GDP growth at 4.7%: Is P Chidambaram the new Yo Yo Honey Singh?

Vivek Kaul 
Yo Yo Honey Singh has an amazing sense of rhythm.
And every time he comes up with a new song, it keeps playing in my head over and over again, like an infinite loop. His latest song “
char botal vodka kaam mera roz ka” is no exception to the rule.
Having said that, one has to also state up front that the lyrics of his songs should never be taken seriously and need to be treated with a pinch of salt. As the tagline of the old Hero Honda advertisement used to be “fill it, shut it, forget it”.
Yo Yo Honey Singh is a tad like that.
But what about the finance minister P Chidambaram? How seriously should he be taken on what he says? Or is he the new Yo Yo Honey Singh?
In a recent interview to ET now, after presenting the interim budget, Chidambaram said “There is no doubt that growth is reviving. We clocked 4.4% in Q1 of the current year, 4.8% in Q2, 5.2% at the minimum in Q3 and Q4 taken together. It shows that growth is coming back at the rate of about 0.4% per quarter.”
What Chidambaram was essentially saying is that the economic growth as measured by the growth in gross domestic product(GDP), in the first quarter of the 2013-2014(i.e. the period between April 1 and June 30, 2013) came in at 4.4%. In the second quarter (i.e. the period between July 1 and September 30, 2013) it came in at 4.8%. He further said that the growth during the next two quarters of the year (i.e. the period between October and December 2013 and January and March 2014) would come in at 5.2%, when taken together. And hence, this shows an economic growth rate of 0.4% per quarter, he remarked. So, by that logic it would take around eight quarters or two years more, more for the economic growth to get back to 8%. Now only if things were as simple as that and everything in life moved in an arithmetic progression.
One needs to be rather ‘brave’ to make predictions on the basis of two data points. But that is what Chidambaram did. And now he has been proven wrong with the GDP growth numbers for the third quarter of 2013-2014(i.e. the period between October 1 and December 31, 2013) that were
released on February 28, 2014.
During the period, the economic growth as measured by the GDP growth came in at 4.7%. This is nowhere near the 5.2% growth that Chidambaram had predicted around two weeks back. If one looks at the data in detail there are many worrying signs.
The manufacturing sector shrunk by 1.9% during the period (GDP at factor cost. At 2004-2005 prices). It had grown by 2.5% during September to December 2012. The sector had grown by 1% during July to September 2013. If India has to create jobs and move people from farms, the manufacturing sector needs to do well.
The agriculture sector grew by 3.6% during the period, after growing by 4.6% during July to September 2013. The agriculture sector contributed around 16.9% to the GDP ( GDP at factor cost. At 2004-2005 prices). But it employs around 45% of the Indian working population (
Employment and Unemployment Survey 2011-12(68th round)). Given this, it is fairly straight forward that if India has to progress jobs need to be created, so that more people can moved out of agriculture, which currently suffers from over-employment.
And what for that to happen, the manufacturing sector needs to do well. In fact, the GDP data clearly shows that the manufacturing sector has barely grown over the last two years.
Other than the manufacturing sector, the mining sector has shrunk by 1.6% during the period. The construction sector, another sector which has the potential to generate ‘huge’ jobs, grew by only 0.6%, after growing by 1%, during September to December 2012. Financing, insurance, real estate and business services did reasonably well and grew by 12.5%, and thus pushed up the overall economic growth by 4.7%.
In fact, things are worrying even when looks at the GDP from the expenditure point of view. The personal final consumption expenditure formed 61.5% of the total expenditure during the period. In September to December 2012, the PFCE had formed around 62.7% of the total expenditure. What this clearly tells us is that PFCE is not rising as fast as other expenditure. In fact, during the period, the PFCE rose by just 2.6% to Rs 9,81,463 crore in comparison to September to December 2012.
Interestingly, during the period September to December 2012, the PFCE had grown by 5.1%. What this clearly tells us is that people are going slow on personal expenditure. The reason for that is high inflation which has led to more and more money being spent on meeting daily expenditure. Hence, people are postponing all other expenditure and that has had an impact on economic growth. One man’s expenditure is another man’s income, after all.
This scenario has been playing out pretty much over the last few years. But P Chidambaram has continued to be optimistic.
In November 2013, he remarked “The second quarter GDP growth rate indicates that the economy may be recovering and is on a growth trajectory again.” In December 2013, he remarked “We are going through a period of stress, but there is ground for optimism. We expect things to become better.” In late December 2013, he remarked “I am confident that the greenshoots that are visible here and there will multiply and that the economy will revive, there will be an upturn in the second half of this year.” In January 2014, he remarked “ I am confident that Indian economy will also get back step by step to the high growth path in three years.” And in February 2014, after presenting the interim budget, he said “we will get back to the high growth path.”
At almost every given opportunity Chidambaram has told us that the economy is recovering, there are green shoots and that the second half of the year will be better than the first half. The GDP grew by 4.4% during April to June 2013 and by 4.8% during July to September 2013. And it grew by 4.7% during October to December 2013. So where is the economic recovery that Chidambaram has been talking about? And where are the green shoots? To me, it appears to be more of the same happening.
Chidambaram has also predicted that “India is likely to achieve an economic growth of between 5-5.5 percent in this fiscal year.” But with the GDP growth being less than 5% during the first three quarters of the year, achieving even 5% growth will be difficult. Let’s not even talk about achieving 5.5% growth.
To conclude, Chidambaram’s statements on economic growth, like the lyrics of Yo Yo Honey Singh’s songs should not be taken seriously at all and be taken with a pinch of salt. While one doesn’t expect a minister of the ruling coalition to be totally negative on the economy, but at least some honesty on what is happening on the economic front, would be nice. Now only, if Chidambaram was listening.
Or, is he, like me, and a lot of other people, busy listening to Yo Yo Honey Singh?
Char botal vodka, kaam mera roz ka…
The article originally appeared on on March 1, 2014

