Less than a decade ago, enthusiastic investment bankers and financial research analysts were tom-tomming the India growth story. India, they said, had so much potential, it could be one of the world’s biggest economies in the next couple of decades. For this, they used spreadsheet models, in which they plugged in a growth rate of 8-10% and projected it for the next 30 years. They learnt this in MBA school.
Of course, anything growing at a compound annual rate of 10% will become pretty massive in 30 years (17.4 times, to be precise). Hence, the sharp minds made an earth-shattering prediction: that anything growing very fast will become very big over time. Clients of financial institutions, seduced with such a rosy picture about the land of miracles, bought into the idea.
Boring economies of Europe, growing at 1-2%, just didn’t carry the spiciness of India. Billions came into India, and the sudden rush of money did lead to some growth. The government in power took the entire credit for it. “We have created growth,” the government spokesperson used to say. The party had started.
The analysts were rewarded and flushed with heavy bonuses at the end of the year. Young M&A bankers bought apartments with a slum-and-racecourse view or a slum-and-sea view in Mumbai. Of course, the idea was to ignore the slum and focus on the sea view or the racecourse.
In all this, a few uncomfortable questions were never asked. For instance, is the government committed to providing a pro-business, pro-growth economic environment? Is the Indian polity ready to accept this new capitalist system? Are we socialist or are we market driven? Can we actually grow so fast every year, considering each power plant or new road or mining approval takes years?
Are we efficient manufacturers for the world? Are our taxation and regulations in line with fast growth requirements? Do we have an educated or skilled workforce to grow average incomes 17 times in the next 30 years? Is our infrastructure in place?
No, no and no. But you don’t ask these questions when there is a good party in progress. You sound like the neighbouring uncle who crashes a party and tells people to turn the music down. Naysayers are seen to be jealous, doomsday mongers who can’t bear to see India come into its own.
Of course, with none of the fundamentals required for such massive growth in place, the money coming into the country had little to do. Sure, a few projects did happen, and the first few companies who arrived did find their products sold well given the pent up demand. However, soon, growth petered out.
The government had, of cou-rse, used this temporary growth phase to start its own mini-party. Budgets showed higher revenue but even higher spending. The government spent way more than it earned. Consequently, private players faced interest rates of 15% for borrowings. The government printed so many rupees, it flooded the market and the currency bought less and less.
All this was going on behind the scenes, while growth numbers were good. Hence, all was forgiven. Media analysis of the budgets included the finance minister’s sartorial tastes and the couplets spoken in the speech. Everybody was happy in wonderland.
Of course, soon the penny dropped. People never saw retu-rns for their money and stopped investing. Dollars stopped coming to India. Local players took their money out too. Growth slo-wed and the government blamed the media, the opposition, the foreigners and even the middle class for it. At the same time, it spent even more, thus increasing borrowing costs and inflation even more.
One day, the party stopped. People figured there was a bubble. Reality is more than just a growth rate formula in a spreadsheet. A socialist country cannot turn market-friendly overnight. A corrupt nation cannot be competitive in the world. A divided population cannot arrive at decisions fast. A nation cannot decide to welcome investors one year, but pull a fast one on them the next year.
We are, whether the government likes to say it or not, in the middle of an economic crisis. In the next two years, we will see many companies go bust, large layoffs, massive inflation and high unemployment. There is no getting away from it. The government could take some steps to soothe the situation, but instead it is interested in tokenism – closing petrol pumps, immaterial austerity drives and controls on consumption.
The economic numbers were bad enough. Now we are appro-aching something much worse – a crisis of confidence. The same analysts who were celebrating India a few years ago, are now telling their clients how to avoid India and its unreliable regime. If the world stops trusting India, this trust will take years to rebuild .
Forget growing 17 times in 30 years, we will find it difficult to sustain even modest growth. Either this government does something dra-stic and fundamental to restore confidence, or we have another election as soon as possible so the focus can shift from politics to the economy. Otherwise, the future of an entire generation is at stake. And yes, next time, don’t ignore the slum view while taking in the sea view.