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Satyajit Das: The Great Pretender – India’s Economic Past & Future, Part 1: “India Shining”

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By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk (2011). Jointly posted with Roubini Global Economics

In the aftermath of the global financial crisis, optimists hoped that the BRIC (Brazil Russia India China) would drive the global economic engine. But China’s economic growth has slowed to its lowest rate in three years. Brazil’s economic growth has fallen from around 7.5% to under 3%. Russia’s economy is heavily dependent on oil and energy prices. India also has stalled. This 3-part paper looks at the development and future trajectory of the “I” in the “BRIC”. The first part looks at the background to India’s recent rise.

Despite the world and its citizens earnest desires, India seems destined to never fulfil its economic potential.

Hindu Growth…

In the 30 years following independence, India achieved a modest rate of economic growth of 3-4% per annum and incomes improved by 1-2% each year. This was the “Hindu rate of growth”; a derogatory term coined by economist Raj Krishna to draw attention to India’s poor performance compared to other Asian economies.

India’s poor economic performance was not driven by religious factors but the half-baked socialist policies of its leaders. India’s first Prime Minister Jawaharlal Nehru admired the Soviet Union, becoming one of the few followers of its ultimately unsuccessful economic policies.

The economy was administered by a central Planning Commission, through a series of 5 year plans, modelled on a similar process used in the Soviet system. Major businesses were State owned and operated. Private firms required official licenses, their operations being strictly controlled by the regulatory regime, rather than free-market demand.

The Indian economy was closed to the world. The principal policy was import substitution and a reliance on internal markets for development. India’s currency, the rupee, was inconvertible. A system of high tariffs and import licensing restricted foreign imports.

This was the era of the “License Raj”, a reference to the elaborate licenses, regulations and stultifying red tape required to operate businesses in India. Consents from up to 80 government agencies were required before private companies could produce goods and services. Under the terms of a license, the government regulated all aspects of operations, including production levels, prices, investment policy and financing. The government restricted businesses from laying off workers or closing factories.

At the time of its independence, India was a stable relatively open economy with high rates of economic growth and significant international trade and investment. By the 1980s, three decades of poor economic management meant India had low growth rates, was closed to trade and investment and prone to instability.

Desperate Revolution…

In the 1980s, India made tepid efforts at reform. By the early 1990s, the country was in dire straits. A combination of international factors (high oil prices) and domestic failures (public finance problems and political turmoil) left the nation effectively bankrupt. Remaining foreign exchange reserves were only sufficient to cover payments for less than 2 weeks. The Reserve Bank of India (“RBI”), the country’s central bank, was forced to airlift 47 tonnes of gold to the Bank of England as humiliating collateral for a loan, while it waited for assistance from the International Monetary Fund.

On 24 July 1991, Manmohan Singh, the current Prime Minister and then Minister of Finance, told the Indian parliament that “the room for manoeuvre, to live on borrowed money or time, does not exist any more. ” Mr. Singh succeeded in passing a reformist budget, devalued the rupee and opened the door to foreign investment in certain industries. He also reduced the tariffs and eased the system of licenses.

Mr. Singh ended his speech to parliament quoting French author Victor Hugo: “No power on earth can stop an idea whose time has come.” Within the next decade, the idea of India as a “major economic power in the world” seemed within reach.

Innians’ Success…

The actions of 1991 paved the way for a period of expansion and relative prosperity for India. Over the last two decades, India’s economy has almost quadrupled in size, growing at an average rate of about 7% per annum and over 9% from 2005 to 2007 – Chinese rates of growth.

The key drivers of growth included a large population which created a substantial domestic market, high savings rates which financed investment and an educated, English speaking workforce which was under employed. De-regulation allowed a latent commercialism, suppressed during the license raj days, to prosper.

While the reforms of 1991 and the nation’s natural resources were crucial, India was lucky. The opening up of India coincided with the rise of business process outsourcing (“BPO”). Developed nations commenced outsourcing basic support services and information technology (“IT”) to cheaper foreign providers. The need to re-code computer software to avoid the Y2K or Millennium Bug and support the Internet boom provided a significant boost to the India IT industry.