(Vivek Kaul is a writer. He tweets @kaul_vivek)

What the latest WPI number tells us about the Indian economic story

InflationVivek Kaul

Inflation as measured by the wholesale price index(WPI) fell to a eight month low of 5.05% in January 2014. On the face of it, it might seem like a reason to rejoice, but the devil as they say always lies in the detail.
Around 65% of the wholesale price index is made up of manufactured products. The rate of inflation for manufactured products stood at 2.76%. In comparison, this had stood at 4.96% in January 2013.
On the other hand the price of food articles which constitute around of the index rose by around 8.9%. In comparison, the rise had been at 12.4% in January 2013.
Vegetable prices went up by 16.60% (in comparison to over 30% during the same period last year). The price of rice was up by 13.4% (in comparison to 17.8% during the same period last year). The price of Egg, Meat and Fish went up by 10.9% (in comparison to 11.2% during the same period last year).
If India has to get economic growth going again, the manufacturing inflation needs to rise from its current level and the food inflation needs to fall further.
For more than five years, food inflation has been very high. High inflation has eaten into the incomes of people and led to a scenario where their expenditure has gone up faster than their income. This has led to people cutting down on expenditure which is not immediately necessary.
When people cut down on expenditure, the demand for manufactured products falls as well. This is reflected in the rate of inflation for manufactured products which stood at 2.76% in January 2014. Interestingly, this is also reflected in the consumer durable number( a part of the index industrial production from a use based point of view), which fell by 16.2% in December 2013.
At a more practical level it is reflected in the falling car sales numbers. The domestic car sales number stood at 1,60,289 units in January 2014, falling from 173,449 units in January 2013. The two wheeler sales went up by just 5% to 179,576 units in January 2014 over January 2013.
With high inflation eating into the incomes of people it is not surprising that they are cutting down on their expenditure. Also, high inflation has prevailed for close to five years now. Given this, a fall in overall inflation, as it has over the last couple of months, will not immediately lead to increased consumption. People need a little more evidence of falling inflation before they decide to open up their purses. This means, that overall inflation (as measured through the wholesale price index or the consumer price index for that matter) needs to continue to fall over the next few months, for consumer demand to return. Whether that happens remains to be seen.
While food inflation has been falling, the inflation at the retail level still continues to be strong. If one looks at core retail inflation (i.e. non food non fuel inflation which forms around 40% of the consumer price inflation index) it continues remains to be high at 8%
The core inflation contains measures of housing, medical care, education, recreation, transport, personal care etc, basically, everything that is required for a reasonably comfortable living.
If consumer demand has to return, the core retail inflation needs to come down from a level of 8% to close to 5-6%.
What makes a fall in core retail inflation even more important is the fact that the items that constitute it (i.e. housing, medical care, education, recreation, transport, personal care etc) are the ones that consumers deal with on an almost daily basis. And they will not feel inflation has come down, unless the price rise of these items starts to slow down.
This number is closely tracked by the Reserve Bank of India(RBI) as well. The RBI governor Raghuram Rajan had said on January 29, 2014, “that he would have liked to see a greater reduction in core inflation.”
Also, f
ood inflation needs to continue to fall. Its the high price of food that feeds into wages and thus leads to high levels of core retail inflation. Once that is brought under control, consumer demand will return, and will start to reflect in higher manufactured products inflation and a better index of industrial production number (which stood at -0.6% in December 2013).
And that, in turn, is likely to show up in higher economic growth.

