saudi Arabia and Russia have continued with production cuts, causing oil prices to rise to $ 90/b. In such a scenario and with impending US Presidential elections in 2024, one would have expected the Biden Government to spur efforts to expand its own output. Earlier this year, it did, giving permission to ConocoPhillips for the Willow project in Alaska. However, coinciding with the Saudi/Russo production cuts, Joe Biden cancelled 7 existing leases in Alaska, as an environmental protection measure. So the price of crude oil will rise further, maybe to $ 100/b. and, pre election, Biden may need to go to MBS begging him to increase production.

Whilst the India GDP for the June quarter grew at a healthy 7.8% rate, the rest of the world is stressed. USA is likely to see more bank failures due to the collapse of commercial real estate. It’s Government may shut down in October if the Congress does not clear a spending bill. China has multi-fold problems due to the collapse of its realty sector, fall in exports and high youth unemployment. Germany is in recession, UK is entering one; it’s second largest county, Birmingham, is in ICU.

So, though the Indian bull runs high on a liquidity driven spurt, it would be a global event that could bring it out of its stupor.

Picture Source: https://www.freepik.com/premium-ai-image/scales-with-light-bulb-one-side-money-other-orange-background-generative-ai_43077968.htm

Comments may be sent to jmulraj@asiaconverge.com