Why India's growth story is slowing down
Former RBI governor Raghuram Rajan has stopped mincing words ever since he left his Mumbai office. Speaking in Hong Kong recently, he said that Indian GDP needs to grow at 10 per cent to be able to produce enough jobs for the 12 million people joining its workforce every year. An 8 per cent GDP growth can be achieved "without doing anything extraordinary" but is not enough, Rajan said.
It's hard to disagree with the fact that India is not growing fast enough, despite having the world's largest young and productive population and a culture that innately values entrepreneurship. It's equally hard to digest how little this importance is given to the issue in our public discourse given how closely it affects all of us. It impacts the rich and poor, people with jobs and those without.
The absence of focus on a slow-growing economy also means that there is no attention paid to the reasons why we are growing slowly, much less any effort made to address them.
If private enterprise is the primary engine of economic growth, India stands out as a rare country that is hostile to business, as seen by our low ranking in the global "ease of doing business" rankings. This systemic hostility ends up hurting our best performing businesses or even industries over a period of time. Back in 2010, Vodafone's global CEO Vittorio Colao described India's regulatory environment as "complicated". He made the same comment just two months ago, while speaking to an Indian newspaper.
Governments come and go, parties win and lose power but the India's hostility to business never wanes. It survives because it is political. Despite pretending to be otherwise, India remains a "rule of will" society, rather than a "rule of law" country. Our politicians and bureaucrats regulating industry and the society draw inordinate amount of power from ambiguous rules, badly drafted laws and procedures that are either selectively enforced or changed at will.
Imagine playing a game of tennis where the lines of the court are not drawn clearly and the umpire, relying solely on his discretion, will decide if the ball fell inside a line or not, and a point was won or lost.
That is the playing field India offers to its people and businesses. If the rules of the game are not clearly codified, those in power can interpret them in any way possible in order to provide unfair advantage to those they patronise. For corporations in particular, winning political or bureaucratic patronage thus becomes essential to survival and growth.
World over, companies try to become successful by creating competitive advantages in marketing, sales, product engineering or operations, but in India they are forced to learn that the only advantage that matters is having the umpires on your side.
The fickleness of this advantage is apparent when a competitor with better gaming skills comes along, as can be observed readily in the performance of erstwhile leading players in industries as diverse as telecom, aviation and energy. Air Deccan founder and former Army man, captain GR Gopinath, in 2017 said, "Fighting the Pakistanis was easier than battling our bureaucracy and government." Like Rajan, he too does not mince his words; for he had earlier called out DGCA for choking the aviation sector, by "using discretionary powers to indulge in arbitrary whims and fancies".
A system with opaque or badly drafted rules, combined with arbitrary or discretionary enforcement inherently favours the rule of will. It only serves those in power - politicians and bureaucrats - and hurts everyone else, you and I included. From the poorest people in the remotest corners of country to middle class citizens, and even big and well-heeled industrialists living in our largest cities, nobody is spared from currying favours with and seeking benevolence from the state.
This hostile business environment makes it difficult for companies to grow and create new jobs. People's incomes do not grow as fast as they should; the market size remains stagnant and companies aiming to grow in India remain stuck inside this vicious cycle.
Indian start-ups quickly discover that they are unable to compete with foreign players, who grow quickly in more benign states. Indian industrialists get stuck with debts that cannot be repaid and turn into non-performing assets (NPAs), and a majority of foreign firms find that despite all the hype over India's growing middle-class, the country ends up contributing low single digits in percentage terms to global revenues.
It is indeed telling that the largest and most successful Indian corporations are either successful because of exports or operate in highly regulated industries where discretionary decisions are a major source of competitive advantage.
As a hard-hitting piece in The Economist earlier this year noted, while India has admirably pulled a lot of people from poverty, it has lagged behind other countries in growing their incomes. The well-off are 10 times richer in 2018 than in 1980, those at the median have not even doubled their income. The Indian middle-class exists only in analysts' projections and powerpoint slides.
For our political parties and bureaucrats, there is no incentive to change the status quo. Their fortunes and power are completely unlinked to India's growth. In fact, preserving and retaining their discretionary powers is in their best interest. Any meaningful change, therefore, has to be triggered by those for whom it matters the most - the civil society actors including large industrialists and business owners - who must demand that parliamentarians make better laws and fix India's beleaguered law enforcement and judicial system.
Codifying clear and unambiguous rules and ensuring their proper enforcement is absolutely critical if we are to let the Indian economy grow to its full potential. This is a fundamental flaw we need to fix, otherwise we run the risk of languishing as a third world country for decades to come, unable to provide jobs to our young and feed our poor.