Modi government is pushing incremental reform, and that's not a bad thing: Ruchir Sharma

Named one of the ‘Top Global Thinkers’ in 2012 by Foreign Policy magazine and among the ‘50 most influential thinkers’ by Bloomberg Market, Ruchir Sharma is that rare thing – someone who can make global economics an accessible subject. In his new book, The Rise and Fall of Nations, Sharma sets out 10 rules for change in the post-crisis world. It comes four years after his previous work, Breakout Nations: In Pursuit of the Next Economic Miracles. Liberally peppered with amusing anecdotes (including one in which Sharma describes, how he took rather literally, an invitation to give his “frank opinion” on the Russian economy – at an event where Vladimir Putin was present) The Rise and Fall of Nations is less about numbers and academic terminology and more about presenting a compelling story about how the world’s economy works.

In a chat with Firstpost this week, Sharma – who is also the head of emerging markets and chief global strategist at Morgan Stanley Investment Management – discussed his new book, Brexit, Rexit and Narendra Modi.

Excerpts from the conversation:

Ruchir Sharma's new book 'The Rise and Fall of Nations' lays out 10 rules of change in the post-crisis world

Ruchir Sharma's new book 'The Rise and Fall of Nations' lays out 10 rules of change in the post-crisis world

Was The Rise and Fall of Nations something you had in mind even when writing Breakout Nations, in 2012?

No, this is a totally different book; the first one was more of an economic travelogue: what my thoughts are of different countries, of different emerging markets. This one is more an ideas book. It developed after I wrote Breakout Nations, about what are the 10 things I would look at (when looking for the next ‘miracle economy’). It was like inverting the model. Breakout Nations was more about the end result, this one is more about the process.

In the very first chapter, you’ve described how in an increasingly impermanent world – after the 2008 recession – countries are looking inwards, fencing themselves off. And that almost seemed like a prophesy of Brexit…

I think there are three things that explain Brexit: One is that there is a big anti-establishment mood in the world today. We tracked the approval ratings of leaders across the world, and these are, on an average today, at an all-time low. It’s a mood against whoever’s in power. In Latin America, left wing governments are being booted out, and in Europe and other places, we’re seeing the rise of the far right kind of parties. So I think the vote for Brexit was as much an anti-establishment vote as it was specifically about the issue.

The other thing is deglobalisation, which is that countries are looking inwards. Protectionist measures have gone up significantly over the past few years in the post-crisis world – the AC or After Crisis world as I call it. And you also have the fact that trade has collapsed, capital flows have declined. The social fabric of different countries is being tested by too much immigration.

The third factor is income inequality. It has been rising since the 80s and 90s, but in this decade, it seems to have turbo charged. It’s gone up much more, and it’s going up in many more countries than it was before the crisis. So I’d say that’s really what set the scene for votes like Brexit to happen. It’s really an anti-establishment vote, and the anger is growing against immigrants at a time when the “pie” is not growing fast enough.

You’ve mentioned that economic reform is influenced by what stage a country is in, in its ‘cycle of life’, and also that it’s more likely to occur under a new leader than stale leadership. In the context of Narendra Modi’s government, could you elaborate on that rule?

What I think is that the best time for a country is the first two years of a new leader. That’s where you tend to see the maximum change, the maximum optimism. Even from the market perspective, I map it out – 90 percent of the relative outperformance of a stock market tends to happen in the first two years of a new leader. After that you end up seeing very few gains, relatively.

With regard to the Modi government, I wish a lot more could have been done in the first six-12 months, because that’s when there was no real opposition in this country and… (it) could have been galvanised to do a whole lot more. But I would say that they’re still doing incremental reform, and at a time when populism is on the rise in many countries, incremental reform is not a bad thing.

With regard to ‘Make in India’, one of your concerns (in the book) is that instead of focussing on simpler industries that can create jobs, the government is looking at advanced ones like military weaponry…

There’s so much talk today about the fact that the manufacturing sector across the world is in the doldrums. Exports in particular aren’t doing well, across the world. My point is that – all that is true, but to create mass jobs, low-end manufacturing is what (works). That’s what worked in China. And some of those low-end jobs are being lost now. They’re going to countries like Vietnam, Bangladesh, even Cambodia. We in India should be gaining some of that market share. It’s very cool to talk about sophisticated technology, high-end exports, but for mass employment, it’s those kind of jobs that are created, and that India is not picking up market share here is a bit of a concern, because that’s what we should be trying to do.

How will the “quiet rise” of Bangladesh, Pakistan, Sri Lanka, which are contributing to the economic growth of South Asia, affect India?

That should be good (for us). India needs to take a leadership role. Because of the old hostilities and rivalries, intra-regional trade is very low in this region, in fact it’s the lowest in any major sub-region in the world. And we need to do much more about increasing trade in this region. At a time when global trade agreements seem to be collapsing, and there’s not much appetite for more of that, when we know that trade (still) helps, the focus on integrating within South Asia is great. And I think this government has done something to improve relations with Bangladesh; it’s moving in the right direction, but we could do a lot more to make trade in this region much healthier.

One of the things you warn against in the book, is buying into the “hype” generated by media stories about the next big economy. What hype do you think India needs to be wary about?

I’ve been very critical of the GDP numbers. It’s very difficult in this environment to grow at 7-8 percent or plus. The global economy is very weak and it’s difficult to grow at such a sharp pace. That’s one hype we need to watch out for. Statements like, “This is the next China”… At a time when demand is weakening across the world, India can hold up the rest of the world – that’s the kind of hype I’d be a bit wary of. Without the tailwinds of a strong global economy, India is going to find it difficult to grow at 8 percent.

