We don’t need another hero! India on track to be a $8 tn economy in next 10 years

Two hundred years ago the Scottish writer, Thomas Carlyle, popularized the theory that “the history of the world is but the biography of great men”, reflecting his belief that heroes shape history through their personal attributes and their ability to inspire others.

The Scotsman saw history as having turned on the decisions of great men and provided a detailed analysis of the influence of several such men (e.g. Muhammad, Shakespeare, Martin Luther, Rousseau, Napoleon).

So influential was Carlyle’s theory that most of us have grown up to believe that be it sport or the real world, without heroes we are lost.

The desperate need for a hero who will take us to the promised land, therefore, characterizes much of business, sport and political life in India.

But the “great man” theory of history is wrong.

A century ago, a pragmatic American physician-cum-philosopher, William James, was the first to point this out. He said that individuals (great or otherwise) shape their environment and, in turn, are shaped by it.

To say, therefore, that a great man defines his country (or the cause he represents) is to misread the world and misunderstand cause and effect.

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Nowhere is the “great man” theory of history more glaringly wrong than in the context of the Indian economy. Over the past 50 years, India’s GDP growth has improved decisively every 10-15 years (see Exhibit 1).

One would be hard-pressed to say that over this half a century India has had economically enlightened leaders who have with their sagacity steered the country to increasingly high levels of GDP growth.

So, how – in the absence of heroes running the show – has India pulled this off?

India has a competitive political system. Hence, those who aspire to lead India have to provide an incrementally better deal to the voters.

So, for example, in the 1960s and 1970s when the country used to be racked by famine every 3-4 years, the politicians provided an incrementally better deal by planting Mexican dwarf wheat in Northern Indian and calling it the “Green Revolution”.

Agricultural productivity improved (between FY61-81 wheat productivity almost doubled from 851kg/hectare in FY61 to 1,630kg/hectare in FY81) and by the late 1970s, India was self-sufficient in food.

Similarly, in the last 20 years, as the Indian government has become wealthy enough to build infrastructure and as the voters have demanded better roads and electricity, Indian politicians have delivered on both fronts.

Between FY01-16, road total length in India increased 1.7x. Similarly, electricity generation increased by 2.4x during FY01-16.

In spite of the institutional nature of economic reform in India, the tendency is to attribute economic success to certain heroic individuals. So, in the popular discourse, PV Narsimha Rao/Manmohan Singh are held responsible for the 1991 reforms and Atal Bihari Vajpayee is held responsible for the Golden Quadrilateral (the fifth-longest highway project in the world, launched in 2001, completed in 2012).

Whilst there is nothing wrong in overemphasizing the role of Prime Ministers of years gone by, as soon as one starts doing that in a forward-looking context, one makes India’s economic growth prospects seem more fragile than they really are.

In specific, one starts believing that if this or that leader is not elected, an economic abyss awaits us. In reality, very little in India’s history suggests that economic development in India is so dependent on heroic leaders.

In fact, looking back at the post-1991 period, almost every economic policy of note – GST, road building, telecom liberalization, banking reform, the opening up of the power sector –has been implemented by successive governments.

It is hard to identify a single important economic reform which was kicked off by Government X and then blocked by Government X+1. In the competitive context of Indian politics, a politician who blocks extant policies which deliver results does not stay in office for too long.

Investment implications:

Just as India’s GDP growth has stepped up decisively every 10-15 years over the past 50 years, there is every reason to believe that over the next decade growth steps up again.

In specific, there is every reason to believe that over the next decade we can register real GDP growth of 8 percent per annum and, assuming 4  percent CPI inflation (in line with the RBI’s target), 12 percent nominal GDP growth per annum.

Given that we are a USD 2.4 trillion economy today, a decade hence our GDP will be around USD 8 trillion and our per capita income will be around USD 5000 (up from USD 1600 today). India’s superior growth over the next decade will be characterized by:

Policies: (1) Given that the Central Government’s tax-to-GDP ratio is an anaemic 11.5 percent (compared to around 25 percent for South Eastern Asian economies), we expect Indian Governments to continue focusing on tax collection and, by implication, cracking down on the black economy. That, in turn, will continue driving the formalization of the economy; i.e. the transfer of economic activity from millions of small, tax evading businesses to larger, more efficiently run, tax-paying firms.

(2) The extra revenue that the Government collects will have to be spent on continuing to build infrastructure for the masses.

Aspirations:

What cable TV did for the middle classes in the 1990s, cheap smartphones are doing for the masses today; i.e. it is giving them a medium via which they can aspire to a better life.

Those aspirations, in turn, are leading them to demand better services and better infrastructure from the politicians. The Finance Minister’s Union Budget speech (indiabudget.gov.in/ub2018-19/bs/bs.pdf”>https://goo.gl/jzmgC7) on February 1 is a vivid demonstration of just how much pressure the polity feels to deliver on these aspirations.

Disclaimer: Saurabh Mukherjea is the CEO of Ambit Capital. His next book “Coffee Can Investing: The Low-Risk Road to Stupendous Returns” will be published in February. The views expressed are personal and not that of Moneycontrol.com.moneycontrol


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