The Leader and the Sign of the Times
The decade that has followed the global financial crisis of 2008 has been characterised by relatively steady, if uneven global growth. Economic growth for most major global economies like the United States, Germany, the UK and France recovered to pre-crisis levels within 4-5 years, and China began the transition of its economy away from an export-driven growth model, while avoiding a ‘hard landing’. Buoyed by these positive macro-economic trends, global equity markets reached all-time highs, and total global wealth reached US$280tn (27% higher than at the onset of the economic crisis). India also witnessed a recovery in economic growth levels, back to c. 8% levels helped by the global economic resurgence, the reform-agenda of the Modi new government, robust foreign direct investment flows and falling oil prices. Recently, however, cracks have begun to emerge in the global economy, driven by rising political uncertainty around the world, on-going trade disputes between the United States and China and financial instability across several emerging markets (including Russia, Brazil, South Africa, Turkey and Venezuela). The combined effect of these risks has driven economic volatility and sharp corrections in equity markets, as investors reallocate capital across geographies and asset classes to manage global macro-risk. India, given its inherent resilience and growth prospects, has the potential to buck the trend the of global capital flight from emerging markets if it is able to maintain its reforms and growth and thereby reassure investors that it is a relatively safer emerging market than others for international capital. The key to this will include India mobilising long-term capital, reforming its banking sector and facilitating global trade. This month’s Sign of the Times examines today’s emerging global risks and their implications on India, and the potential impact on its investment story.
Last month’s Sign of the Times benchmarked the economic performance of the current government against both its Congress and BJP predecessors over the past 25 years. Among the key takeaways of this analysis was the observation that there have been a number of Indian governments that have delivered growth and Mr. Modi’s government benchmarks well relative to them. Mr. Modi’s supporters believe that his government’s policies are the basis of sustainable growth trajectory based on having laid the foundation for a structural step-up in the country’s development. India’s macro-economic drivers – its population, demographics, urbanisation trends, education, among other major factors – point to a country with double digit GDP growth potential under a government with the right policies and economic development strategies. While previous governments have briefly achieved these growth rates on the back of massive stimulus or global economic booms, neither party to date has been able to construct an economic strategy or model that has delivered this growth consistently or sustainably.
As mentioned in last month’s Sign, voters in next year’s general election will need to form a view on, among other things, the economic agendas of the different parties to determine who can better pick up where the current government will have left off. Real leadership is more likely based on a clear vision of an India that has realized its potential and clarity on the political, social and economic components that will deliver this vision. India’s model will need to do more than simply deliver increased growth rates: it will need to respond to and where possible leverage the major geopolitical, economic and technological shifts underway and place the country into a position of strength in a world that is currently witnessing the passing of its current world order and the longer-term shift from the industrial to the information age.
The Indian general elections – the “world’s largest exercise in democracy” – will take place in a little less than a year from today with an electorate larger than that of all 34 OECD countries combined electing their parliamentary representatives. In the previous 2014 election, voters backed Mr. Modi’s promises of reform and his track record of delivering rapid growth in his home state. Economic growth and reforms again promise to be the key issues of the upcoming election, and the assessment of Mr. Modi’s economic performance is at the epi-centre of the narrative for both the BJP and the opposition.
In 1991, India opened its economy to the rest of the world and reversed decades of slow and insular growth implementing a series of far-ranging reforms. There have been ups and downs in the years since; today however, a little over 25 years later, the effects of this liberalisation are clearly visible with India enjoying an increasingly vibrant domestic economy, a large and rapidly growing middle class, significant foreign investment inflows, and a high degree of political stability. Following one of the down swings, recent changes by the current administration have recovered some of the economic losses of the previous one and placed the India story back on the agenda of international investors. As the fastest growing and currently sixth largest economy in the world, India appears set to become a top three global economy and a middle-income country over the next c.25 years. This economic growth is set to transform the country, its society and its place in the world, creating a prosperous democracy of 1.4bn with a diversified and globalised economy. This month’s Sign of the Times plots India’s projected journey through to 2040 across five key economic and social metrics, benchmarking the country’s transformation to a series of global comparisons.