The article originally appeared on on February 14, 2014

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Why Chidambaram should not be overconfident about India’s economy

In the recent past, politicians belonging to the Congress led United Progressive Alliance have often remarked that India will be back to a high economic growth path over the next few years. The latest such comment came from finance minister P Chidambaram on January 16, 2014. As Chidambaram said “As global economy recovers and as new measures take effect, I am confident that Indian economy will also get back step by step to the high growth path in three years.”
This confidence seems to suggest that high economic growth in India is a given and come what may it will come back. But history suggests that is clearly not the case. Economic growth can never be taken for granted.
The Global Emerging Markets Equity Team of Morgan Stanley in report titled 
Tales from the Emerging World dated January 14, 2014, points out “In a recent paper, former [American] Treasury Secretary Lawrence Summers warns that of all the factors that drive economic growth the one with the most clearly proven predictive power is simple regression to the mean.” Regression to the mean is a technical term which essentially means that a variable that is highly distinct from the norm tends to return to “normal”. Summers has co-authored the paper titled Asiaphoria Meet Regression to the Mean with Lant Pritchett.
In simple English what Pritchett and Summers are saying is that high economic growth rates tend to revert to their long term averages. As they write “Episodes of super-rapid growth tend to be of short duration and end in decelerations back to the world average growth rate. Both China and India are already in the midst of episodes that are historically long and fast.”
Hence, high economic growth rates can never be taken for granted. “The growth rate, even in successful economies, will tend to revert to the long-term average for all economies (which is about 1.5 to 2 percent). Summers[along with Pritchett] analyzed all 28 nations that, since 1950, have experienced periods of “super rapid growth” of more than 6 percent a year. These booms tend to be “extremely short lived,” with a median duration of nine years, and “nearly always” end in a significant deceleration, with a median deceleration of 4.65 percentage points to an annual GDP growth rate of just 2.1 percent, or “near complete regression to the mean.” In short, the nations catching up most rapidly now are increasingly less likely to continue catching up in the future,” the Morgan Stanley authors point out.
As mentioned, periods of high economic growth rates last for a median period of 9 years. The research paper considers data up to 2011. And by that time, 
the economic growth in India had lasted for a period of around 8 years. In China, it had lasted 32 years.
While Indian politicians might like to think that it is just a matter of time before economic growth comes back, that may not be the case. As Pritchett and Summers write “The single most robust and striking fact about cross-national growth rates is regression to the mean. There is very little persistence in country growth rates over time and hence current growth has very little predictive power for future growth.” Given this, just because the Indian economy has grown at a high growth rate between 2004 and 2011, that does not mean that it will continue to do so in the future as well.
Pritchett and Summers do not get around to explaining the major reasons behind why this happens (the research paper is still work in process). But one of the reasons they point out is the rule of law. As they write “we suspect that the reason for slowdown that will come in China and India is for a similar reason but which will manifest differently given the very different politics. That is, in neither country does investor confidence rely on rule of law.”
But there is other research which points out why poor countries are not able to sustain high economic growth beyond a point. As the Morgan Stanley authors point out “New research, however, shows that “development traps” can knock countries off the catch-up path at any income level. The challenges of developing industry — backed by better banks, schools, regulators, etc. — do not accumulate and confront an economy all at once. They continue to harass an aspiring nation every step up the development ladder.” This is already playing out in India.
In fact, countries flatter to deceive, do well in one decade and don’t do well in the next. “In some cases, development traps can drag newly rich countries back to the middle income ranks, as has happened in the last century to Argentina and Venezuela. Since the late 1950s, many nations have also slid back from the middle to the lower income class, including the Philippines in the 1950s, and Russia, South Africa and Iran in the 1980s and 90s. On average, more nations regress to a lower income level than advance to a higher one. And every decade tosses up new convergence stars — from Iraq in the 1950s to Iran in the 60s and Malta in the 70s — that burn out in the next decade,” Morgan Stanley authors point out.
Hence, sustained economic growth is a very rare phenomenon. And just because India has grown at a fast economic growth rate in the past, it may not do so in the future. The highly optimistic UPA politicians need to start by at least appreciating this point. 