The external environment was favourable, characterised by strong global growth underpinned by the “peace dividend” from the end of the Cold War. The rise of emerging markets, especially the BRIC (Brazil, Russia, India, and China) nations, helped sustain a flow of investment into India. A weak Indian Rupee assisted growth, allowing Indian exporters to compete and encouraged foreign capital.

India also avoided the worst of the 1997/ 1998 Asian monetary crisis and the 2007/ 2008 global financial crisis. The high level of regulation of the financial system, including extensive capital controls, and domestic focus of the banking system protected the Indian economy.

The last factor which assisted growth was the large Indian Diaspora. The lost decades had resulted in a flight of human capital to developed economies. Beginning in the 1990s, there was a steady flow back of these skills, augmented by overseas education and experience, into the Indian economy.

Non-resident Indians (“NRIs”) were important in supplying capital. Indians working overseas, both in technical or more modest positions especially in the Middle East remitted more than $20 billion a year to India, the most of any country in the world. Successful expatriate Indian businessmen and professionals provided business connections which helped Indian business.

India and Indian had arrived on the global economic stage. Activist Arundhuti Roy satirised President George Bush’s favourable view of “Innians”: “…I like rish Innians…they are obedient and brainy…they provide additional brainpower to help solve problems… Innia is important as a market for US products…one billion people to exploit…” Domestic Innians now shared the success of their immigrant countrymen.

India Shining…

India’s GDP rose by 43% between 2007 and 2012, slightly less that China which increased by 56% but much fast than developed economies which grew only 2%.

Economists rushed to out do each other in spruiking the India story. Forecasts of growth rates of 8.5% per annum or even higher became commonplace. Morgan Stanley, the US investment bank, predicted that India’s growth would reach 9-10%, outpacing China’s pedestrian 8% within three to five years. In a report titled India: Better Off Than Most Others, Macquarie Capital, argued that India’s traditional weaknesses -low exports, a predominantly state-owned financial system lightly integrated to foreign markets, sluggish export growth because of bureaucracy and the large domestic agricultural sector producing only for domestic consumption- were now strengths underpinning growth.

Indian leaders moved between international forums, basking in their new found status and power. Indian businessman made trophy purchases of business overseas, financed by debt. At the World Economic Forum at Davos, representatives of the Indian government and business announced that India could grow in its sleep.

India’s economic hubris was exemplified by a marketing slogan, first popularised by the then-ruling Bharatiya Janata Party (“BJP”) for the 2004 Indian general elections – “India Shining”.

While India’s economic progress was evident, the benefits were narrowly based. A large portion of the population continued to struggle with low living standards or poverty, lacking access to basic amenities such as sufficient nutrition, clean water, sanitation as well as basic education and health services. The basis of the growth was also not balanced.

After years without a good news story, the Indian media focused on the nation’s “greatnesses”, relying on extraneous facts. The fact that the market capitalization of State Bank of India surpassed that of Citigroup was cheered. The press celebrated the first Indian edition of Harper’s Bazaar, which featured a crystal-studded cover, the introduction by Rolls-Royce of its new Phantom Coupe in India and the opening of a new BMW showroom in Delhi.

Billionaires Shining…

India now had nearly 7% of the world’s 1,000 or so billionaires, despite its GDP being only 2% of world GDP. The total wealth of Indian billionaires is more than 20% of the nation’s GDP, about the same as Russia but higher than China where it was less than 3%.

Mukesh Ambani, head of Indian based petrochemical giant Reliance Industries, and the fifth richest man in the world with a net worth of around $50 billion, used his wealth to build Antilia, a $2 billion house within sight of some of Mumbai’s slums. The lavish property was dubbed India 21st century Taj Mahal.

Controversial from the outset, Mukesh Ambani and his family reportedly have not moved into their new completed home, preferring to move between Antilia and their previous residence, Sea Wind. The press speculated that the building did not comply with principle of Vaastu, an Indian tradition similar to Feng Shui, the ancient Chinese system of aesthetics. Antilia’s shape was supposed to move energy beneficially through the building to improve the wealth and well being of residents. But it may violate of a key principle of Vastu. The building’s Eastern side does not receive ample morning light. It is more open to the West, which exposes it to negative energy.

