Ruchir Sharma says, India should have sold state-owned companies when they were valuable instead of simply watching private firms drive them into irrelevance.
India should have sold state-owned companies when they were valuable instead of simply watching private firms drive them into irrelevance, according to noted investment banker Ruchir Sharma.
“India has adopted a de-facto policy of what I can only describe as privatisation by malign neglect. The political class can’t bring itself to sell off old state companies, or to reform them either.
“Instead, it simply watches as private companies slowly drive the state behemoths into irrelevance,” Sharma writes in his latest book, titled ‘The Rise and Fall of Nations: Ten Rules of Change in Post-Crisis World.’
Sharma, head of Emerging Markets and Chief Global Strategist at Morgan Stanley Investment Management, wrote that this approach — refusing either to privatise or protect state monopolies — is the worst possible combination for the government.
Citing the example of state-owned Air India, he said, “Thirty years ago, Air India was basically the only way for Indians to fly, but the rise of agile private airlines, including Jet and IndiGo, has reduced its share of flights to less than 25 per cent.”
Similarly, in telecommunication, Sharma argued that former state monopolies like MTNL and BSNL have been allowed to slowly wither in the face of more nimble private telecom companies, and together they now account for less than 30 million of India’s 900 million telecom subscribers.
Noting that two years into his second term, Prime Minister Narendra Modi has moved with surprising caution on economic matters, Sharma said he has stayed well within the old Indian habit of incremental change.
“He (Modi) has done some positive but obvious things, like reducing fuel subsidies, and has promoted a culture of competitive federalism among the states,” he said.
However, he added that India under Modi also offers plenty of fodder for pessimists.
“One of the biggest obstacles to faster growth is a state banking system that controls 75 per cent of all loans, more than double the emerging world average. “In a country with deep socialist roots, privatising some loss-making state banks is seen too heretical a step, despite clear the clear signs of mismanagement,” Sharma noted.
Sharma, who also contributes regularly to the Wall Street Journal and the Financial Times, pointed out that under Modi, the new inflation-fighting mandate of the central bank has combined with falling oil prices to bring inflation down from double digits to 5 per cent.
“That’s a marked improvement, but it is still well above the emerging-world average,” he wrote.
Highlighting flaws in Modi government’s Make in India programme, Sharma said, “…there was still a basic problem. His aides, at least initially, were not talking about building simple factories first.
“…they were talking about advanced factories in industries like solar-powered appliances and military weapons which require the highly skilled workers not yet found in abundance among India’s vast population of rural underemployed.”
Stressing that a nation’s overall rank on the Human Development Index (HDI) often aligns very closely with its ranking for per capita income, Sharma writes per capita income is the result of a country’s long-term growth record and India has risen in the HDI ranking on the back of its growing economy.
Blaming the previous UPA-II government’s polices for double-digit inflation in the five years after the 2008 global financial crisis, Sharma said, “Rather than investing in ways to help contain inflation, India was spending in ways that made its economy exceptionally vulnerable to inflation.”
According to Sharma, to protect people from the effects of global downturn, the previous government threw money at populist schemes that tend to push up prices and wages.
“These programs encouraged Indians to stay at their villages rather than move to factory jobs in the cities, making the economy less productive and more vulnerable to inflation,” he noted.