Why US could be a Breakout Nation even while we slide

Nobody in his right mind would think of the US - the original author of the global slowdown with its Lehman collapse - as a potential 'Breakout Nation' in the group of rich democracies. But that is precisely what Ruchir Sharma, author of the best-selling book, Breakout Nations, seems to be saying.

In a Huffington Post blogpost, Sharma says that unlike Europe, China, and Japan, the US is breaking out of its problems by rapidly reducing private debts, wages, employment and real estate prices instead of trying to "dodge the pain" like Japan and setting "up its economy for stagflation."

Says Sharma: "This year...the United States will grow faster than the global average for the first time since 2003 (at around 2-2.5 percent)... As of 2007, the emerging markets were on average growing three times faster than the United States; now they are growing only twice as fast." Nothing demonstrates this better than the fact that China is now lowering it growth estimates to below eight percent, and actual levels could fall to 7 percent as global growth slows and China's export markets shrink.

Reuters

Sharma sees the US regaining its status as the key driver of global growth, if the US government starts acting on its own debt overload. "If China slows to under 7 percent in the coming years, which is likely, the United States would once again be the single largest contributor to global growth -- a symbol of economic status it lost to China in 2007."

Not only that, US manufacturing - once considered a lost cause due to the rise of China as "factory to the world," is reviving. According to Sharma, "after losing 6 million manufacturing jobs in the last decade, the US gained half a million in the last 18 months while Europe, Canada and Japan lost jobs or saw no change." This is the result of America's ability to tap into cutting edge entrepreneurship and innovation, which has enabled the country to become almost self-sufficient in energy (gas prices in the US are among the lowest), even while its technology leadership is unchallenged.

If Sharma is right, and US becomes a breakout nation once again, it has three implications (or lessons) for India.

One, a reviving US economy will become less protectionist, and faster growth means the Indian IT industry will revive quicker. This should be good news for TCS, Infosys and Cognizant, among others. If America revives, our export market will also surge more quickly, given the strength of the US dollar against the rupee.

Two, the fact that the US has, in less than 10 years, achieved near energy self-sufficiency by the exploitation of shale gas (and brought prices down to new lows) shows that the less the state meddles with energy pricing and innovation the better. The American lesson is simple: allow free competition, and let the market balance energy supply and demand. In India, we have artificially underpriced all forms of energy - and we still have slowing growth and high inflation. And Reliance is reporting a steady fall in gas output.

Three, the UPA's excessive concern with welfarist policies and efforts to keep public sector dinosaurs (and private sector crony capitalists) alive at huge cost to the taxpayer is doing more harm than good. Policies that artificially raise land prices (Land Acquisition Bill), refuse to allow competition to knock out inefficient players (in aviation and telecom) and restrict labour migration to more productive urban jobs (NREGA) are more likely to slow down India's revival than help it. All these constitute massive interventions to influence the markets for land, labour and capital - and they will all fail.

Sharma's conclusion: "In a global economy that is increasingly shaped by competing forms of capitalism, the American brand appears to be winning."

Should India be joining the winners or losers? Should we follow the US out of trouble or Europe and Japan into more economic mess?

According to The Economic Times, as at the end of March 2012, India Inc was sitting on twice as much cash as it had three years ago - over Rs 9,30,000 crore. And guess how much the government expects to obtain as tax and non-tax revenues this year: Rs 9,35,000 crore.

Put another way, India Inc has enough money to run the government of India for a year. Why then is it sitting on this pile instead of investing it to make even more money?

The government has a lot of answer for. Instead of a Breakout Nation, India may be heading to become a Breakdown Nation.