Hindus believe that living in a building not built according to Vastu principles brings bad luck. In recent times, Mukesh Ambani’s empire has been adversely affected by a bitter fight with his brother Anil as well as legal and regulatory problems with some of his businesses.

Like Ambani, India’s bad luck may be just beginning, as growth slows rapidly and her problems mount.

Prime Minister Singh recently conceded that “it would be wrong to conclude that India is now unshakeably set on a process of rapid growth.” It was a contrast to Home Minister P. Chidambaram earlier optimism: “Thanks to our domestic consumption and demand, India and a handful of other countries, despite world gloom, are a shining example of a resilient economy”.

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22 comments

  1. G3

    http://www.isreview.org/issues/77/featint-arundhatiroy.shtml
    ***********************
    I actually spoke to some correspondents of major Western publications, and they told me they have strict instructions: no bad stories about India, because India is the finance destination for the rest of the world. So you have people looking to India to revitalize their economies, and you have an Indian government which has just become so servile that it doesn’t any longer know what’s good for it.
    ***********************

    And 100 million people in India went on a strike on Feb 28 :
    http://www.alternet.org/world/154376/millions_of_indian_workers_join_nationwide_general_strike_?page=entire

  2. PaulArt

    I gobbled this up. Many thanks to Das for this series. I regret however his general denigration of Nehru calling his policies ‘half-baked’. While the policies of Nehru and his daughter Indira Gandhi may not have provided massive growth to India there was plenty of upside to the heavy hand of the state in terms of no layoffs, production control etc. This provided enormous stability to Government employees. We cannot just brush this advantage aside so easily. Nehru and Indira Gandhi also understood the importance of education. They pumped massive investments into Universities and subsidized private colleges regardless of religion. India has thousands of Catholic and Christian institutions which have done yeoman work over the years and this would not have been possible without the University Grants Commission built by the Socialistic Government of Nehru and Gandhi. The children of public employees benefited enormously from the stability of their parents jobs. Government employees could afford to buy land and build homes with cheap interest rates and Government controlled allotment of plots in suburbs. Its sad no one talks about all this but its there and its real. My own Dad and Mum now own a house which with their education and jobs would have never been possible. We need to look at India as a laboratory and learn about the Socialism that worked wonders there, not dismiss it lightly as ‘half baked’ policies.

  3. F. Beard

    Combining Satyajit Das’s fine article and PaulArt’s fine comment why not this to have the best of both worlds – a government money supply spent into existence for infrastructure and social needs and any number of private money supplies to insure strong economic growth in the private sector? Oh, but first a universal bailout till all credit debt is paid off.

    1. F. Beard

      And of course, banking has to go, or at least all government support for it. Otherwise, the so-called “credit worthy” are allowed to steal from everyone else.

      Private money supplies that “share” wealth and power are the way to go.

  4. Aquifer

    For some really good analysis of Indian (as well as American) politics and “development”, i strongly suggest reading Arundhati Roy – not only a trenchant critic but an excellent writer/speaker …

  5. Harihar

    Eagerly awaiting for the next two chapters. Thank you very much.

    The author is absolutely right that Nehruvian polcies were half-baked socialist ideals. Nehru never had any idea of his own. Whatever he did was just a copy of the Soviet models. With a country as vast and diverse as India, Nehruvian wrong translations of Russian socialist policies (which went on till 1990s) could provide stability to only government employees. But the great mass of lay people had to suffer without access to proper educational facilities, exponential rise in corruption and wrong macroeconomic policies.

    I am surprised by some of the comments above. They state huge investments were made on universities following independence and educational institutions were supported by subsidies, and this led to availability of better education to public employees. My concerns are: is it sufficient to provide good education to children of well-educated parents? I worked in a state government department for three years. I know the inferior (substandard teachers and pathetic infrastructure) education the huge mass of villagers in Inda are able to get in this age of Internet. If there was so much investments were made on Indian universities, why are there not any one institute with a world-class record? Going by this argument, there should have been at least a 100 IITs in India by now. But how many do have now?

