Turning 70, an Economic hope?

India, is one of the oldest and one of the greatest civilizations on the planet. It’s had a history dating back at least 3500 years, and has been a very unique jewel amongst the different countries and culture. The Indian civilization dates back to the Aryans from Persia and Africa, coming over to occupy the land, making way to the local Kings and rulers, to the Mughals and Islamic influences, to the European settlers and the British colonies and finally its Independence as a nation 70 years ago. Now, after all these years after Independence, a struggle from its complicated past, a new world order seems to emerge amongst the developing countries, so is there an Economic Hope in sight for this country?

India is blessed to have one of the most fertile plains and lands on the planet. The unique geographical location, stretching from the Himalayas to the North to the 3 oceans makes it’s a subcontinent, having its own sort-of ecosystem with several unique hills, plateaus, rivers, forests, and other features. The great Indian Monsoon, an activity which stretches from mid-June to mid-December every year, brings bountiful rains, making 2 places on this country the wettest on the planet, the majestic rivers in the North, has fresh snow melting water from the Himalayan Glaciers, making the alluvial soil so rich and fertile to grow different kinds of crops and provide the life-line to people living along its banks.

The Deccan plateau has many industrial grade minerals for the manufacturing sector, there are some oil and gas basins for consumption, a robust education and banking system covering the entire nation. The many rivers and 3 oceans on the sides contribute to the maritime safety, and one can experience weather patterns ranging from extreme rain to bearable cold and heat even though the country is not in the frigid zones. So, this should ideally make the country one of the best amongst nations? Right? Unfortunately, its performed so poorly across so many measurable indices from Human development, literacy, poverty, ease of business, corruption, social inequality, purchasing parity, diseases control, and above all human value system. Each one of these topics are valid cases for a blog in itself, but after 70 years of struggle, I see in a distance, an economic hope? At least I would like to dream and write about it, being an optimist.

The Past

Living in India, and having lived and visited several other countries, the first sights of India gives a contrast of wealth, brilliance and despair. It’s in the eyes of the beholder what is more likely to be the truth. After the last British viceroys left in 1947, and the painful partitions of the land, India still had some where close to 500 million people. It is said 150 years ago, around mid-1850s India’s GDP was one of the highest and its trade was flourishing, I would not like dispute it, but my views are it was highly unlikely. The British did do so many good things apart from some mess, like the unification of all the land boundaries and cultures, end monarchy, work through languages and political differences, but I don’t think there could have been the perfect model here at all to define a new country, which has a complex blend and melting pot of traditions and diversity. The many pitfalls have led to so many differences to hamper growth and outcomes, but there was no explanation as to why poor human development index or corruption would be there in spite of all these challenges? The so-called leaders, had no grand plans, and maybe it was not possible 70 years ago to set forth a grand plan for 500 million people? So, were we left to our own devices to flourish, to set local rules for advances, backed just by a concept of a central constitution and democracy? May be. The 2 other countries which had such large population was China and the USA, and they both have had different styles and values to get them to where they are today. When I read about China, still under dictatorship style rule, it was easier to govern the people and to give economic hope to all its citizens, is only a guess. However, China, started out its reforms in the mid-80s (10 years ahead of India) and now, they are an expansionist, having more than $2trillion of reserve forex, an economy closer to $8-9 trillion and improving the quality of lives of several millions of people. USA has been a super country, set forth in its constitution, superior leadership, a president who must give directions and hope, and having the rules of the engagement as a capitalist model, boasts of a $15 trillion economy, the $ being a base currency for global trade and a proud nation with most of its people flourishing. Comparatively, India, is blessed with better climate, a more balanced constitution, a manageable land mass, large young population, but still struggling in a distance in the economic indexes? Why?

The Distant Present

The Present model dates back to almost 25 years ago today, the economic liberalizations were set forth in Mar 1991 when the country was close to bankrupt, a large debt ratio, high corruptions, lack of leadership, poor manufacturing and demand, and a near zero forex reserves to fend or fund for itself. The leaders of the several political parties governed with a socialistic style of economics for more than 40 years, gave rise to uncontrolled population growth with poor literacy, with inward looking and no trade surpluses, heavy import of key commodities, large subsidies, no uniform tax codes, drove the country to near closure for everything, except the only truth to produce its own food supply. The bountiful rains, and fertile lands, could not come to the rescue of the economy, the population had just touched 1 billion, and more than 35% under extreme poverty and another 25% in very low-income class.

