The Leader and the Sign of the Times
Britain’s actions on Europe have an impact far beyond its shores. They provide a blueprint for how to dismantle the unity of a democracy (and probably autocracies too), undermine a trade bloc and seed the destruction of a superstructure (an international trade body, climate change effort or even the UN). While Britain may figure out how to stabilise to a state of affairs that it is prepared to live with, the Brexit project is a profound threat to others. Why, how and what happened in Britain as it pursued its Brexit also provides the key lessons for how to prevent further damage to peace, prosperity and freedoms in democracies across the world.
Within less than a century, the United Kingdom has gone from an empire on which the sun would never set to an island country at war with itself. Two world wars and decolonialisation reduced this Great Power to one of several European regional powers. Up until now, the UK appeared to do well in the smaller pond called the EU, even negotiating a sweet deal, the best of any EU member, that allowed it to leverage the power of the EU as the largest trading bloc in the world while keeping its own currency, financial hub and immigration controls. However, a small group of its politicians harboured the dream that it could once again be a great global player. A closer look reveals that Britain is not well placed to succeed in a time of significant global macro-change and, despite its innovation and many advantages, it has failed to build a global scale high-tech industry, lacks diversified natural resources and does not possess a highly skilled labour force for advanced manufacturing, to name a few. Other EU nations in the absence of these dreams have done better. And so, even within this smaller pond, the UK is not the biggest fish, ceding ground to continental powers that engaged constructively with each other and implemented structural policies that allowed them to benefit from increased globalisation beyond one core area (financial services in the case of the UK). None of them complained about “loss of sovereignty” as the Eurosceptics did because they had lived the reality of a world where for obvious gain they had forfeited slices of sovereignty to the UN, the WTO, climate change agreements and indeed every trade agreement with every major trading power around the world.
India’s Prime Minister Narendra Modi at the start of his second term has laid out a vision of economic growth for India that would see the country’s GDP nearly double from US$3tn today to US$5tn within the next five years. Achieving this target will require a GDP growth of approximately 8%, substantially higher than India’s current growth, but well within its growth potential of 10% or more at this stage in its growth trajectory.
As highlighted in previous Signs of the Times, India’s growth is fundamentally being driven by a series of macro drivers, including its large and growing workforce, rapid urbanisation, mass technological adoption, financial inclusion and growing (mass-) consumerism, factors that are largely independent of government policy and provide a stable basis for the country’s long term economic growth. Despite these independent drivers, India’s growth is of course not decoupled from that of the rest of the world, and remains subject to external supporting events and dislocations, with the world as a whole entering a period of increased volatility and decreased growth. Accordingly, while the achievement of India’s targeted US$5tn economy is not in doubt, the timeline on which it will occur potentially is. India’s leaders will need to focus their efforts on supporting policies removing roadblocks to the independent drivers and on avoiding being derailed by internal dislocations and countering external dislocations. The first Modi government (2014-2019) has demonstrated that it can successfully deliver the first of these two through the implementation of structural reforms that drove GDP to up to over 9% at its peak. Delivering an average growth rate of 8% for a sustained period in the face of macro-economic headwinds, however, will depend on the government’s ability to continue to press ambitious reforms.
Between 2009 and 2016, the market value of India’s eight largest government-owned enterprises (also referred to as public sector undertakings or “PSUs”) declined by 33% at a time when India’s benchmark Nifty index increased by 9%. This divergence is driven largely by the productivity gap between government and privately-owned entities in India. The private sector has a critical role to play in India’s current journey to become a US$5tn economy within the next decade. While some of the required economic value creation will certainly be derived by the growth and incremental productivity increases of existing private sector companies in India, a significant portion will need to come from the c.12% of the economy that is currently generated by government-owned entities, the unlocking of value from which will require privatisation and restructuring.
Successfully privatising government-owned assets in India will require a shift in mindset away from the ad-hoc approach to privatisations that Indian governments (including the current government) have traditionally adopted. Instead, India will need a comprehensive and structured privatisation program that combines targeted selection and execution with a series of supporting policies and reforms that drive the competitiveness of the privatised assets and their industries as a whole, while addressing the demands of a growing number of stakeholders who are demanding that companies meet a wider purpose than only making money.
The first two years of the Modi-led government’s first term (2014-2019) are widely seen as having been insufficiently ambitious, given the size of the mandate secured, with slow execution. This time around, the government is aiming higher to create a quicker and lasting impact on India’s political, social and economic fabric through a series of big initiatives. This month’s Sign of the Times provides an outline of how the India’s privatisation programme can be one of these big initiatives and a key platform for the country’s growth, modernisation and development.
India, the world’s fastest growing major economy, has been one of the few bright spots in an increasingly volatile world that has seen global risk rising. A comprehensive reforms programme implemented by the Modi government helped economic growth accelerate to c.7% even as global growth has slowed, sharply increasingly India’s ‘Growth Multiple’ (defined as Indian GDP growth as a multiple of global GDP growth). With global political and economic uncertainty set to increase for the foreseeable future, India has a unique opportunity to further cement its position as pillar of growth and stability globally. India’s finance minister, in her maiden budget speech predicted India as a US$5tn economy by 2024, which will require an average GDP growth rate of 8% over the next five years to achieve. The Sign of the Times in February 2019 laid out the case for a US$5 trillion economy and its key drivers and in April further laid out the structure of India’s trajectory into a new phase of this growth. While India’s ability to sustainably grow at this rate is largely driven by a series of country specific macro-drivers independent of government policy, India of course is not immune to the global slowdown underway. The recent slowdown in growth over the last few quarters – GDP growth for Q2 2019 was c.5%, the slowest in six years – is at least partially attributable to on-going global macro-economic volatility. Against this backdrop, for India to defend or even increase its Growth Multiple over the rest of the world it will need to accelerate and deepen its current reform program (alongside tactical monetary and fiscal policy actions to manage global volatility and risk). If India can deliver on this, it has the potential to leapfrog most large western economies over the next decade, in a similar fashion as China did following the Global Financial Crisis. In addition, not to be underestimated, the government will need to avoid the traps that derail growth, such as wars and conflicts. The Modi government will need to steer a careful course through a looming global crisis and its own challenges, leveraging the positive drivers of its democracy, demographics and development.