The article originally appeared on on January 21, 2014 
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Mr FM, interest rates in India should be at least 17%

On July 3, 2013, the finance minister P Chidambaram asked government public sector banks to cut interest rates. There was nothing new about the finance minister’s diktat. He has asked public sector banks to cut interest rates, several times in the recent past. “Reduction in base (or floor) rate will be a powerful stimulus to boost credit growth,” said Chidambaram.
In a statement made today(July 5, 2013) D Subbarao, the governor of the Reserve Bank of India, came out in support of Chidambaram. “When RBI cuts interest rates, expectation is that monetary transmission will take place and banks would respond. Some have responded and some haven’t,” Subbarao said. What Subbarao meant in simple English was that when RBI cuts interest rates, the expectation is that banks will also cut interest rates on loans.
But interest rates in India are much lower than they should be given the rate of consumer price inflation and the rate of economic growth. This is one of the well kept secrets of Indian banking.
The return on a 10 year
government bond as of now is around 7.4%. A 10 year government bond is a bond sold by the Indian government to finance its fiscal deficit or the difference between what it earns and what it spends.
Anyone investing in a bond basically looks at three things: the expected rate of inflation, the expected rate of economic growth and some sort of risk premium to compensate for the risk of investing in the bond. These numbers are added to come up with the expected return on a bond.
The consumer price inflation
in the month of May 2013 stood at 9.31%. As per most forecasts the Indian economy is expected to grow at anywhere between 5-6% during this financial year (i.e. the period between April 1, 2013 and March 31, 2014).
Lets assume that lending to the Indian government is considered to be totally risk free and hence consider a risk premium of 0%. Also to keep things simple, lets assume a consumer price of inflation of 9% and an expected economic growth of 5.5% during the course of the year. When we add these numbers we get 14.5%.
This is the rough return that a 10 year Indian government bond should give. But the return on it is around 7.4% or half of the projected 14.5%.
Why is that the case? The reason for that is very simple. Indian banks need to maintain a statutory liquidity ratio of 23% i.e. for every Rs 100 that a bank raises as a deposit, it needs to compulsorily invest Rs 23 in government bonds.
Hence, banks(and in turn citizens) are forced to lend to the government. Similarly, Life Insurance Corporation of India also invests a lot of money in government bonds. So there is a huge amount of money that gets invested in government bonds. This ensures that returns on government bonds are low in comparison to what they would really have been if people and banks were not forced to lend to the government.
The return on government bonds acts as a benchmark for interest rates on all other kind of loans. This is because lending to the government is deemed to the safest, and hence the return on other loans has to be greater than that, given the higher risk.
The 10 year bond yield or return is currently at 7.4%. The average base rate for banks or the minimum rate a bank is allowed to charge to its customers, is around 10.25%. So most loans are made at rates of interest higher than 10.25%. The difference between the 10 year bond yield and the average base rate of banks is around 285 basis points (one basis point is one hundredth of a percentage).
If the 10 year bond yield would have been at 14.5%, then the interest rates on loans would have been greater than 17%(14.5% + 285 basis points). But since the government forces people to lend to it, the interest rates are lower. This act of the people being forced to lend to the government is referred to as financial repression.
Economist Stephen D King in his book
When the Money Runs Out makes an interesting point about financial repression in the context of western economies. As he writes “our savings will increasingly be diverted to government interests, whether or not those interests really deliver a good rate of return for society.”
While this may happen in the Western societies as governments resort to financial repression to repay the huge amounts of debt that they have accumulated, it is already happening in India.
Financial repression is a major reason behind the Congress led United Progressive Alliance (UPA) government going in for a large number of harebrained social programmes (the most recent being the right to food security, which has been brought in through the ordinance route). They know that money required for all these programmes can easily be borrowed because 23% of all bank deposits need to be invested in government bonds issued to finance the excess of government expenditure over revenue.
This is also why interest rates offered on bank fixed deposits are close to the rate of consumer price inflation, leading to a zero per cent real rate of return on investment. This is also makes people buy gold and real estate and invest in Ponzi investment schemes, in search of a higher rate of return. The cost of financial repression is being borne by the citizens of this country.

