I spent the last week back in India, where I have lived for seven years before. During my visit, I discussed India’s economic situation with both business partners and friends. I often simply ask: “In your view, is India’s economy going in the right direction and fast enough?”. Like always, I get very different answers, which in itself is testimony to the great complexity and diversity of the country. Here are some key points that emerged:
India’s banking sector has fuelled growth for decades. However, it has too often done so in a manner that did not create real economic value. A lot of its loans went into over-leveraged businesses (often in real estate and infrastructure). The result is a huge pile of non-performing assets. The previous governor of the Reserve Bank of India, Raghuram Rajan, has begun cleaning up the banking sector. His successor, Urjit Patel, now continues the task. The short term result is an economy drained of debt. Also, new regulations make it more difficult to lend money the old way – based on personal networks. This has led to a “hangover” in large parts of the industry. An architect friend of mine noted that the mid-level, wheeler-dealer real estate market is practically dead. At the same time, bigger, more professional corporate houses with bankable balance sheets and transparent practices are now ramping up their activities. We see the same thing happening in the renewable energy industry, in which we work. Our research shows a two-tier world: While the large guys find it easy to get loans (“it’s a buyers market”, said one), the mid to smaller players are stranded.
Add to that new regulations demanding more transparency on wealth, international incomes and the flow of money, and it seems that the old way of doing business has taken a hit. I hope that this is truly the case and that soon the structural benefits of the cleanup will show.
At present, there is still a curious void between the growth numbers the government communicates (ca. 7%) and a felt reality of slow consumption and investment.
The End of Inflation?
In one conversation, a minister said that the current government has “defeated inflation for good” (“and I don’t say that lightly”). He seemed convinced. While most observers would say low inflation is temporary and due mainly to luck (low global oil prices, relatively good monsoons), he argued that it was his government’s efforts at making markets in India work again (“we roll out the red carpet, not the red tape”).
One key focus of the current government is to improve the “Ease of Doing Business” as per the World Bank. From that perspective the recently published 2017 results were disappointing: India moved up just one, from rank 131 to 130 (out of 190). China, by comparison, ranks 78th, having moved up two since last year. The fastest improvers are Georgia (now 16th) and Kazakhstan (now 35th). (Here is a good article about India’s “Ease of Doing Business” efforts.)
One of the biggest bottlenecks in really making India a business and investor friendly destination is the country’s weak legal infrastructure and enforceability of contracts. Here, India scores a very low 172nd out of 190 globally. It is encouraging that the government wants to tackle this. A lawyer friend of mine, who has just joined a special task force to reform the jurisdiction, seemed very hopeful.
Lutyens’ Delhi in Disarray
Are the old power structures, the tangled nets of Lutyens Delhi insiders, cut off? There is a sense that this might be true. Those, who feasted excessively on undue business advantages under the previous government, seem to have far less access to the government now. They are in disarray.
If you are pessimistic, you consider this simply the usual lull after the reshuffling of political power. New people are moving in to play the same old games. It just takes some time for them to settle in. If you are optimistic, you see a fundamental improvement of India’s politics, towards more transparent, competitive and value adding business practices. This brings me to my last point.
Pride and Prejudice
The battle is still the same: between those who believe in Modi and those who don’t. Those who believe will tell you stories about how transactions suddenly happened without bribes, of how the government has become truly responsive to the needs of investors, and of how there is a genuine effort to improve the corroded institutions of governance. Often, the line between observation and ideology is thin. If India does not manage to reform and grow at a sustained, fast pace (to create approximately 500 million industrial jobs in the next 10 years), it could have the most dire consequences. Therefore, optimism is almost a patriotic duty. Add to that a heavy dose of pride in mostly-still-to-be-achieved things. In some conversations, I was criticised for asking questions about the government, even accused of harbouring prejudices of the lower kind. (I don’t.)
On the other side of the spectrum are those who are strongly opposed to the current government. Some simply don’t believe that pro-market policies will really help the poor, which is still the largest section of society. This is, at root, an economic argument. However, it is clear that in the past, in India, weak governance structures have ensured that the benefits of growth were not distributed equally. Others have cultural, social, political or environmental objections.
Somewhere in-between, lies the majority of my business partners in India: they don’t care much for the big government slogans (“Digital India”, “Make in India”, “Clean India”, etc.), but rather get on with the everyday task of building a business in a tough, but still very promising environment.
My own opinion is cautiously optimistic. Much of our work is in the power sector (renewables, grids, energy efficiency). Here, there is a clear improvement in the complex basic economics of utilities and grids. Data about the functioning of the market is becoming better and more accessible. Government policies and regulations are on a steep learning curve (for instance with respect to bankable PPAs). There are some states that are really taking the lead. So my answer to my own question is: Yes, India is moving in the right direction. I can’t say, whether it is doing so fast enough. It is simply too complicated a picture. I just hope it does.