For almost two decades now, whenever the Indian economy hits a rough patch, the done thing on the part of press and financial market participants is to say that “to improve economic growth, India needs to go through structural reform”. So potent is this phrase that conference speeches, economic strategy notes and newspaper op-ed speeches feel incomplete without at least one mention of “structural reform”. So what exactly is this modern economic equivalent of the alchemist’s spell? And are we in India so deprived of this wonderful economic aphrodisiac?
Structural reform was born after World War II thanks to the IMF and the World Bank. Both of these institutions started dispensing loans to troubled economies from the 1950s onwards. These loans would come with certain pre-conditions and over time journalists and academics started using “structural reform” or “structural adjustment” as shorthand for these pre-conditions. Broadly speaking, the five main structural reforms that the IMF and the World Bank were keen on were:
1. Trade liberalisation i.e. lifting restrictions on imports and exports;
2. Balancing budgets (rather than the overspending);
3. Removing price controls and state subsidies;
4. Encouraging more investment (for example, by encouraging FDI and FII flows); and
5. Improving governance and fighting corruption.
Now, let me try and give India marks out of 10 on each of these counts.
1. On the trade of both goods and services front, the Indian economy is by and large fully liberalized (barring a few anomalies like the legal profession). However, India has not fully liberalized its capital account and if the RBI has its way, India will not relax its capital account restrictions for a long time to come. That being said, post-Lehman, no economist in his right mind believes that a developing economy should have full capital account convertibility. Marks: 8/10.
2. Balancing budgets has been a problem for us. In fact, if we ignore the go-go years of FY04-08, when rapid economic growth boosted tax revenues and pulled the deficit down to 2.5 per cent of GDP, the government has never had any real control on the budget deficit. Public expenditure has in fact grown at a CAGR of 12 per cent over the past decade. Marks: 4/10.
3. Whilst in the financial sector ‘price controls’ are by and large gone (eg. interest rates on savings accounts have been deregulated), in the real economy, the three traditional subsidy guzzlers – food, fuel and fertiliser – remain price controlled. Marks: 5/10.
4. On both the FDI and FII front, India has shown great willingness to accept foreign capital. In fact, on both of these counts it has been relatively successful (albeit less so than China). FDI and FII flows into India over the past decade have grown at a CAGR of 15 per cent and 21 per cent respectively. Marks: 8/10.
5. Whilst the government has done little to improve governance and fight corruption (other than to pass the Right to Information (RTI) Act), the people at large have over the past decade become increasingly proactive about this issue. Partly due to the RTI Act, partly due to a large and unbridled media sector, and partly due to the emergence of iconoclastic institutions like the Comptroller and Auditor General (CAG), for the first time since Independence, the government is being held accountable for governance, for the delivery of basic public services and for the economic well being of the nation. Marks: 5/10.
In total I give India 30/50 when it comes to delivering structural reform. Whilst some of you will I suspect give India five fewer marks than I did, most realists will struggle to give India less than 25/50 on these basic measures of structural reform.
Now, the puzzle therefore is not ‘why has India not experienced structural reform (it clearly has). The puzzle is ‘why does everyone discuss India as if it is a basket case seemingly on the verge of economic collapse?
The answer I think lies in timelines. Many of us view economies like we view corporates. Just as a beleaguered corporate is expect to turn its performance around in a couple of years, the same is expected of an economy. Some investors actually expect quarter-to-quarter delivery on structural reforms. Politicians and their coterie unfortunately fuel this fantasy. During the Finance Minister’s recent global roadshow, Arvind Mayaram, the head of economic affairs at the Finance Ministry was quoted as saying:
“Once you see fiscal consolidation start to happen, you will see the rupee strengthen further… the rupee at 52-53 (per dollar) is good. It will be still competitive but imports will become cheaper and inflation will moderate.”
So there you have it – it is as simple as that, easier than making Maggi noodles.
The fact is that the quantum of reform that India has seen over the past decade is substantial. Moreover, the current FM is moving things along at a relatively rapid clip (think fiscal consolidation, FDI Retail and potentially FDI Insurance followed by the Land Acquisition Bill and GST). These measures will bear fruit in the years to come. Those who have patience of character and capital to wait until then will bear the fruits.
(Saurabh Mukherjea is the Head of Equities at Ambit Capital. The views expressed here are his own and not Ambit Capital’s.)
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