India: A Roaring Tiger or Lumbering Elephant?

Both Saurabh and Nandita studied economics at a postgraduate level. As they were doing so, they came across a body of literature on the Indian economy that either sees India as a broken economy or as a shining exemplar, a country on the ascent. They do not believe that such polarised accounts do justice to the multifaceted nature of change playing out in 21st century India. To be specific, there are three different dimensions of change that they feel are neglected:

Two steps forward, one step back: No free-market democracy moves forward in a linear fashion. Periods of growth are typically followed by periods of hardship. Part of this is due to the economic cycle, wherein periods of expansion typically result in rising inflation, as demand outstrips supply sooner or later. That is then countered by policymakers by hikes in interest rates which then slow down the economy. If these rate hikes continue for an extended period and are accompanied by other shocks, e.g. rising oil prices, then the economy often enters a period of low growth or contraction.

However, the other reason free market democracies go forward two steps and then go back a step is because vested interests step in to arrest the advance of the economy if things are not playing out in their favour. So, for example, Japan’s unprecedented burst of economic growth in the 40 years following the end of World War II was brought to an end by the Plaza Accord of 1985, which signalled the beginning of an extended period of the yen appreciation relative to the US dollar (46% appreciation in real effective terms by the end of 1986 itself). American manufacturers had prevailed upon the Republican government to engineer this intervention which helped arrest the rise of highly efficient Japanese companies like Toyota, Honda, Sony and Panasonic. The sustained appreciation of the yen in the face of American coercion ultimately pushed Japan into a 20-year period of economic stagnation.

Similarly, the ongoing bull run in the Indian stock market is entering its fifth year with the BSE500 having more than tripled from its April 2002 low of 10,527. As much as 33% of annualised returns over more than four years have brought more than 120 million new retail investors into the market. Given that only 80 million people file personal income tax returns, it is all but certain that many newcomers are low-income earners who are likely see much of their life’s savings wiped out in the correction that tends to follow such breathless rallies. However, that correction do NOT negate the unequivocal benefits that accrue to the Indian economy from a rising stock market, e.g., the drop in the cost of equity capital, the shift in household savings from unproductive physical assets to more productive financial assets. Understanding the uneven nature of economic progress is essential for those who aspire to emerge stronger rather than weaker from economic and financial cycles.

Winners & losers: Not only do free market democracies create winners and losers, but the winners tend to be few, and their margin of victory tends to be huge. In contrast, the losers are numerous, and their losses tend to look enormous in comparison to the spoils that accrue to the winners. This is a design feature of capitalism. The force behind this design feature is the Power Law, which posits that in any competitive economic situation (e.g. the stock market or a high stakes sports tournament such as Wimbledon), a very high proportion of the gains will accrue to a small minority of participants (e.g. the Wimbledon champion’s prize money is 50x that of the player who loses in the first round).

The nature of economic progress, therefore, creates inequality, and India is no stranger to such an inequitable distribution of spoils. Understanding these inequalities helps not just investors but also other decision-makers such as CEOs and policymakers make better decisions.

Interplay of social and economic change: next Literature on the Indian economy that discusses issues such as unemployment, income inequality and Budget deficits without reference to the rich interplay between society and the economy is incomplete at best and misleading at worst. Although India is the world’s fifth largest economy, it is only the 136th richest country in the world when ranked on per capita income of around Rs 2.4 lakh or $2,700. When such a country makes a transition from grinding poverty to second world status, it is but natural social and economic change will go hand in hand. As the economic historian Joel Mokyr describes in his outstanding book on the origins of the knowledge economy, The Gifts of Athena (2004), the industrial revolution and the subsequent multi-century growth surge of the West owed much to rise of social networks comprising universities, publishers, scientists, guilds, trade bodies and kindred institutions. Through these networks knowledge was generated and disseminated and that in turn drove technological change and economic growth. The networking of India is driving a similar cycle of ideation, innovation and growth in the most unexpected corners. One of the privileges of living and working in India today is to witness these in full flow on a daily basis.

Nandita Rajhansa & Saurabh Mukherjea. The authors work for Marcellus Investment Managers. Views are personal.