The 25 years to 2014, was governed with slightly better foresights, on key issues, although the large subsidies and debt ratios were still very high and unsustainable. 15 years after this liberalized rule were set, in 2005, there was a glimmer of hope with the country’s growth topping 7% for 3 years in a row, gave the much-needed impetus for the local stock exchanges, and a boost for foreign equities and direct investments to look up and bring the much needed $ for trade and payment for exchange of commodities such as Oil and Gold. The property markets looked up, the agricultural economy boomed, given large subsidies, contributed to more than 4.5% of this growth, and there was cheer and hope, but for the so many millions still under poverty. The local currency however had depreciated an alarming 150% by then, making cost of goods and imports dearer. So even though the economy had bounced back, the affordability still was poor, and with a growing population and high inflation, the purchasing power was still dismal. The boom in the real estate markets from 2004, brought more corruption, unaccounted money, poor tax codes and compliance, to only make way for more indirect taxes and services for tax mopping’s, to pay of subsides and fund the government, leading to even more corruption and poorer ethics for doing transparent business, combined with high inflation and lending rates.

These 25 years helped so many countries, which had come out of these traps, to excel more and more, and become multi trillion economies of scale and having large trade deals and booming markets, and primarily improving the human quality of life and indexes. The gap had grown even more, but there was still some hope, with the economy showing signs for growth. The country should have held on to this growth rate of near 8% for a decade, like China, which had a decade of 8-9% growth, to get closer to solving most of its issues, but Alas, the global Banking crisis of 2008/2009 brought down this short-lived dream. The stock markets corrected, real estate deals were difficult, the foreign funds were liquidated and fled, and a liquidity crisis loomed at large. The currency took another plunge, and the government at that time, had no clue, but still held strong to continue to carve out a path for prosperity, by only managing inflation with balanced interest rates, maintain subsidies, tax the rich, new and many indirect taxations to fund the government, hoping for robust manufacturing to pick up and move ahead reducing account deficits and the large import bills.

5 years after, by 2013, the fundamentals had returned to the markets, the foreign funds and local domestic economy thrived and limped back to 6% growth, but key factors such as current account deficit, balance of payment, very very large subsidy bills, and poor tax collections still prevailed. The liquidity of funds and poor returns on manufacturing and real estate lead to zero planning on key items such as electricity generation, water management, environment protection, and poverty upliftment, the country appeared stuck at 5-6% growth growing sideways, with agriculture still providing the cushion of 3.5-4% of this growth, with a lot of governmental help. The 1.1 Billion population was still young and vibrant, the currency reserves had held on to a modest $250 billion from near zero, the GDP touched a near $1tillion, a huge potential, but still now where to go.

 The Immediate Present

The year 2014 saw a leadership change, a more dynamic person elected as the Prime Minister, heading a near majority party, grabbed the votes to govern the country with new flamboyance and nothing to lose strategy to may be give it a best shot to lift the fundamentals of the country and bring back the much-needed euphoria never seen before for a long long time. The developed world, was also looking at India, to provide the much-needed balance of power, at least amongst the developing world and S.E Asia, as it had now a proven record for 3 years after the economic crisis, to have come out relatively unscathed as compared to several other big and vibrant economies taking a very heavy beating. The inflation in the developed world had touched to new lows, the interest rates maintained to near 0% saw no growth in these evolved markets. China, by now, with its dictatorship style rule, had built much of the reserves, brought about the world class manufacturing engine for growth and jobs, a not so robust but government funded booming stock market, lifting several of its million citizens out of poverty, world class infrastructure and cities, robust electricity generation and water management, and a plan to be the world’s leading economic powerhouse for the next several decades. So, the impetus for India, to get better was also in some ways thrusted, as there may not be many more chances for this country to come up in the global world order, its time was ticking.

The leadership change of 2014 had several challenges to overcome, a complex indirect tax structure, a less than 10% of the population every paying income tax, a very high 11% inflation, a high 10% interest tax regime, current account deficits near 3% of GDP, a 1.2 billion population, high subsidies, large oil and gold import bills, high corruption, large government spends, 250 million in poverty, and poor accountability. But what it had as advantages were a 1.2 billion young population, a corporate governance structure, a good forex reserves of $250 billion, $1.2 trillion economy, sustainable markets, good crop yields and a hunger for the country to succeed. If one was to see these facts in B&W it would seem like a formidable task, and it would be easier to just give up all hope for any economic prosperity.

