Restart: The Last Chance for the Indian Economy

273 Pages·2015·1.03 MB·English

by  Mihir S Sharma

MIHIR S. SHARMA
RESTART
The Last Chance for the Indian Economy
RANDOM HOUSE INDIA
CONTENTS
Introduction: ‘What is the matter with India?’
PART I: DEATH BY LIME REGISTER
Roads and judges
Why we can’t build
There is a tide
Three big questions
The Mahatma’s malign legacy
A future unwoven
The nice, kindly government inspector
The Manchester of the past
Men who guard machines
Tea-shop truths
The dangerous Indian dream
The wrong schools, the wrong skills
Honesty always flops
PART II: THE STAINS OF PAST SINS
‘India is wide awake’
The fires of ’91
Where Rao went wrong
An agenda unfinished
The original, stinking sin
Half-reforms half work
That false feel-good
We make nothing. Nothing!
My father, the believer
The Great Leap Left
Village of mills
Reclaiming Bombay
Bridges to nowhere
Forever second
For whom the toll pays
PART III: SEVEN YEARS OF PLENTY
It’s all about growth
‘Build the plants, and growth will come’
Looking the other way
The ‘Green Tax’
Put it there, private partner
Someone to rely on
Bargain basement
The rot in India’s heart
All the little Lee Kuan Yews
PART IV: THE CURSE OF ‘JUGAAD’
What’s worse than the government?
Demoting promoters
Flies in the pills
The cheapest of reputations
All innovation is frugal
Crony competition
The King of Good Crimes
Survival of the fattest
Democracy, the unlikely hero
PART V: THE ONLY WAY TO GROW
Lessons from Mother India
The memory of factories
Five bad choices
Dissolving a partnership
Trust prices
The real price of coal
Trains and panels
Who’s your daddy?
That patchwork feeling
Five strides forward
When bigger is better
Holding up land
Accounting for ownership
Town and country
There is power in a farm
India-class cities
Tax and spend
Too much to ask?
Searching for suitcases
The miracle cure
A silver bullet
Conclusion: The noise of building
Notes
Afterword and acknowledgements
Follow Random House
Copyright
For my father, Prem Swarup Sharma, whose fondness for factory shop-floors is
the biggest reason I wrote this book
And my mother, Moneesha Sharma, who suggested I become a journalist long
before I had the vaguest idea what journalists did
Introduction
‘WHAT IS THE MATTER WITH INDIA?’
W
hen the first plane crashed into the World Trade Center that beautiful
September morning, the West changed: it began to look outwards. In the weeks
and months after 9/11, the exuberance of the self-obsessed Clinton era became a
dim, distant memory. But financial markets feed on exuberance, and on
optimism. And so, even as some eyes in the West turned fearfully to the
dangerous parts of the outside world, others’ eyes turned to seek out those places
that offered hope.
One such pair of eyes—bluer and keener than most—belonged to Jim O’Neill,
who headed the global economic research division at Goldman Sachs. The vast
investment bank was, as usual, quicker to respond to a world in which
‘everything had changed’. As the smoke rose from the burning World Trade
Center, a trader at Goldman’s building—a few blocks downwind—looked up at
the papers fluttering through the dusty blue sky, and remarked on ‘all the written
derivatives contracts that had literally flown out the window’. O’Neill, true to
form, saw at once that the energies of the West would turn from the engines of
economics to the engines of war. And yet, he pointed out in a report that was to
change the world, there was hope for the world economy elsewhere: ‘In 2001
and 2002, real GDP growth in large emerging economies would exceed that of
the West.’
The large emerging economies O’Neill had in mind were four: Brazil; Russia;
India; and, obviously, China. Together, in that 2001 report, he called them BRIC
—or, showing the nifty salesmanship that is a large proportion of the skill set of
modern finance, ‘the BRICs that would build the global economy’. Over the next
decade, the four emerging economies would come to dominate global growth.
Twelve years later, O’Neill was a disappointed man. Not in China, of course,
which had, in the first decade of the new millennium, come to dominate global
manufacturing and trade. Not even that much in Brazil, which grew slower than
expected, then faster than expected, then slower than expected again—a
sequence clearly Brazil’s fault, rather than of those who kept on expecting the
wrong thing.
No, O’Neill’s biggest problem was India. It was India’s apparent failure to
No, O’Neill’s biggest problem was India. It was India’s apparent failure to
match expectations that had caused the whole BRIC idea to be sniggered at on
Wall Street; with the financial world’s customary sparkling wit, BRIC was now
being expanded as ‘Bloody Ridiculous Investment Concept’.
O’Neill, stung, said in the middle of 2013 that ‘India was the biggest
disappointment of the BRIC countries.’ His frustration had been growing
steadily over the decade-and-some since he had invented the concept. The
previous year, when an electricity failure across northern India plunged hundreds
of millions of people into darkness in the largest power cut in history, O’Neill
wrote in a note to Goldman’s investors that it ‘highlighted the scale of the
challenges’. He ended his note somewhat unusually, by demanding of India:
‘What is the matter with you guys?’
What was the matter with India?
Superficially, going just by the numbers, we guys hadn’t had that bad a decade.
Since 2001, the economy had grown manifold. Hundreds of millions of people
had been lifted out of abject poverty in a few years, in an achievement
unmatched in human history—well, except by China, a couple of decades
earlier. Almost every single Indian lived in a better house, ate better food, and
had a far higher standard of living than at the beginning of the millennium.
And India had managed solid, sustained real growth in output for many years
—not the double-digit miracle that China kept on delivering, but close. Seven
per cent growth in gross domestic product adjusted for price inflation—‘real
GDP growth’—was seen as startlingly fast in 1997. By around 2005–06, that
much was being seen as India’s birthright. So fast was the economy expanding,
in fact, that the amount added to the average Indian’s income in the first fourteen
years of the twenty-first century was as much as had been added in the entire last
half of the twentieth.