    Unlike China, there has been no strategic planning in India. While China was slowly getting herself closer to the U.S. at a decisive stage of Cold War, India went more and more close to USSR. This too delayed the inevitable opening up of the economy, which has cost India dearly in the areas of technology (especially semiconductor-related industries) and science. Just look at the companies the two countries have. China has Lenovo, Haier, Huawei etc that are home-grown high-technology companies. China is even in a stage to build its own aeroplanes and naval ships. What has India got? Reliance, Wipro, HCL and Infosys? Ambanis are just businessmen, not industrialists. Infosys et al are just labor-suppliers. The only Indian company that can claim to be world-class is Tata.

    Arundhati Roy is good only in giving colorful and glorified semi-informed and half-baked facts. It is pseudo-intellectuals like her that are more dangerous to Indian economies.

    There should be no doubt about the potential India holds as a destination for investments of any sort. Just look at the fabulous achievement of one single state- Gujarat- in the last ten years or so. If one state can attract so much good investments because of the right economic climate alone, the only factor adversly affecting the chances of India becoming true giant is weak, corrupt and unimaginative politicians.

    1. Jim

      Harihar, I believe that the key phrase is, “Unlike China, there has been no strategic planning in India.” And it’s difficult to have a strong strategic plan without a strong federal government.

      Have there been any efforts in India to curb the power of states/cities in favor of the central government?

      1. May

        China grew because it is decentralized. Unlike India where the states curtail freedom of local units, China allows freedoms unimaginable in India. In terms of fiscal decentralization it has had higher rates than even western countries (American scholars know this and have studied this). Whereas, in India it is the reverse. Unlike India it also helped its rural areas. That is why they have millionares village residents, why their open defecation is vastly lower than India’s,why the air is better even though it is the growing workshop of the world.
        You seem to be relying on media coverage which is very limited and misinforms you about China.

      2. Harihar

        I am not from the part of India that has substantial Maoist problem. So what I know about Maoists is only as good as the newspaper reports. And, with age, I have learnt to rely less and less on the Indian newspapers/media. Call me a cynic if you want to!! You can hardly find media people who are worried about the villages and poor people. Everyone wants to telecast reality shows, bollywood crap songs, and capital events. No one wants to take up important investigations.

        For example, it is widely known that Indian politicians (cutting across parties), bureaucrats, businessman, and godmen possess much more black money than is being currently guessed. However, no section of the media really wants to get down to the roots of the problem and come up with more investigative reports. They are happy with politically sponsored sting operations. Similarly, everyone knows that less than 10% of the expenditure on populist welfare schemes sees proper utilization. The rest 90% ends up in the pockets of politicians, bureaucrats, and powerful contractors. No media is covering such issues seriously these days. Everyone has taken it for granted that it is better to go along the tide and get richer.

        There are two types of reports that emerge in Indian media about the Maoist problems. One is by the pro-government section which says Maoists are sponsored by outside forces, who supply them with arms and train them. The other group is pro-Left media (like The Hindu) who say that the Maoists find support from exploited populations living in resource-rich zones of the country. I do not know which one is the right one. The truth may be somewhere in between.

        I as an Indian find it really surprising that people even dare to think that India is competing with China. Those of us who have been exposed to the plight of Indian villages know that the situation could not be worse. There is no public outcry in India only because of age-old lethargy and feudal mindset. With all the hue and cry of unbalanced development in China, it makes sense to observe that the Chinese govt is making its best efforts to offset it. Or else, it will be thrown out by public. Indian administrators do not fear such revolutions, as they know the psyche of their vote banks.

        India badly needs efficient administrators (politicians) at the state-level units. However, not many states have this luck of being governed by a good administrator. There are not many in the opposition parties too who show promise. So please pray to God that He/She will deliver some soon!!

    2. Harummph

      Roy is dangerous for pointing out how corrupt politicians are?
      I take exception to the generic socialism label, for that is the US model too. How often do we hear justification for enourmous Defense Contractor entitlements because they create jobs? Yet we have millions unemployed, losing their houses. without health insurance. No where near the levels in India -enourmous numbers of poor that the corrupt central money changers could care less about. We always need writers like Roy to attack the wretched, elitist status quo.

