Sep 12, 2023
12 September 2023. Emerging countries often find themselves in periods of good economic growth. In a micro-corporate sense, animal spirits rise, companies invest, and growth surges. But at some point, capital begins to be misallocated, returns begin to fall, and companies find themselves in tougher times with balance sheets that are more leveraged than they appeared to be at the peak of the cycle. In a macroeconomic sense, the cycle exhibits buoyant growth gradually leading to higher and eventually unsustainable fiscal and current account deficits, which the markets eventually baulk at financing, leading to an inevitable (and sometimes severe) retrenchment. Thus, at any point in time, we believe the really important issue is not the rate of growth, but the sustainability of that growth.
The ‘pie conversation’ is ubiquitous, in both emerging and developed countries. The conversation always revolves around whether the focus of government should be on ‘growing the pie’ or on ‘how the pie is divided’. One side of the argument is that the focus should be on growth, even at the expense of its deleterious side effects (inequality and the effect on the environment to name a couple) as this will see the biggest benefit for all. The other side is that the focus should be on a more equitable division of the pie, given all the iniquitous side effects of capitalism.
In our view, both sides make good points and both matter. But for emerging countries, the focus should squarely be on growing the pie, as it is currently too small to satisfy everybody, however it is divided. The only way of meeting a poor society’s needs is through making the pie bigger, not by parsing the division of the pie. If we compare China and India, for most of the past 40 years, China has tended to focus on growing the pie. However, in recent years, China’s policy has appeared to pivot to how the pie is sliced, with a significant regulatory intervention in the economy to address some of the imbalances that arose during the years of strong growth. India has emerged under the administration of Narendra Modi, who has been prime minister since May 2014, as an increasingly focused ‘pie-grower’.
India has successfully been on a mission to build its soft infrastructure. An instrumental part of this has been the introduction of the Aadhaar identification system, which has legitimised 1.4 billion citizens. Subsequent endeavours have included:
India is also developing an ability to deliver ‘hard’ infrastructure projects as well. Highway construction which averaged 28km per day in 2019/20, is targeted to reach 45km per day in 2023/24. The government is also addressing the historic inefficiency of India’s railways. A key project here is the Dedicated Freight Corridor (DFC) which is an ambitious attempt to create new freight rail capacity in the heart of India. In addition, city metros and India’s first high-speed passenger railway are being built. This marks a break from the past where India struggled to execute its infrastructure plans.The myriad of ways in which India has built both soft and hard infrastructure to underpin and improve the sustainability of the growth that it is achieving in the past decade have been impressive. In other words, the key point about growth in India is not its quantum, but its new visibility and sustainability. There is also a new determination and ruthlessness in pursuing growth. India almost feels like the China of the 1980s and 1990s. Deng Xiaoping, the architect of China’s great policy pivot to prioritising economic growth, once said, “It doesn’t matter whether a cat is black or white, as long as it catches mice”.
It appears to us that India’s cat is finally catching real mice.
Read our full insights on India here.