The picture I presented showed the cover of Fortune magazine titled The Decade of the Challengers from RDEs (Rapidly Developing Economies) and announced that the market cap of the top 100 globalised companies from RDEs was nearing that of S&P 500, and their revenues had crossed $8 trillion and that 20 of these 100 global champions from RDEs are from India. The words were recent headlines in the business press like India: another bull eats humble pie or 9-10% GDP growth rate is history for Indian economy. The audience in Amsterdam consisted of senior managers from global companies. Many of the companies had bought into the India growth story and made large investments in India. But now they are confused. Should they believe the picture of the future I presented or recent newspaper headlines They mentioned a litany of issueshigh inflation and interest rates, high power costs, delays in project clearances, uncertain regulatory policies, falling investments, uncertainty from the proposed Land Acquisition Bill, and, to cap it all, the perception of logjam on major policy reforms as exemplified by the recent fiasco on FDI in retail. They asked, How can India grow and create those 20 global champions given all these challenges in the economy
When faced with such a question, which pits the India growth story against the current doom and gloom mindset, I have found it useful to look for patterns and solutions across time and countries. In this case, there was no need to look beyond our own shores, as a study of recent history of Indias economic development shows that the current situation is certainly not the first time its economy has faced such existential questions.
It was exactly 30 years ago in 1981 that saw the Indian economy contract dramatically by over 5% and the government was forced to launch the economic liberalisation programme that ditched licence raj and policies like MRTP and FERA. The next shock was in 1991 when the GDP growth rate fell to 1% and the government embarked on the next phase of liberalisation, opening up most sectors to FDI and restricting government role to eight sectors. The third economic shock was triggered by the dot-com bust in 2000 when the growth rate fell to about 4%, which led to the opening up of the infrastructure and banking sectors to private participation. The fourth such situation is one we face today, when the GDP growth rate has fallen to 6-7% from average of 8-9% in the last decade.
History often surprises us by throwing up patterns when you look back with a dispassionate eye, patterns which give pointers to solutions to similar problems in the future. So what were the patterns visible from the previous three crises The first pattern, which came as bit of a shock, was the sheer co-incidence of the incidence of a crisis every 10 years or so. Those who believe in destiny may see a hidden meaning in this. Another interpretation could be that the new set of policies in response to a crisis plays out in 10 years, and then the economic and political forces begin to build up, again leading to the next crisis. The second observed pattern, a critical one from the perspective of the current crisis, is that these crises pretty much forced the government to act finally and implement policies that otherwise were difficult to get through the political process. It is a mute question if India would have seen economic reforms in 1981 and 1991 if we were not faced with the deep crisis in those years. The third observed pattern, which gives a lot of hope for the rest of this decade, is that each of these crisis led to resetting of the economy into a higher growth trajectory. The 1981 crisis led to resetting of the Hindu rate of growth of 2-3% to 4%. The 1991 crisis reset the rate to 5-6%. The 2000 crisis reset the growth rate to 8-9%. The fourth pattern, an interesting one for students of economic and political history, is that each crisis led not just to a new economic environment but also changed the political discourse in the country.
Time now to come back to the original question. Will the picture of the future or the words of the current headlines set the agenda for the rest of the decade Even a pessimist cannot dispute the facts that we have a higher per capita income, a younger population, the highest levels of investment as percentage of GDP and the highest levels of corporate profitability today compared to 1981, 1991 or 2001. These are fundamental growth engines for the economy. At the same time, an optimist will agree that we seem to have hit the 10-year economic speed breaker. The interesting conundrum we now face is whether India will remain true to the historical patterns and the government will be forced to act on the large policy agenda in front of it. If history is anything to go by, the policy reforms will reset GDP growth rate to a higher trajectory of over 10% and also reset the current political processes to include the growing importance of civil society and the role of people movements in shaping economic policies.
History often portends the future, more so when a picture is worth a thousand words!
The author is managing director, the Boston Consulting Group, India. These are his personal views