India might be first BRIC to lose investment rating

There is lately a lot of focus on BRIC club. And within BRIC on India.

• Jim O Neil, its creator feels time not yet over for BRIC but thinks India the most disappointing..
• Ruchir Sharma feels BRIC was just a clever marketing construct. Has recently added, pre 2003 of 5-6% growth will be the new normal for India
• Finally the latest is S&P warns India could be the first BRIC to lose its investment rating.

India had all the factors to become  the most impressive member of of the  BRIC Club – demographics, diverse economy, very large market, top Indian companies etc.

However, since 2011-12  India has turned out to be the most disappointing story.

Raghu Rajan in this  article tries to connect the dots:

Emerging markets around the world – Brazil, China, India, and Russia, to name the largest – are slowing. One reason is that they continue to be dependent, directly or indirectly, on exports to advanced industrial countries. Slow growth there, especially in Europe, is economically depressing.

But a second reason is that they each have important weaknesses, which they have not overcome in good times. For China, it is excessive reliance on fixed-asset investment for growth. In Brazil, low savings and various institutional impediments keep interest rates high and investment low, while the educational system does not serve significant parts of the population well. And Russia, despite a very well educated population, continues to be reliant on commodity industries for economic growth.

Hardest to understand, though, is why India is underperforming so much relative to its potential. Indeed, annual GDP growth has fallen by five percentage points since 2010.

He says the problem started when BJP lost the elections in 2004 based on growth agenda. High growth agenda soon gave way to inclusive growth agenda. And inclusive growth was created by doling out money:

In any event, that election suggested a need to spread the benefits of growth to rural areas and the poor. There are two ways of going about that. The first, which is harder and takes time, is to increase income-generating capabilities in rural areas, and among the poor, by improving access to education, health care, finance, water, and power. The second is to increase voters’ spending power through populist subsidies and transfers, which typically tend to be directed toward the politically influential rather than the truly needy.

In the years after the BJP’s loss, with a few notable exceptions, India’s political class decided that traditional populism was a surer route to re-election. This perception also accorded well with the median (typically poor) voter’s low expectation of government in India – seeing it as a source of sporadic handouts rather than of reliable public services.

Growth dividend was simply wasted:

For a few years, the momentum created by previous reforms, together with strong global growth, carried India forward. Politicians saw little need to vote for further reforms, especially those that would upset powerful vested interests. The lurch toward populism was strengthened when the Congress-led United Progressive Alliance concluded that a rural employment-guarantee scheme and a populist farm-loan waiver aided its victory in the 2009 election.

But, while politicians spent the growth dividend on poorly targeted giveaways such as subsidized petrol and cooking gas, the need for further reform only increased. For example, industrialization requires a transparent system for acquiring land from farmers and tribal people, which in turn presupposes much better land-ownership records than India has.

As demand for land and land prices increased, corruption became rampant, with some politicians, industrialists, and bureaucrats using the lack of transparency in land ownership and zoning to misappropriate assets. India’s corrupt elites had moved from controlling licenses to cornering newly valuable resources like land. The Resource Raj rose from the ashes of the License Raj.

He also says how in times of uncertainty people have preferred to invest in gold leading to a wide current account deficit…So pretty much connecting most dots in the piece..

Ends with a warning:

As with the other major emerging markets, India’s fate is in its own hands. Hard times tend to concentrate minds. If its politicians can take a few steps to show that they can overcome narrow partisan interests to establish the more transparent and efficient government that a middle-income country needs, they could quickly re-energize India’s enormous engines of potential growth. Otherwise, India’s youth, their hopes and ambitions frustrated, could decide to take matters into their own hands.

It is even more interesting to note Rajan is advisor (honorary) to India’s PM since 2008. See his CV. It just mentions he became the advisor in 2008 and there is no end date. Wondering what his advice to the government all along has been?

Amazing job by Indian economy managers. They have managed to create huge false hopes and then dash them in spectacular way..Rajan like most other econs apparently are just too confused with what has happened..

Addendum:

TCA Ananth on the amazing Indian stats system (see the previous post on the same)..