The Leader and the Sign of the Times
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.
This month’s Sign of the Times examines India’s current economic growth outlook and challenges, developing three potential future growth scenarios, each driven by assumptions around the level and success of reforms implemented. The difference between these scenarios is stark when seen over a ten-year period; a comprehensive reform program could see India become a US$10tn economy by 2030, while a muddled response would lead to an economy of only at US$7tn, over the same period.
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.
Liberal democracy is perhaps the most successful political ideology in history and has led to unprecedented global development, peace and prosperity. While it has suffered numerous external shocks in the past two decades, it has until now stood firm and continued to underwrite the Western global order it gave rise to in the 20th century. However, its natural dissolution appears to be inevitable in the face of major long-term forces that are reshaping the world. Given the progress made by global society along so many fronts and the myriad transnational institutions it has established, there is an opportunity to manage an orderly transition to the next world order, using the levers created by the current one.
However, liberal democracy is now facing an internal threat in the form of national populism that by its very nature it is not equipped to handle, and one that combined with external factors threatens the very existence of western civilisation as we know it. Over the past three years national populism has grown from a fringe movement, supported by money, media and personalities into a powerful ideology, National Populism. The resulting clash of ideologies between National Populism and liberal democracy is being fought not just between nation states and power blocs but primarily within them, and this clash threatens to weaken the West just as its dominance is being challenged by emerging superpowers that do not share its values. This may be the first world order whose fate will be determined at the ballot box, where citizens in the West have the opportunity to choose which kind of world they wish to live in.
This month’s Sign of the Times examines the world’s position at a crossroad, where the actions and choices of western industrialised countries will impact the trajectory of the world for potentially decades to come, determining whether the liberal world order can be reformed and rejuvenated or whether the world is facing a less prosperous, more fragmented and darker future.