Do you see any mirroring in the ‘Acche Din’ and ‘India Shining’ slogans?

I think India is constantly changing. One thing I find is that the more time I spend in Delhi, the more pessimistic I feel about India, and the more time I spend outside, the more optimistic I feel about India. Which is that when you travel to different states, like I do, you find that the quality of state leadership has improved a lot, compared to what it used to be. It’s not ideal, but it has improved.

You’ve also said that India has many more ‘good’ billionaires in 2015 than it did in 2010, when you'd written a piece for Newsweek on crony capitalism.

Yes, in 2010, on the Billionaire Metrix, India was looking very bad: our share was very high (the share of wealth/economy), but the number of ‘good’ billionaires vis-a-vis ‘bad’ billionaires (those who make their wealth in ‘rent-seeking industries, like real estate, mining, steel and other metals, oil, gas and other commodity industries) was very low, and the number of billionaires who had inherited their wealth was extremely high. So I’d say on the metrix, we’ve done well in the years since. The decline in the value of crony capitalism – those companies are just not doing well – and the number of good billionaires (from industries such as technology, pharmaceutical, manufacturing) has seen a big rise.

In 2013, when Raghuram Rajan came in, there was so much support for his measures to curb inflation. And now we have ‘Rexit’ which was so ugly.

I’ve quoted a former central bank governor, Jaffar Hussain, in my book, who said: “Central bankers are like good tea, you only realise their worth when they’re in hot water”. So 2013 when things were really bad in India and it looked like we may have another crisis, we realised the worth of Raghuram Rajan. Now that things are stable, you take it much more in your stride…

You’ve talked about the difficulties we’ve had in valuing currency right since the 12th century, and The Economist’s Big Mac Index, and all the other globally available commodities people have tried to compare prices of (to come up with a measure). As a purely academic exercise, if you had to study the price of any one good/commodity as a global index, which would it be?

There’s no holy grail, you’ve to look at a whole bunch of things to figure out which countries look expensive and which look cheap. The good thing is that India does feel cheaper, compared to other countries, the exchange rate feels a lot more competitive compared to earlier. But one very basic comparison I could make, is hotel room rates – that’s a very easy, lazy way to do it, because I travel to these countries. Hotel room rates tell you many things – if they are too high, either the exchange rate is too expensive or the infrastructure is lousy because they just don’t have enough hotel rooms there to meet the demand. So this is a very easy way of making these cross-country comparisons. India’s rates are far more affordable.

A factor you’ve expressed concern over, is the lack of new cities in India, and most of the urban population being concentrated in the megacities of Delhi, Mumbai, Bengaluru, Kolkata. But with Narendra Modi wanting to make Pune a smart city, and with Gurgaon growing the way it is, aren’t they poised to become the next big cities?

For a country’s development, you need new cities to come up. China’s got Shenzen, that came up from complete scratch. You need more manufacturing zones and hubs for such cities to come up. And in India’s case, why haven’t we seen any new cities? That tells you there’s a lot that’s wrong. Seventeen percent of India’s urban population resides in just five cities. In the case of China, six such megacities exist, with a population of over 10 million, and only 10 percent of the urban population resides in those cities. I’d say that you need to look beyond the Delhi-NCR region, you need new hubs to come up, and new cities to come up, and that is what will tell you that development is going much more inwards in India. There are tier-II cities that have seen very good growth, there’s no denying that. But how do you get new cities to come up from scratch?

In Karnataka, for instance, I’m shocked at how dependent they are on one city – Bengaluru. Mysore has an unused airport now! It’s shocking, you build a new swanky airport and there are no flights there.

Which country’s economic story has been most fascinating for you to follow?

India, because it’s closest to my heart. But there have been others – some have been fun but predictable, like Brazil: every time commodity prices go up, it looks like a superstar, every time they go down, it looks like a basket case. It’s a fascinating country to follow. Eastern Europe I like because those countries have the best potential of the middle-income countries which could break out and become rich countries. But that’s what it makes it so fascinating, that you’ve got all these experiments going on. In Russia and Turkey I’ve seen how under Putin and Erdoğan, those countries first did so well, and then the longer that those leaders have been in power, they’ve done poorly.

There’s the anecdote you’ve narrated, of giving a frank talk about Russia’s economy at an event where Vladimir Putin was present, and how that ended quite embarrassingly! Have there been any other times when you’ve had to tell an inconvenient truth?

Yes. Currently I’m grappling with China – I have a pretty strong view, which is that, the debt cycle is out of control. They’ve taken on far too much debt and they’re not able to get off that treadmill. Today, it takes $6 of debt to create $1 of GDP growth in China, it used to be 3 to 1 at the peak of the US housing bubble. That to me, is the really interesting thing that’s happening.

So is there any country you’d put your money on to possibly be the next ‘miracle economy’?

I don’t expect any miracle economies, but I’ve got a whole world map of “the good, the average and the ugly” (in The Rise and Fall of Nations), so those are the economies I’d be putting my money in. Phillipines is a good turnaround case in Southeast Asia, I think Indonesia will do okay. I’m optimistic about South Asia. And despite all my criticisms of India, it still looks relatively good.

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Updated Date: Feb 07, 2019 17:12:58 IST

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