India has just a 50% chance of becoming a breakout nation (exceeding expectations of 7% GDP growth) in coming years. So says Morgan Stanley honcho Ruchir Sharma in a fascinating new book, Breakout Nations.
There is no better book for country-by-country accounts of emerging markets (and riskier ones called frontier markets). Its strong point is the author’s reliance on grassroots experience in each country, avoiding statistical charts.
His surprise prediction: the top breakout prospects include two Muslim democracies, Turkey and Indonesia. Tops in Europe are Poland and the Czech Republic. Asia’s potential breakouts include Sri Lanka and the Philippines. Nigeria and East African nations may qualify too.
India’s big advantage, says Sharma, is its low income base and big catch-up possibilities. He correctly sees huge potential in the sharply accelerating backward states of north and central India. These can grow fast for decades with little effort through catch-up with advanced states. They are being transformed by dynamic chief ministers, even as New Delhi dithers and wallows in corruption , premature welfarism and policy paralysis.
The book is a bit too pessimistic about India, which probably has more than a 50% chance of exceeding 7% growth. Sharma dismisses the demographic dividend, arising from a growing workforce, as a mere fad. But research shows that demographic dividends accelerated growth in every Asian tiger from Korea to China. India is no exception.
India’s workforce needs better skills to maximize its demographic advantage. Progress here has been deplorable. Yet learning-by-doing and innovation are unambiguously taking India up the skill ladder. Total factor productivity keeps rising.
India hasn’t actually reaped any demographic dividend so far, the latest surveys show, because female participation in the workforce has fallen sharply. As poor families become middle class, they withdraw women from the workforce, a sign of status. But as incomes keep rising and girls complete college, they re-enter the workforce. That’s a huge coming demographic advantage.
Sharma identifies South Korea as the gold medalist of growth, transforming itself from a cheap-labour economy to one at the cutting edge of R&D. Yet he ignores India’s technological achievements at a very low income level. By refusing to liberalize labour laws, India has failed in labour-intensive industries, yet has succeeded dramatically in brain-intensive areas from software and high-end outsourcing to pharmaceuticals and automobiles. Many multinationals are building R&D centres to harness Indian brainpower . India has a hundred flaws, but punches way beyond its weight in technology.
Sharma worries about premature welfarism and subsidies. Subsidies on oil and fertilizers are outrageously high. But NREGA costs just 0.33% of GDP and is affordable. Sharma complains that India’s consolidated fiscal is up from 6% to 9% in five years. But it has been 8-9 % for most of the last three decades, yet India’s growth has actually accelerated . He worries that the debt/GDP ratio is very high at 70%, but doesn’t notice that the ratio has actually fallen from 85% to 70% in the last decade. This is mainly due to inflation, which erodes old debts.
There’s not enough creative destruction, he says: entry and exit of companies in the sensex is much less than in the Dow in the US. Surely the right comparison would have been with other Asian bourses. India has produced new giants galore for two decades-in software, infrastructure , pharmaceuticals and even windmills- unlike any developing country, save China.
Corruption and crony capitalism are major problems. Yet, India’s ranking has actually improved in Transparency International’s corruption index. Corruption is worst in natural resources , real estate and governments contracts.
Many cronies are incompetent crooks. But others once called cronies-like the Ambanis -later developed into world-class players. GMR, the crony of Delhi Airport, is now a successful global player, building airports in Turkey and Maldives. Cynics say success in managing Indian politicians makes you a world class manager. If so, cronyism is partly a desi Harvard Business School, teaching jugaadthrough learning-by-doing.
The biggest problem in India is multiple hurdles for small businesses despite supposed liberalization . Sharma denounces Russia for being 120th of 183 countries in ease of doing business according to the IFC/World Bank Doing Business report. But India is 132nd. Worse, India comes 166th in ease of starting a business, 181st in getting building permits, and 182nd (second last) in enforcement of contract.
Sharma’s worries about India pale beside his merciless dissection of China, Brazil, Russia and South Africa. He predicts, persuasively and wittily , that these four will disappoint in coming years. His compelling chapters on these countries are the best reason for reading this book. They raise a major question: should India stop paying attention to the BRICS group, a sinking ship?