Thoughts on economics and liberty

A forecast of India’s economic prospects

Today, despite all the hoopla surrounding India, an average Indian is 1/10th as rich as an American, and India's share of world trade is 1/10th of what its share should have been based on its population size. India remains a Third World nation on these and MANY other criteria.

A key question before all investors and commentators is this: Can India sustain its current growth and ultimately become a rich country?

I have examined this issue and come to certain conclusions – which effectively are a  forecast of India's economic prospects – given current policies and governance frameworks.

Analysis underpinning the forecast

India was given a policy shock by IMF when it almost went bankrupt in 1991 and flew a large chunk of its gold reserves to the Bank of England. That policy shock, unwelcome as it was in socialist India (and administered reluctantly by Manmohan Singh who claims undue credit for it!!), jolted India to life like an electric shock can jolt to life the heart of a dying patient. 

That policy shock (policies that Swatantra Party had advocated in 1950-70s but no one in India listened to!) showed immediate results but has now run its course. No further policy reform of significant order has since occurred.

The equation of growth can be summarised thus:

Growth = f(policy, governance, opportunity).

"Opportunity" in the above equation reflects the distance to the technical frontier. In this case India is, on a scale of 1 to 10 ("10" representing the average wealth status of developed countries), at 1.There is an opportunity to increase wealth in India by at least 10 times. 

But to achieve the results for which an opportunity exists, we need right policies and right governance. Governance, or institutions, are absolutely vital. It is the existence of institutions of governance that ultimately dictate whether policy is translated to the grassroots. On that, however, India continues with a run-down dilapidated colonial model of governance that was further smashed up by socialists, so that today corruption and incompetence is all-pervasive. 

Corruption is, as I always say, only a SYMPTOM of the problem. The problem is the poor design of institutions (and policy). These two will INEVITABLY lead to corruption. Indians don't have immoral DNA, any more than the Chinese have immoral DNA. The Chinese on the mainland are hopelessly corrupt. In Hong Kong the same Chinese lead the WORLD(!!) on integrity. People in all these places are merely responding to policies and governance. In India and China the people have no choice but to be corrupt (or, like I have done – to leave).

Today even as India is literally collapsing under the weight of its totally rotten system of governance, there is no one administering a governance ‘shock’ to India. [Note that fact that India's governance is collapsing does not mean India is going to break apart! – no India will ever tolerate that.]

India has grown since the 1990s because it had some SPARE skilled manpower. It has some SPARE capacity in its infrastructure. But today all that has been squeezed out. This is easily illustrated by the examples of communication and transport.

The mobile phone revolution overcame many market barriers in India. For instance it is no longer possible to exploit the rural farmer for he knows the precise price of commodities in the wholesale market. Prices of mobile phone calls are so low that people can call each other literally for free.
 
However, while information can be transmitted wirelessly, humans and goods can’t be transmitted wirelessly! We need to move through roads and other physical obstacles. Ensuring this requires good governance, which India simply doesn’t have. And so India's villages/ towns/ cities are congested beyond imagination: choking to the brim. No more capacity. Journeys which at one time took 20 minutes now take up to three hours.
 
And no more skilled people to manage the industries and institutions that lead to growth.
 
This has become a huge barrier to India's productivity. And there are no signs of improvement because the governance system has ALMOST TOTALLY COLLAPSED.
 
In brief: 
 
1) India’s policy and governance failures have restrained it for 60 years and prevented it from exploiting the opportunity to reach the technical frontier. IMF led rforms in some (not all!) policies have led to some improvement, but these gains are coming to an end.
 
2) Further progress – at least the 10 times catch-up needed for India to become rich – is NOT going to happen unless a lot of things change, in both the policy and governance space.
 

 

My forecast

My prediction about India is this: UNLESS India radically changes its governance design, its current policies can’t do much more good. Expect India's economic growth rates to pull back in the next few years. Its stock markets are optimistically priced. That optimism is misplaced. Investment has already started slowing down. You can't possibly invest in a country where there are NO more skilled human resources and NO infrastructure. And NO rule of law. And NO justice. A country that is Third World from top to bottom.

Yes, it is possible that some more 'juice' can be squeezed out of India if people like Nitesh Kumar or Narendra Modi become its leaders – a prospect that is increasingly more likely. 

But while such people may be able administrators, they have simply have no clue about good governance. They have never understood nor articulated any model of reform that can work. They will perhaps make things work more efficiently, but they, too, can't shift the huge blockage in India – poor governance design (and bad policy!).

So don't be deluded by 'experts' and others who claim that India is going to be a unidirectional growth story. Don't imagine that India's incomes will match those of the West by 2066 or some such date. Its NOT going to happen under the current system. Such "experts" are innocents with no CLUE about what they are talking!

The solution

The solution is clear. It was available 50 years ago when Swatantra Party offered it. India did not listen. A more comprehensive solution is offered in BFN. Most of it is not new. It was known to Rajaji as well. But there are important governance issues on which I've thrown precise light in BFN. 

Whether India follows this advice (medicine!)  today or after 50 years (after much avoidable failure!) is its choice, but if it wants to succeed it WILL have to follow this advice. On that there is simply no choice.

If India does that soon, it will achieve super-rapid growth rates and definitely achieve prosperity. If it does this later, it will delay its growth rates. If it doesn't follow this advice, it will get stuck at a miserable level – including a miserable quality of life – for ever. The choice is yours, India. You decide your fate. Your destiny is in your hands. Has always been so.

The Freedom Team of India aims to offer such governance (and policy) reforms to India. It is looking for members to join. FTI's second annual conference is taking place this weekend. I'll report on it in due course.

Should you be genuinely interested in a dramatically better India, then read BFN and join/support FTI.

Else please carry on dreaming!! Your dreams about India are SIMPLY NOT GOING TO HAPPEN with the current set of political parties.

Period.

My message is very blunt, forthright, uncompromising. I never mince my words. Because there is only ONE way to do things right. There is only ONE way to achieve a healthy wealthy society.  

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