Insights
The Electric Summer of ’91: India’s Hopes Then and Now
|
|
Tales From the Emerging World
|
• |
August 10, 2021
|
The Electric Summer of ’91: India’s Hopes Then and Now
|
August 10, 2021
|
The Electric Summer of ’91: India’s Hopes Then and Now
The Electric Summer of ’91: India’s Hopes Then and Now |
|
Thirty years ago, in the summer of 1991, an unlikely figure galvanized India with his maiden budget speech. This annual address is always a big deal in India, widely scrutinized as a map of the nation’s way forward. Manmohan Singh, the new finance minister, was a true policy wonk, not the kind of speaker one expected to excite. Yet this was a perfect meeting of man and moment.
India was facing one of the darkest periods in its post-Independence history following the assassination of prime minister Rajiv Gandhi. The new government was on borrowed time, rapidly running out of funds to pay its foreign debts. The treasury held enough foreign reserves to cover maybe two weeks of imports. And the winds of change were blowing in favor of technocrats such as Singh.
Soviet communism had recently imploded, capitalism was firmly ascendant. Free market ideology appeared to rule, even in China, India’s archrival. The scene was set for India too to enact the basic tenets of a reform package broadly known as the “Washington Consensus.”
Singh’s speech, which began with a solemn remembrance of Gandhi, somehow captured all the fear, but also all the hope, of that time. The reforms he outlined electrified India, unleashing a wave of optimism for real economic progress. This year the 30th anniversary of the July 24th speech prompted an outpouring of retrospectives in India. Looking back at the text, all 31 pages, Singh’s words were surprisingly dry yet perfectly reflected the tone of a technocratic era: “Indeed the centerpiece of our strategy should be a credible fiscal adjustment and macroeconomic stability during the current financial year, to be followed by continued fiscal consolidation thereafter.”
The Soviet collapse had ushered in what many thought would be “the end of ideology,” which also implied the fall of demagogues and the rise of pragmatic policy wonks. Fiscal consolidation was cool. Singh would be widely feted for budget discipline, busting up the license raj and opening India to the world, and would become one of the last of the popular technocrats. He along with his mostly Oxbridge and Ivy League educated team were the toast of the Davos crowd.
The reform momentum in India lasted for a couple of years. After that, as the economy pulled out of crisis and back on to a growth path, politics once again trumped economics. Fellow members of the Congress party, disappointed by state election setbacks, questioned the value of reform if it didn’t win votes. Singh too lost his zeal for reforms and later as prime minister was more focused on welfarism than on liberalization.
Years later one of Singh’s advisers would say that their team’s biggest mistake came in 1993, when in their rush to declare victory, they paid back the IMF loan India had taken at the depth of its foreign exchange crisis. So long as the loan was outstanding, the government could conveniently blame its creditors for pressuring them to reform. Without cover, it was much more difficult to enact tough measures.
This is not unique to India. Very few governments have pushed painful change without the pressure and cover of a crisis. The changes Singh engineered promised more drama than most: rolling back socialism, widening economic freedoms and consumer choices, including for the first time many foreign goods and brands. It was a heady time and the most memorable period in India’s checkered reform history, but not the only one. India had advanced post-crisis reforms before, in the early 80s, and would again do so in the early 2000s and early 2010s.
Throughout, however, India proved resistant to the sweeping transformation that would boost the economies of many East Asian nations, including China. Citing the virtuous obstacles imposed by a vibrant democracy, India’s leaders were never able to mobilize a vast, rural society to quickly reinvent itself as a manufacturing export powerhouse—the model that made the East Asian miracles so much richer.
Too often, Indian politicians packaged measures designed to aid an individual business or industry as economic reform, when the measures in fact undermined competition and growth. Pro-business is not the same as pro-capitalist, and the distinction continues to elude India.
India’s founding party, Congress, is steeped in socialist ideals, mostly homegrown. Congress has faded as a national force, but its successors carry the same political DNA, which opens the door to state meddling. Every decade, a spasm of free market reform, yet India has barely inched up the Heritage Foundation rankings of economic freedom, still falling in the bottom third among 178 nations.1
Economies that are “most free” tend to have not only the highest average incomes, but also the highest life expectancy, lowest infant mortality and lowest levels of poverty. Still, Indian politicians constantly restrict economic freedom in the name of helping the poor. True, since ’91 India’s per capita income has risen sixfold from $300 to $1900, but its global rank has improved only marginally, from the bottom 15 percent to the bottom 25 percent.2
A Tale of Limited Progress
India’s rank among nations, by per capita GDP, has risen since 1991 from the bottom 15 percent to the bottom 25 percent
Source: MSIM, Bloomberg, FactSet, Haver.
A Tale of Limited Progress
India’s rank among nations, by per capita GDP, has risen since 1991 from the bottom 15 percent to the bottom 25 percent
Source: MSIM, Bloomberg, FactSet, Haver.
Thirty years after Singh’s speech we are at another “crossroads.” Though the pandemic battered every economy, India like many emerging nations lacked the funds to implement stimulus of the scale seen in many developed countries. So once again it is under pressure to reform.
But times have changed. Opening to the world is out, and national “self-reliance” is the new motto, even in countries that were the big beneficiaries of globalization, including China. Free market ideas are out, socialism is fashionable again, particularly in the West. Fiscal consolidation is out, big government is in.
Many of the most advanced economies now practice a distorted form of capitalism marked by constant stimulus and bailouts, which are a form of socialism for rich individuals and corporations. Competent but dour technocrats like Singh are back in the shadows, colorful populists like Narendra Modi are back in the spotlight.
The zeitgeist of the age is no longer pushing India toward a more competitive form of capitalism. Modi’s reforms, including budget discipline, corporate tax cuts and lower barriers to foreign ownership, are all positive harbingers of a strong stretch ahead. But they are not likely to unleash the broad new freedoms that seemed so close to realization in the summer of 1991.
India’s brightest prospects now lie outside of politics. Top of the list is the digital revolution, which by many measures is spreading faster in emerging countries like India than developed ones. China, where the digital economy now accounts for a staggering 40 percent of GDP, has shown how tech can lead economic development.3
The irony: tech giants are now so powerful, the newly confident political classes are cracking down on them from China to the United States. The risk in India too is that a more adverse regulatory environment kills this new golden goose of global growth.
What India needs to keep in mind is that its economy is still relatively unfree, and so more than ever it should buck the global trend of more regulation and bigger government. As Singh said back in 1991: less government means more growth. While the world of 2021 is no longer in thrall to free market wonks, India would still be wise to mark those words.
RISK CONSIDERATIONS
There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this portfolio. Please be aware that this portfolio may be subject to certain additional risks. In general, equities securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. The risks of investing in emerging market countries are greater than the risks generally associated with investments in foreign developed countries. Stocks of small-capitalization companies entail special risks, such as limited product lines, markets, and financial resources, and greater market volatility than securities of larger, more-established companies. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the Portfolio’s performance. Illiquid securities may be more difficult to sell and value than public traded securities (liquidity risk). Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility.
|
Head of Emerging Markets and Chief Global Strategist
Global Emerging Markets Team
|
Select Product(s)
Right Click Edit