India: Is The Growth Story Intact? A Seminar
Today I attended a seminar at Chartered Institute for Securities and Investment on India. The panel, which included Lord Meghnad Desai, the famous Economist from LSE, alongside Ian Gomes, Chairman of High Growth Markets division of KPMG, Ian McEvatt, Chairman of the Himalayan Fund and Eoin Treacy, Global Strategist from Fullermoney.com, was discussing whether the Indian growth story, faced with high inflation, slowing growth and political scandals, is more or less over. This was a room full of bond traders and existing and potential investors, and the subject was whether investment in India is good value for money.
The members of the panel were in agreement on certain issues. First, they all agreed that the Indian government's forecast of 8.4% GDP growth rate for next year is too optimistic, and it is likely to be in the range of 7 to 7.5%. Second, they were in agreement that India remains a good investment for the long term investor because of its strong domestic demand, and advised that stock market investments in India should be made on companies that focus on servicing consumer demand, like Hindustan Lever, Nestle and the like. Third, they were all in agreement that the recent monetary tightening in India, the Central Bank has increased in interest rates by 350 basis points over last 12 months, would hurt the growth, and argued that the inflation problem in India is more supply side or structural, rather than a demand side problem. They pointed out the supply side bottlenecks and other issues, the agricultural prices driven up by minimum support price increases for example, infrastructure, dependence on global oil prices and gradual withdrawal of the subsidy on fuel, as the main drivers of inflation. Finally, they agreed that corruption scandals, despite being immense distractions, do not undermine the value of Indian assets. Eoin Tracey suggested that it is better to look at governance issues not in the categories of 'good' or 'bad' governance, but in terms of 'progressing' and 'regressing' governance. Ian McEvatt also brought up the corruption issues in the United States and said that the corruption is a relative term, and while the Indian government must do more to curb corruption at all levels, the overall governance standards in India are improving. Ian Gomes cited Gujarat as an example of governance and how using IT effectively in governance has transformed the state.
The other key theme that was evident in the discussion was the focus on Indian consumer. Much of the confidence in India comes from its ability to create a large consumer market in the coming decade. The central idea perhaps is that once the 800 million people in India, who live under $2 a day, are lifted out of poverty, there will be huge knock-on effects on the consumer demand. Ian McEvatt was talking about the enormous collective impact on demand of consumer goods when the average income of 800 million rise from $2 to $2.25. Interestingly, Lord Desai was talking about the current government's focus on villages and was suggesting that many of the failures of the UPA government to deliver on the reforms are linked to their populist policies like National Employment Guarantee scheme, raising of minimum support price for crops and various other rural investment schemes, which redirected the resources from the urban classes to the rural poor. This would surely directly contribute to the kind of demand uplift everyone seem to be hoping for. I am personally not aware of the impact of these policies, but in broad terms, the rural to urban migration, one sure sign of which is the availability and pay of domestic workers in Indian cities, seemed to have thawed. Though many will want to see the India's growth story as a re-run of British Industrial revolution, backed by a huge movement of subsistence labour to large industrial townships, it is possible to paint an alternative development route for India through the development of rural societies.
This is possibly my key take-away from this discussion. I am not sure whether this is happening, I am too distant to know this, but if the rural investment programme is successful, this will transform India as much as National Health Service transformed Britain. Everyone agrees that there are tremendous inefficiencies in Indian agriculture, and employment can be boosted in agriculture with better irrigation and technology and land reforms before it starts coming down eventually. I can suddenly see the values of a sustained rural investment strategy: It delivers growth with greater social harmony, it relieves the Indian cities of the tremendous population pressure they are under, it shifts the dependence to domestic demand than export industries and it generates prosperity regardless of volatile global investor sentiments. It does not generate newspaper headlines, but in transforming a country like India, it is possibly a very smart strategy.
Indeed, there are challenges for such a strategy to work and deliver sustained prosperity. One can clearly see the governance challenge here: It is one thing to create urban markets and let private companies deliver growth, but it is quite another to boost rural demand and employment and sustain growth through upgrading linkages and economic infrastructure. It will possibly come down to two critical factors - education and governance - if this strategy has to work. The panel members agreed that the real investment in education remains very small in India and this creates significant supply bottlenecks. The huge regional variation in governance was also noted and commented upon. However, the benefits of rural transformation are quite evident too: One can suddenly see the hidden genius of Nitish Kumar's strategy in the 'miracle' state of Bihar.
It surely seems a slow shift is underway in India: Very subtle and shall we say Indian in nature, it seems an unique model of Indian economic revolution may eventually emerge.