June 12, 2012 3:00:13 pm
Morgan Stanley head of emerging markets Ruchir Sharma rues that Indian policymakers are not being able to respond to the deterioration in the country’s growth prospects and feels more power needs to move towards the states and away from the Centre.
He also predicts some more movement for the rupee.
“All currencies of countries with a large current-account deficit have been under pressure and the rupee is no exception. Global liquidity is contracting and funding current account deficits is going remain a challenge. Therefore,the rupee is likely to be under pressure for a while,” Sharma,who has recently come out with the international bestseller “Breakout Nations”,said.
Delving into the factors that affect Indian economy,the columnist-investor says the cheap foreign capital that funded India’s economic boom between 2003 and 2008 is no longer available.
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“India’s growth rate is returning to its pre-2003 average of 5.5-6 per cent. That is a real disappointment for everyone who had got used to India growing at 8-9 per cent and it seems the Indian policymakers are not being able to respond to the deterioration in India’s growth prospects.”
Sharma,however,suggests steps to help stabilise the economy.
“India needs to get its government spending under control. The welfare state genie needs to be put back in the bottle. Talk of increasing foods subsidies and other such handouts needs to be curtailed.
“India also has to be seen as welcoming foreign investment in more sectors at a time when global investors are risk-averse and need to be incentivised to leave their shores.
The days when India could take high growth,buoyed by global liquidity,for granted are over.
“In the medium-long term more power needs to move towards the states and away from the Centre. The Indian economy has historically best functioned as a commonwealth of states with distinct identities rather than as a centralised nation-state,” he says.
In “Breakout Nations”,published by Penguin,Sharma shows why the economic mania of the twenty-first century,with its unshakeable faith in the power of emerging markets – especially China – to continue growing at the astoundingly rapid and uniform pace of the last decade,is wrong.
“For the last 15 years,I have typically spent one week every month in a particular emerging market,obsessing about it,meeting all sorts of local characters,and travelling the breadth of the country,mostly by road. Just over a year ago,I decided I needed to put all my observations from such travels in a book,” he tells about how “Breakout Nations” was conceived.
To identify breakout nations,it is key to travel with an eye toward understanding which economic and political forces are in play at the moment,and whether they point to growth and at what speed. The book is a tour of the world to examine the nations that are likely to breakout or flourish and also disappoint in the new era of diverging economic prospects.”
“Breakout Nations” debuted straight into No 1 on Nielsen Book scan and also featured in Wall Street’s journal bestseller list.
Sharma also says India’s middle class had gotten used to a continuous increase in India’s growth prospects.
“This is the first time in its recent memory that India’s growth prospects are deteriorating and that is leading to a lot of disappointment amongst the middle class. The pace of job creation will obviously slow at this new lower normal of economic growth. The middle class is likely to express its anger at the polls by turning against the incumbents,” he says.
In his book,Sharma analyses why the basic laws of economic gravity (such as the law of large numbers,which says that the richer you are the harder it is to grow your wealth at a rapid pace) are already pulling China,Russia,Brazil and other vast emerging markets back to earth.
He argues that we must abandon our current obsession with global macro trends and the fad for all-embracing theories. He offers instead a more discerning,nuanced view,identifying specific factors – economic,political,social – which will make for slow or fast growth.
Spending much of his professional life travelling in these countries as head of Emerging Markets at Morgan Stanley,Sharma presents a first-hand insider’s account of these new markets and the changes they are undergoing.
As the years of unbelievably swift growth draw to their close,the book shows us how it is time for both investors and economists to halt their blind thrust towards an impossible future.
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