Not even the financial crisis of 2008 appeared to have slowed India down that
much. Even as America and Europe teetered on the edge of another Great
Depression, Indians warmly congratulated each other on their foresight in
keeping their financial world detached from that of the West. ‘Decoupling’ was
the in-word that year, a gentle way of saying that emerging economies had
happily broken up with the West because the relationship just wasn’t working
for them any more. Supercharged by the cash being pumped into the arteries of
global finance by the world’s governments, India’s economy finally seemed to
be touching double-digit growth at the very moment the industrialized nations
seemed to be poised for disaster.
seemed to be poised for disaster.
But, then, it all fell apart.
India’s economic miracle had been held together by rubber bands and hope,
the equivalent of the elderly buses that ply its potholed village roads. It turned
out that the early years of this century had all been downhill; the broken-down
bus that was the Indian economy had been coasting along, not purring
powerfully. Sometime in 2012, it hit the bottom of the slope. And then, when the
government pressed the accelerator, the ancient engine stalled.
Month after month, the world’s investors looked hopefully at the numbers
from New Delhi’s statisticians. And, month after month, the numbers were the
same, dashing all hopes: manufacturing output was flat. Nobody so much as
thought of investing; no company dared to increase production. India’s factories
had fallen silent, its mines were deserted, its trucks stood parked beside empty
highways. Quarter after quarter, GDP growth decreased, and the government
seemed powerless to reverse the decline. A noisy, frustrated desperation began
to pervade all thinking about India’s economic future, both within the country
and on trading floors and in boardrooms across the world.
The guys in power then had been, once, feted. They had been called, once, a
‘dream team’ of economic managers. But their reputations were unequal to the
task. They kept their foot on the pedal, but the bus still refused to move.
Meanwhile, a crisis seemed to be approaching in the rear-view mirror. India
needed dollars to buy petroleum; almost all its fuel has to come from abroad. But
Indians simply weren’t making enough stuff that they could sell in return for the
dollars they needed. And, so, any minute, unless the rest of the world was kind
enough to lend us a few billion dollars, India might be stuck without cash to pay
its fuel bills.
This was exactly what had happened in 1991, a crisis that became the trigger
for India first opening up to the world—and the excuse that Manmohan Singh
used to start dismantling socialism as finance minister. Two decades later, Dr
Singh was prime minister—and, at the end of his long career in public life, it
seemed to be happening again.
Everyone panicked. Senior Indian ministers wandered the cities of the West,
caps in hand, begging for investment, for those life-affirming, life-preserving
dollars, swearing to anyone who would listen that things would get better soon,
that the bus would start moving any minute. Manmohan Singh himself tried,
even. But not one member of the Dream Team had much credibility left. The
otherwise reticent Dr Singh said, gloomily, when I prodded him with a question
about one such stormy session, that when India was growing fast ‘everybody
was quite happy. Even when there were defects in our policies, they were
overlooked. But, when the economy slows down, people try to find fault and
overlooked. But, when the economy slows down, people try to find fault and
excuses.’
Still, India wasn’t alone. Brazil and Russia had slowed down, too. Many of
the ‘tiger’ economies of Southeast Asia, too, seemed to be in trouble. But
something about the slowdown was very strange: they all seemed to have similar
problems.
Here was one: they were short of infrastructure—of roads, of bridges, of
working ports. But the vital task of building these was being held up by worries
about corruption, by concerns about the environment, or because companies
simply didn’t seem to be able to find the cash or the expertise. Worse, some of
these projects were half built, begun amid great optimism and rosy forecasts in
the flush years before the financial crisis.
Here was another: they had governments that seemed unable to take decisions.
It seemed that, across the world of emerging markets, democratic leaders had
used the go-go years prior to the 2008 financial crisis to buy popularity.
Politicians had promised their people free food, or socialized medicine, or cheap
housing, or something else that they weren’t being able to pay for now that times
had turned tough. That meant they were politically weak—and most were further
weakened by corruption scandals, too; skeletons from the years of excess being
painfully unearthed by various determined investigators. Weakened, frightened,
timid, divided, these governments struggled to take the decisions needed to help
their economies recover. There seemed no way out.
The emerging-market model, people worried, was broken.
It seemed that there were simply too many things that had to be fixed, and not
enough willpower to fix even one. Like a procrastinating student faced with a
long to-do list early in the morning, policymakers in developing nations across
Asia and Latin America seemed to have groaned and gone back to bed.
And everyone agreed that India was the worst offender.
If Goldman Sachs’s O’Neill was the hopeful guiding light behind emerging-
market investors, the grumpy yin to O’Neill’s ebullient yang was the super-
investor Jim Rogers. Rogers cultivates the plain-spoken attitude of a Midwestern
farmer; not for him the relatively gentle remarks about ‘disappointment’ that
O’Neill was coming out with. One of the most acerbic voices in the international
economic community, he was declaring, bluntly, by 2013 that ‘there’s nothing
good in India’. It was the worst place in the world to do business, he growled. Its
politicians made one mistake after another; they made any foreigner who wanted
to bring his money into India jump through seventy hoops; and Indian
companies were poorly run, unable to be successes without support, open or
covert, from politicians.
And Rogers didn’t even seem to be the most pessimistic man around. If