Also, the idea behind Chidambaram’s call for lower interest rates is that people are likely to borrow and spend more. And this in turn will get economic growth going again. Theoretically this just sounds perfect.
But then theory does not always match practice. Banks raise deposits at a certain rate of interest and then give out loans at a higher rate of interest. So unless the interest rate offered on deposits goes down, the rate of interest charged on loans cannot come down.
Banks are not in a position to cut interest rates on deposits as of now (
As I have explained here). Hence, it is not possible for them to cut interest rates on loans. Any bank which cuts interest rates on loans will essentially end up with lower profits.
Also even if interest rates on loans are cut, it may not lead to people borrowing and spending money. There are several reasons for the same. Lets first consider car loans.
Car sales have fallen for the last eight months in comparison to the same period during the year before. High interest rates are a reason offered time and again for slowing car sales. But some simple maths tells us that can’t really be the case.
Lets consider the case of an individual who borrows Rs 5 lakh to buy a car at an interest rate of 12% repayable over a period of 7 years. The equated monthly instalment for this works out to Rs 8826. Lets say the bank is able to cut the interest rate by 0.5% to 11.5%. In this case the EMI works out to Rs 8693, or Rs 133 lower. Even if the bank cuts interest rates by 1%, the EMI goes down by Rs 265 only. If we consider a lower repayment period of 5 years, an interest rate cut of 0.5% leads to an EMI cut of Rs 126. An interest rate cut of 1% leads to an EMI cut of Rs 251. The point is that no one is going to go buy a car because the EMI has come down by a couple of hundred rupees.
This is something the people who run car companies seem to understand.
As Arvind Saxena, managing director, Volkswagen Passenger Cars, told DNA in an interview carried out in late January 2013 “Fundamentally nothing has changed that should really prop up sales. If interest rates go down by 25 or 50 basis points, it doesn’t change anything overnight.”
RC Bhargava, a car industry veteran and the Chairman of 
Maruti Suzuki India was more vociferous than Saxena of Volkswagen when he told Business Standard in a recent interview “In India, over 70 per cent of car purchases are financed by banks. An interest rate reduction of, say, one percentage point doesn’t change a person’s decision of buying or not buying a car…With the uncertainties prevalent today, a consumer does not know what his job would be like after a year – whether or not he will have an incremental income, or even a job.”
Of course when people are not buying cars, it is unlikely they will buy homes, unless we are talking about those who have to put their black money to use. A cut in interest rates will bring down EMIs significantly on home loans. But even with lower EMIs people are unlikely to buy homes. This is because the cost of homes especially in cities has gone up big time making them totally unaffordable for most people.
The broader point is that just asking banks to cut interest rates doesn’t make any sense without trying to address the other issues at play.

The article originally appeared on on July 5, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)

‘The average lifespan of good govts is just 7-8 years’