      1. gepay

        I have read many articles by Arundhati Roy. I wish more talented writers would write about the hypocrisy and expose the injustices in the world (this veil of tears). China and India were lucky to embrace the globalistic neoliberalism at an opportune time. I doubt if they will fare as well now that Europe is imploding and the US will find that decoupling is a myth for it as well. These crises happen slowly and then all at once. Eventually Enron accounting and environmental degradation catch up to everybody.
        Unless India or China can come up with a new system that burns brightly with the clarity of recognizing the inherent restraints of reality and dealing competently with the many problems of human existence. Everybody is better off when everybody is considered in decisions that affect us all.

  6. Foppe

    Allow me to unpack the term “the right economic climate” a tiny bit:

    A few weeks ago the Indian government announced its plans to raise 26,000 paramilitary troops to mount a military operation against Maoist ‘terrorists’ in the dense, mineral rich forests of Central India. For decades now the Indian Army has been deployed in States like Nagaland, Manipur, Assam and Kashmir where people have been fighting for independence. But for the government to openly announce the militarization of India’s heartland is an official acknowledgement of civil war.
    The Operation — which incidentally, is what wars are called these days — is scheduled to begin in October, when the monsoon rains come to an end and the rivers are less angry and the terrain more accessible. The people who live in these forests, including the Maoists who see themselves as waging war against the Indian state, are tribal people, the poorest people in the country. They have lived on these lands for centuries with no schools, no hospitals, no roads, no running water. Their crime is an old one —they live on the land that is rich with iron-ore, bauxite, uranium and tin, all of it desperately desired by major mining corporations, among them Tata, Vedanta, Essar and Sterlite. The Prime Minister has declared that his government is duty bound to exploit India’s mineral wealth to fuel India’s economic boom. He has called the Maoists the ‘single largest internal security threat to India.’ In the corporate press words like ‘stamp-out’ and ‘exterminate’ are commonly used in discussions about what ought to be done to them. When the security forces enter the forests, nobody knows how they are going to distinguish between Maoists, Maoist sympathizers and ordinary people.

    1. different clue

      So it looks like India is preparing to wage its own “Indian Wars” against its own “Indian Tribes”, ah ha ha ha . . .
      Maybe India will allow its “Indian Tribes” to retain some tiny bits of their ancestral homelands as Reservations. Or maybe India’s “Indian Tribes” will win India’s “Indian Wars” with Maoist assistance.

  7. sunny129

    AS an emigree from India (born during British India and grew uo during Nehru dynastrule) I can attest to the fact that progress was stiffled by socialisst ‘planned’ Economy to the detriment of the rest.

    Brown Sahib replaced British sahib. Tatas and Birlas supported Nehru dynasty to keep the competition in the name of ‘nationalism’. The whole circus collapsed along with USSR in 1989. The blame for the lack of progress during the first 50 years after independance should be born by Nehru-Indira and Rajov Gandhi!

    When the Supreme court of India declared that a muslim woman has equal rights after the divorce, Rajiv Ghandi enacted a legislation turning that verdict void and condemed the Muslim women for second class status! Why? to appease the Muslim voters. He was supposed to be western educated but lacked guts or the vision. The curse of Nehru dynasty conrinues today under Sonia Gandi. Congress has ‘cashed in a lot’ in the name of Gandhi, too long. Instead of supporting and developing institutions in support of democracy, personal cult like following was/is encouraged by Nehru-Indira- Rajiv and now Conress party under Sonia!

  8. Ray Duray

    It’s great to see so many people with roots in India contributing viewpoints to this discussion. Thank you.

    I have to admit to being one of those “pseudo-intellectuals” who find Arundhati Roy’s writing to be some of the best in the English language. (Her Man Booker Prize was a tip off to me. http://www.themanbookerprize.com/prize/authors/37 )

    Those with an open mind to a utopian and communitarian viewpoint might enjoy reading Roy’s “Walking With the Comrades http://www.outlookindia.com/article.aspx?264738 , an essay and meditation on what it is like to be a threatened indigeous sub-group on the Sub-Continent. The Naxalites seem to have a good argument for protecting their homelands from rapacious industrialists. I guess I’m showing my bias here.

