The Leader and the Sign of the Times
Last month’s Sign of the Times focused on India’s growing links to the rest of the world, and their important role in the country’s growth and development over the near- to medium term. Looking a decade or further out however, there are a number of broader macro-themes, demographic, social, economic, and political, playing out that will fundamentally reshape India as we know it today. These themes give rise to a set of “certainties” (in so much as anything is certain in our world) that will define India in 2025 and beyond. Over the longer-term India stands to benefit significantly from the transformation these macro-themes promise to bring about. While the drivers of these trends are more or less inexorable, and their impact will inevitably continue to gather momentum, there are a number of implications for India’s policy makers over the coming years that will determine whether these certainties are harnessed to create long-term value, or remain a set of impressive but inconsequential statistics.
There has been much discussion about the “India Story” and the key drivers of the world’s second most populous nation’s gradually accelerating growth path. The conventional wisdom is that India’s growth is being driven by its burgeoning young, working age population (the “demographic dividend”) which is creating a growing middle class with increasing purchasing power driving India’s rise. This in turn gives rise to a number of investment themes which point policy and investors to focus on backing incumbents in the domestic market: domestic consumption including organised retail, healthcare, education and financial services, the creation of infrastructure among others. However, despite the rapid growth at a macro level, many of these themes have failed to deliver scaled and rapid change over many decades and consequently have failed to deliver consistent returns, leaving many investors in India disappointed.
The third part in the series on ‘The Shape of the World to Come’ attempts to describe the transition to and the shape of the New World Order. The first part had looked at the positive long term development trends taking place in the world today, providing historic breakthroughs in increasing material benefits on a global scale. The second part looked at the contrasting challenges, both shorter and long term, facing the world, many of which are unintended but direct consequences of the order and system that has enabled the benefits we enjoy today. Looking at these challenges and the pressures that they create it is clear that we live in revolutionary times, and that the world order that has governed the world for decades is coming to an end. This longer-term process is being further exacerbated by current events, with the instability and uncertainty being caused by the Trump Administration serving as a potential catalyst for the demise of the current world order and a harbinger of the transition to come, although the reality of where the Trump Administration are far more complex. In the third part of the series we try to draw out how these current events might impact the larger framework of global change taking place, describing the both transition scenarios the world might face as well as the ultimate result. We also seek to put the current shifts underway within the frameworks the describe the broader sweep of history. What is clear though is that the personal and collective choices we make today have the potential to shape the world for decades to come.
India’s demonetisation scheme announced at the end of 2016 is perhaps the boldest move made by Prime Minister Narendra Modi since taking office in 2014. In a surprise and globally unprecedented action, at least on this scale, the government cancelled all high value currency notes in circulation in an attempt to rein in unaccounted cash wealth, fight corruption, increase the size of formal economy and kick start India’s transition to a cashless society. Mr. Modi’s scheme is particularly bold given the Indian economy’s high dependence on cash transactions and the significant portion of legal tender affected by demonetisation, estimated at 86% of the total value of notes in circulation. While the initial public reaction was positive, public sentiments have turned critical due to the inevitable implementation issues associated with secrecy, the resulting economic hardship felt by the poorest and the growing view that the corrupt had found loopholes to evade the pain. Despite these challenges, the move provide a clear signal of the government’s intent to eliminate graft and improve transparency, and is potentially a harbinger of further reforms and measures to come. Further action is clearly needed; while demonetisation has had a significant short-term effect on the size of the underground economy and unaccounted cash, the government will need to not only follow up with aggressive action against other sources of illegal wealth, it will also need to address with the same sense of urgency the structural root causes that give rise to corruption as well as create the financial systems necessary to handle the massive inflows of capital that the formalisation of India’s economy will bring. If India can effectively channel these inflows and repair what has become a corrupt system such that capital is channelled to the most productive uses, it has the potential to accelerate GDP growth to in excess of 10% annually over the next decade and more importantly remove a corrosive influence which has damaged the nation at all levels. However, the timing for addressing these issues is urgent and the price of failure is a steep one. A failure to follow through on this bold move with the necessary follow-on actions required to quickly revive GDP growth and achieve the stated objectives may risk derailing the economic momentum that India’s economy was building prior to demonetisation by undermining the government’s credibility as an agent of reforms. Therefore, this presents the most important political challenge for Mr. Modi in the next general election due in two years’ time and one of the biggest opportunities in modern times to put India onto the right course.