Picture 028
When it comes to the growth sweepstakes, it’s like a game of snakes and ladders. It’s not easy for any country to avoid all the snakes, says Ruchir Sharma, head of Emerging Market Equities and Global Macro at Morgan Stanley Investment Management. Most recently he has authored the bestselling Breakout Nations – In Pursuit of the Next Economic Miracles.He generally spends one week a month in a developing country somewhere in the world. Based on those experiences he even refers to his book as an ‘economic travelogue’. Sharma was speaking a literary festival in Mumbai on Sunday. Here are a few excerpts from what he said.
The past has no prologue
One of the first rules of the road that I would like to set at the outset is that the past has no prologue. Because what we do is extrapolation and we take what happened in the past and draw straight lines out into the future and say this is what is going to happen in the future. That is just one of the basic rules that does not work.
If you look at it, there are very few countries in the world that can sustain economic success. Only about one third of all economies are able to grow 5% or more for on an average in any decade. Only about one third of the 180 economies in the world. Of the 180 economies in the world only about 35 are developed economies, everyone else is emerging.
What this basically means is that there are these countries which grow for a short span of time and then come back down. It is like the game of snakes and ladders. You sort of go up and get bitten by a snake and come down. Some countries find a lucky ladder and leap frog and get to the top. Very few countries are able to get to the top and very few countries are able to sustain economic success.
Given this, one of the biggest negatives against India at this point is that they have had such an extraordinary decade. And after this extraordinary decade the complacency had set in where we thought of demographics and other factors we would be able to cruise control and nothing else matters as far as growth is concerned and that really has been thrown out of the window.
The average life of a good government is seven to eight years
The other rule is that the average life of a good government is about seven eight years. Typically governments tend to do well for seven to eight years, maximum to a decade and after that the performance of the governments typically tends to decline. This is true even for Russia where the first two terms of Putin was relatively fine. In the UK Margaret Thatcher did very well for about eight nine years and was booted out after that. François Mitterrand faced something similar in France.
There are some exceptions like Lee Kuan Yew of Singapore who are outliers. Usually the average life of good government is seven to eight years and which is why we are concerned about governments that remain in power for too long and very concerned about countries which try and change the constitution to hold onto power for too long. Then there interest is only in ensuring that there power and vested interests are taken care of and they run out of fresh ideas.
So that is the thing with the current government that it has been in power for a long period of time. But typically after seven to eight years governments don’t do well. That is the life cycle. There are very few who do well for a decade or more.
Markets reform when in crisis
The other sort of rule that I have figured about markets is that they only tend to reform when they have their back to the wall. Crisis is what focuses your mind. Otherwise you have a boom, you fitter the gains away and then you sort of slide away and then try and stop it.
That is why I said that of the 180 economies in the world today only 35 are developed because very few are able to grow for a sustained period of time. So you get these sort of growth spurts because they don’t reform.
India’s case is very interesting to look at it. Every 10 years at the start of the decade India seems to consistently have a some sort of a macroeconomic crisis. This was there in the early 1970s, early 1980s, 1991, the early 2000s period when we had the tech boom bust cycle and the growth rate slipped. You can argue that this year has turned out to be similar. The good news for India is that every time we have this macroeconomic crisis or a threat or a currency weakness that is when we take to reform. In 1981 we did that under the IMF, in 1991 we did that, 2001-2002 the same thing happened and we seem to be doing that now.
Very few emerging markets have taken to reform in a proactive manner. They tend to reform with their backs to the wall and that is what China did with such an exception. China pro-actively reformed every 4 to 5 years and came up with some big bang reform. They were proactive about it and not complacent about it. You can argue that complacence is setting in now. But the last thirty years has been a stream of pro-activeness.
Premature populism is a bad sign
The other sort of rule is to look for is populism. This is one of the things which is very hard to say because it is politically incorrect, but building a welfare state pre-maturely creates the wrong incentives. Schemes like NREGA keep too many farmers at the farm. A mass form of populism which has taken place in India over the last ten years. On the other hand if you look at the successful economies like Korea, Taiwan or even China, they did very little in terms of the welfare state at this stage of their economic development. There focus was lets get grow, and make the pie big enough. And then we will share the the pie later.
Today you can argue that countries like Korea and Taiwan don’t do enough of a welfare state. The Korea story is very fascinating. It is one of the most equal societies. And it is a very well educated society and Korean women are very well educated. Yet their participation in the labour force is very low. And that is because many of them are not able to leave their children at home and go to work because they don’t have a good enough child care support system. They don’t spend enough on those kids. In Korea’s case I can argue they need more welfare and in India’s case I can argue that there is too much welfare.
Social spending as a share of GDP for Korea and India is equal even though Korea’s per capita income is more than ten times higher than India’s per capita income. So to have too much populism prematurely is a bad sign.
The billionaire’s index