    For those who prefer, this video wherein Ms. Roy declares democracy to be a hoax is refreshingly revealing about the menace the 1% pose to the rest of us, no matter at what rate of economic growth the finance types aspire to: http://www.outlookindia.com/article.aspx?264738

    I’m reminded of the wonderful quote at the start of the RSA YouTube editions, courtesy of Richard Attenborough: “Anyone who believes in infinite growth on a finite planet is either mad or an economist.”

    1. Paul Tioxon

      Really, pedestrian growth of 7 or 8%.

      The Most Important Video You’ll ever See!!!

      It’s about math, no Black Swans, no Goedel’s Proof, just much more basic, simple math.

      http://www.youtube.com/watch?v=F-QA2rkpBSY

      Our growth rests on oil, gas and burning fuel in amounts of BTUs far exceeding the amount of energy in BTUs that human beings can possible expend in 24 hour a day activity. Economic growth is a function of energy policy more so than socialism, capitalism or a mixed economy such as we have here, at least for a little while longer.

      1. Ray Duray

        Paul,

        Thank you for introducing the Albert Bartlett lecture to the thread. I’ve seen it. I believe it is well considered.

        There’s one thing that is certain. The 21st Century will look nothing like any before it.

  9. manik kapoor

    Number 1 – How can we wait for more than 40 years to realize all our policies (License Raj) are wrong. I believe it should be corrected within 20 years of Independence.

    Number 2 -Why don’t we have strong mechanisms to check on corruption. Why only TATA, birls ARE ALLOWED TO FURNISHED

    Number 3 – Someone cracked a point on education, subsidies. I can bet still today our education system is one worst in the world. I had studied the same concept which my uncle studied 20 years back.

    Number 4 – We are talking about growth, growth and growth. Only the rich are becoming richer poor poorer.

    Number 5- We still don’t know the meaning of R&D. How its beneficial for everything. How much our companies spend on R&d.

    Number 6 – I read somewhere still today more than 50 percent people don’t have the proper sanitation facilities at their home (Imagine women and girls are going outside home) shame on us and we talk about India Shining.

    1. imam hussain

      hi manik i am imam hussain from cochin well you are speaking of R&d Education etc well keeping all logical debates apart think of countries those you think are fully developed take for instance EU Germany Italy France Britain Israel Belgium West Usa , Russia China Japan S.Korea look what is common in them there education system i mean there education is in mother tongue so is the subjects on science technology Law R&D in there respective mother tongue if you are an economist you know that only manufacturing economies have made development India on other hand have taken loans from all international banks possible given subsidies partly corruption etc look at India s manufacturing output we are good in services like IT but thaz not permenant or sufficient you are right what our dads learned v are following the same herd mentality and you may argue cases like apj abdul kalam cv raman etc but there education was in there mother tongue Tamil hence they prospered now i shall site you a case or an exceptional case of Iran there education is in persian and there advancement in science and technology is well lauded by major independent scientific bodies there growth in enginering chemistry laser tech in last decade was greatest and massive by any country apart from dirty politics if Iran prospers in nuke tech independently though they had help of us and russia china in passt now its going well hope i might have given you a small idea y R&D is constraint in India all languages are good but make sure that science and technology and advance studies should be understood for that mother tongue is needed not muggedup

  10. Denis Khan

    Is PM Mohan Singh willing to bring back the approx.$500 billion black money nestling abroad?
    If not, it is likely to be will be a case of Nero fiddling while Rome burnt.

  11. imam hussain

    well after watching his interview in bloomberg i noticed a point 1 the govt in denial and having not done there home work and the other is the two types of investment that is to be made well he is right in that aspect now see IT cos are now drifting to philippines and now the new growth story that would all bet on will be SIMM SriLanka Indonesia Myanmar Malaysia well Myanmar will be a new light of hope of investments or silver lining

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