So, when the new government came, they went about some fairly large, ambitious but predicable ways to achieve this sustainability. Some of these have worked poorly, some OK, and lot of things are yet to see the fruits blooming in the future. It’s still too early, but there is action on the ground.

When I talk to many people, they have all given up some of this hope. I would like to give a best view that it is quite possible to achieve some of these goals, and have a path set out for the near Future?

 The Near Future

The current government went about first correcting 5 things all in some ways linked, with great vigour. The first one was the perception of the country to the external world, with open arms, welcoming foreign investments with a promise to have better business climates and eliminate corruption. This has worked to some extent past 3 years, with several leading countries believing in the India story, and seeing their investment have good returns. The second one was current account liquidity, stable markets, manage inflation to 6%. This too has yielded great results with the local stock exchanges booming and performing as one of the best markets for both equity and debt in the world. The average returns have been a superb 18% over the past 2 years, with foreign funds flowing to several billion dollars, the first time since 2005. Liquidity is flourishing now, people are spending, and a consumer boom story is underway.

The third was to control fiscal deficit, reduce subsides and maintain a good foreign currency exchange rate. The Current account deficit, now is only 0.5% of the GDP, main subsidies have gone away like dependencies on Oil, and over time with crop yields doing well, the farms and Kerosene subsidies should get corrected too. The local currency has now strengthened and is now one of the best performing currencies in the developing world, compared the inflation of the dollar. This has also helped to keep Oil and Gold import bill predictable and manageable.

The fourth was to simplify and do away with the complex indirect tax structure, and improve the conversion of the personal income taxes. The GST bill introduced recently, got away with so many complex taxes, making businesses easier to do. The GST has reduced prices on several commodities, and by having a 4-tier structure as to 1 in developed countries, pave the way to uplift the poor and still marginally tax the rich. The demonetization of 2016, is said to have cleansed the system of lots of corrupt free money, and it has also yielded another 2-3% of the population as tax payers contributing to the country’s treasury. With the country now getting more money to help subsidize the poor, it also has a chance to spend on infrastructure, give out government bonds to see the benefits roll out in the long run. The journey to advance on the worldwide index to fair and free policies for doing business to corruption free practices still have long ways to go, but I would think the direction is at least in the right way.

The fifth was to drive the concept of Make in India, like Made in China, this would yield better manufacturing output, bring down prices of goods, depend less on imports, create more jobs, and drive real estate prices higher. This in turn would make the government spend on infrastructure facilities to improve connectivity of land, and ports, add new electricity generation facilities to the grid, introduce clean green initiatives and in turn help people earn higher salaries, spend more and drive the economic engine forward.
The last three years, with these changes, has propelled the economy to $2.3 trillion, a stock market which has touched peaks like never before and one of the best performing indices in the world, the local currency being very stable to appreciating, new spends on infrastructure, bold moves to clean up the rivers, cities and target the corrupt, improve the overall image of the country in the external environment, and possibly generated new jobs for the local youth. I am hopeful that these measures will continue and the country will do even better in the years to come.

 The Distant Future

I see a distant future, the year is 2025 AD, 8 years from now, the country doubling its GDP to a $ 5.5 trillion economic powerhouse, being the third largest in the world, a substantial increase in purchasing power parity for its citizens, about 250 million people financially on par with the rest of the developed world, a massive 150 million people lifted out of poverty, a robust education system to think on logic and principles, an improved tax base of 15-20% yielding in more money because of jobs, complete electrification for all the cities and villages, an improved water management system for the rivers and cities, local states improving their internal rankings for ease of doing business, better policing and lesser lawlessness with income inequality improving, beautiful paved roads, cleaner cites, no slum dwellings, a near current account convertibility of the local currency, forex reserves of more than $750 billion, transparent governance, access to capital for business, reduced or no subsidies, manufacturing doubling for several commodities made locally and exported to other countries, accountability and overall increase in the human value index.

I know, this is an alternate reality, not many will think it is possible, but with a stable government for the next 10 years, a predictable world order with stable geo-political climate, Oil stabilizing, and every citizen’s dream to make this the place they want it to be, I do think most of it is possible. Human values and compliance is an integral part of this journey, and no matter what the government does or does not do, it is up to each and every one of us to see this value system improve and make this a better place for us and our children in the distant future. The India of the future beckons hope and prosperity for not only its citizens, but for the world at large, like going back centuries ago, when the country was the forerunner to the entire world, for knowledge, wealth and wisdom.

Is there an Economic Hope in sight? Is it time to realise this Dream yet?