One of the popular parts of the book that resonated with many people was the billionaire’s index. Forbes publishes a billionaire’s list in March. It sort pours over across the world to see who are the good billionaires, who are the bad billionaires and stuff like that. I think the key dimension will be to look at the billionaire’s index which is that you need to figure out that in case of how many of these billionaires the wealth has been created because they are genuinely productive billionaires. They are creating wealth in sectors such as technology, pharmaceuticals, manufacturing etc. When you have wealth created in those sectors you are respected but when you have wealth created in so called sectors where the benefit has happened because you had a good government connection, that is just not good. In India’s case we saw many such billionaires rise over the past decade which is what made me somewhat concerned. It is a bad sign for democracy as well .
Other thing to see in the billionaire’s index is that you need churn, you need new people to come up the list. You don’t need holders of the past always there. The third thing is that you need the concentration of the billionaires as a share of the economy to not be that high. That leads to resentment. Having said that India respects its billionaires a lot.
The James Bond moment
When I go and meet billionaires in countries such as Mexico, Brazil, or even Russia, in all those countries you have all these billionaires with a whole bunch of armed bodyguards. There are scared to go out on the streets on their own because they fear that they are going to be attacked. In places like Brazil, you will find a sale of luxury cars is quite low for a country of that size, because people are scared to display that kind of wealth. And if there are luxury cars they are all bullet proofed because they are scared about what is going to happen.
On the other hand Brazil tops the list of maximum number of helicopters sold. The only time I feel like James Bond is when I go to Sao Paulo in Brazil. In Sao Paulo the traffic is really bad but the permission to fly helicopters is quite easy to get unlike what happens in Mumbai.
My sort of James Bond moment is after you finish your meeting they will take you to the roof of the building where there is a helipad waiting for you, you run to the helipad, you take the helicopter and go to the next destination. And you see the aerial view of Sao Paulo and there is a whole bunch of helipads up there on top.
That is a sign. It is a sign of poor infrastructure and you are using these helicopters to short circuit roads and to sort of not care about what is happening on the street and take a helicopter across it. And then you got gated community where they you behind these fortresses. And I think that is just a bad sign. Brazil is the most extreme and my James Bond moment will remain and therefore I relish my trips to Brazil.
The Four Seasons Index
What I do not relish going to Brazil let me tell you are the costs. And this is one my other rules in terms of the cost with the Four Seasons index. I am fortunate that I get to stay in the Four Seasons hotel in all these countries. And I think its good benchmark to look at a country to figure out whether its cheap or expensive?
In Brazil when I go I find the rates are exorbitantly expensive. To get a top hotel on a trip to Rio de Janeiro you pay $800-1000 a night. And that is really exorbitant. You go to East Asia, places like Jakarta and Bangkok, you pay about $200-300 a night, and that is pretty competitive. In places like Brazil and Russia you pay $800-1000 a night. And the currency seems very expensive. My colleagues went to Brazil last year and one of them bought a a t-shirt. The t-shirt cost more than $100 and it did not last even a single wash. So terrible quality and you are like paying a huge price for that.
Hence, Brazil has been one of the big laggards because of expensive currency. This year the Brazil’s growth rate will be only 1%. When you have expensive currency it is bad news. India on the other hand one of the positive would be currently is that the currency is extremely competitive at this point of time.
But isn’t a weak rupee a sign of weakness?
People are concerned that this is a sign of real weakness in India and whether India is about to face a balance of payment crisis? Is money going to leave the country in a huge way because is the currency is quite weak?
One of the rules of the road I watch out for is that one of the first people who take money out of the country when they think that the country is going to face a crisis are the locals. And this is counter-intuitive because most people like to believe that its the foreigners who flee when they sight trouble.
So I am always watching what are the locals doing? Are they taking money out of the country? Or are they bringing money in? This happened in India in 1991. Similarly in East Asia in the late 1990s.
The good thing for India on a balance of payment front is that we don’t have too much outflow on that front. We don’t have mysterious outflows which show up on the RBI balance sheet. You know that is going on when the hawala rates are way way more expensive than what your official rates are. You don’t see such signs in India. So it seems that the currency weakness is happening in an orderly manner. The currency is adjusting for the overvaluation because of our inflation.
Efficient Corruption
The businesses are complaining about investing in India. They are saying that listen we are better off investing abroad rather than India because the cost of India doing business has become very high. So they are even going to places like Indonesia etc. So I asked one businessman in India, that isn’t Indonesia also very corrupt? So why are you investing in Indonesia? His answer was very interesting. But Indonesia is something what you call efficient corruption compared to India which is like in Indonesia if you pay money to somebody the work is done.
And I have got first hand evidence of efficient corruption. I went to Indonesia and I was struck in Jakarta in a traffic jam. The person who was taking me around Jakarta called a number up and without me knowing police escorts arrive. What you do there you pay a $100-200, and call up a number, police escorts arrive, who clear the traffic for you and take you to the airport. That is efficient corruption for you as far as that country is concerned.
