There seems to be a disconnect in the fortunes of the economy and the analysis, and forecasts, of the experts. The economy has been consistently growing above 8% per annum, with the latest estimate within kissing distance of 9%. The Sensex is back above 12,500, after flooring many an analyst who had forecast that this wouldn’t happen, not this year anyway. It could be that the UPAGovernment has been implementing sound policies. Try as they might, the government has not been able to do much economic damage. So what’s going on?
The simple reality is that India has changed. So much so that soon the economy will be politician proof. Check out any boss you know. How often do they have to seek the government’s permission to conduct any of their daily activities? To be sure, housing and the municipal departments are still a magnet for exceptional performance in the realm of corruption. Rent control is still too hot a potato for the Communist Minimum Programme to tackle. University admissions will now enter a larger corruption arena as students compete on the basis of fake OBC certificates. But besides these areas, government regulation is less than just 10 years ago.
This greater economic freedom has meant that the fortunes of the macro economy are increasingly linked with the fortunes of the micro households. The macro economy looks good for various reasons, but most prominently because of a much greater role for interest rates to accurately reflect the cost of capital. This has meant a higher investment rate, up from 25% of GDP just six years ago, to over 30% today. This extra investment has meant higher growth, and this has trickled down to reflect higher wage levels,and lower unemployment.
This deregulation of interest rates has been accompanied by an expansion in non-food credit, home loans, credit cards and more. In just a few years, we have gone from almost no loans for housing to a boom in housing prices and loans. The babu set the interest rates a few years ago; the cost of capital did not reflect the international cost of capital. Today, the babu has been (mostly) replaced by the international invisible hand. What a beautiful transformation, the ugly Indian replaced by the impersonal global fellow.
The ugly duckling was synonymous with the government determining what happened to the economy and personal (mis)fortunes. Today, our destiny is in our own hands. We can create our own wealth, and our capacity to do so is indicated by the rise of the growth rate from 5.5% a year to 9%. In per capita terms, the growth has doubled— from 3.5% to 7% today.
Is this transformation a transient phenomenon? Recall that many a woman has been found six-feet under because she bet on India being different in the future. She was an optimist, and always wrong. No more. The strong link between personal entrepreneurship and macro-economic performance, suggests that it is unlikely that history will repeat itself.
We should revel in the fact that India has changed. It will be a while before the traditional Indian scotchguzzling, doomsday-predicting, left liberal intellectual will concede to the new reality. But he has been wrong for at least 20 years, so why pay him any attention. Instead, let us make our own fortunes. For the first time in our economic history, we have that opportunity. I’m confident we will not betray ourselves any more.
(By Surjit Bhalla, Managing Director of Oxus Investments)
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