The second city rule
One of the other rules that I looked for is the second city rule. If you look at all the successful economies across the world that whenever there is a growth spurt you get the rise of second cities in that country.
As far as India is concerned we don’t have one prominent city and everything else below that. We have four to five mega cities. And here is the difference with China. You look at India’s mega cities with populations of 10 million, 16% of India’s population lives in these mega cities. And that is why these mega cities are bleeding because that is way too high a number. You take the case of China 5% of the population lives in the mega cities of China .
The question is why? Because there has been a huge rise in the second -tier cities in China. If you look at the last fifteen year or so more than 20 second tier cities have come up in China. And second tier I define as cities which had a population of a less than 100,000 but now have a population of a more than a million. In India’s case only six such cities have come up over the last forty to fifty years. And that is the real difference and so there is big pressure on the big cities in India.
A 5% growth rate is a big disappointment
So is India going to be a breakout nation or not? And here is what I find quite fascinating as far as India is concerned. When the book came out this year, the general response was that by giving India a 50% chance of becoming a breakout nation, you are being too pessimistic.
And how I define breakout nations? I define breakout nations as those countries which are going to do better than other countries in the same per capita income class and countries which will grow faster than expectations.
So those are two my major major definitions of breakout nations. And why those two? Because if people tell me that if India grows at 5% what is the big deal because that is still faster than the US or many of the European countries. And my response to it is that is the wrong way of looking at it because if India grows at 5% per year, India’s per capita income is really low and it is far too low to satisfy India’s potential and for India to get people out of poverty.
And which is why India’s case of a 5% growth rate is a big disappointment and specially when you take into account that at the beginning of the year there was an expectation that we will do 9% this year.
A bit conflicted on India
On most countries in the book I was quite categorical. Like I was quite negative on Brazil as you have guessed by now. Even on Russia. I had a fixed view on China. On India I was a bit conflicted. I came out with the book and the most common response here was that are you being a bit pessimistic by giving it a 50% chance. Fine. Six months later by August, the response of most people was that you are being too optimistic on India by giving it a 50% chance of being a breakout nation. So that is how dramatically sentiment has swung on India this year. We went from euphoria on a straight line extrapolation. And how great we are. And how are going to concur the world.
And then there was complete disappointment by August. Last couple of months sentiment has shifted back again. The needle has shifted again. The good news is that expectations are much lower now for India to be a breakout nation.
Indian democracy versus authoritarian China
Gone is the story that how we are going to be the next China out there. One thing I find do disturbing is that a lot of people respond to this by saying you know the reason India cannot be the next China is because we are democracy. And that is the price we pay for being a democracy. China is a authoritarian state. It can implement reforms the way it wants. It can displace people and acquire land. It can set projects up.
India is a democracy therefore we have to pay a price by accepting a lower growth rate. And this argument irritates me. If you look at the high growth instances of the last thirty years, a high growth instance is a situation when a country is able to grow at 5% per year or more in any particular decade. And there are hardly 120 such cases over the last 30 years. How many of them were democracies and how many of them were authoritarian? Its a 50: 50.
For every successful China following an authoritarian regime, there are failures like Vietnam, which was built as the next China, and which has turned out to be a real disappointment, following the authoritarian system. A whole bunch of countries in Africa including the dictatorship of Zimbabwe have failed.
So what matters is the quality of economic leadership and not whether you are democratic or authoritarian. A lot of democracies have done well over the last twenty thirty years. Democracy lets remember is a relatively new concept in much of the emerging world and that is something that we should celebrate.
India is 28 countries with almost distinct identities
There are some state leaders in India who are able to do quite well because they are focussed much more on economic growth. And that to me is a real positive about India as to how India is emerging as a land of 28 independent states, almost 28 countries with distinct identities. We have many good state leaders and the relationship between economic growth and getting re-elected is increasing.
If you manage to grow above the national average and at a past faster than the preceding five years the chances that you as a state leader will get re-elected are extremely high. I think that’s the big message. So therefore you get states like Gujarat where you keep getting victories and then you get a state like West Bengal where you finally get defeated after a very poor performance. This is being backed by data over the last five years.
The picture for India for me is still one that is mixed. But it is improving and improving principally because our expectations have been balanced compared to where we were at the start of this decade. Gone is the era of straight line extrapolations. India still has a reasonable shot at being a breakout nation. But if we got to do it we got to do it state by state. This really is a land of 28 countries like no other emerging market I know. For example China is a very homogeneous society where as India is a lot more heterogeneous. And this bottom up model of economic growth state by state gives up the best hope. 

The article originally appeared on on December 11, 2012.
Vivek Kaul is a writer. He can be reached at [email protected]