Where India bests China, for now
The five most dangerous words in economics are “this time things are different”. Such prophesies, 999,999 times out of a million, are mere hubris. Ditto for consulting companies hawking the latest game-changing “megatrend.” That is, unless they really are on to something.
Such is the case with Dominic Barton of McKinsey and his theory about cities. For a decade now, he’s argued that “cities more than countries will matter” in terms of discerning where global economics and politics are heading. We’re not talking New York, London or Tokyo, either. Barton says that between 414 and 440 emerging-market metropolises around the global will fuel around half of all gross domestic product (GDP) by 2025.
That makes a recent Oxford Economics ranking of Asian cities all the more tantalizing, particularly for India. Four Indian cities dominate the top-five fastest-growing places: New Delhi, Chennai, Mumbai and Hyderabad. Ho Chi Minh City is the only non-Indian city in the top five, while Kolkata, Bengaluru give India six places among the top 10.
Only two in the top 10—Tianjin and Beijing. Shanghai, China’s showcase metropolis? 12th place. Hong Kong, China’s financial green-zone city? 22nd.
Demographics, of course, but also Narendra Modi’s success in removing some of the regulatory shackles that held India Inc. back in recent decades.
“Limits on foreign ownership of Indian companies are gradually being reduced or eliminated,” says Oxford’s Mark Britton. “This,” he adds, “is conducive to strong growth in Delhi’s professional services sector, as overseas investors seek advice on possible deals, while long term it should mean steady income streams for such businesses.”
That advice on deals, of course, could have a multiplier effect on jobs, incomes and productivity gains in myriad other cities around the world’s biggest democracy.
New Delhi’s economy, Oxford says, could be 50% larger in 2021 than it was at the end of 2016.
China’s 6.7% growth, by contrast, is seen slowing as India’s rate accelerates. That puts Barton’s cities-matter in greater perspective.
The bad news is that Modi’s reforms must at least keep pace with growth in India’s biggest cities, if not outpace it. Unfortunately, we’re not seeing great urgency from the prime minister’s team.
After some admittedly important wins to increase foreign-investment quotas, streamline some public services and implement a national goods-and-services tax, Modi’s team appears to have settled into coasting mode.
With the 2019 election beckoning, say observers like Morgan Stanley’s Ruchir Sharma, India investors should tamp down expectations for a Modi reform-trade bonanza.
The risk is that New Delhi settles into a familiar pattern. India’s reform, Sharma said in New Delhi recently, “has always been incremental in nature. You get some spurts like in the 1990s when India had its back to the wall. But the reform process in this country has always been incremental in nature. So to expect anything more than this is foolhardy and you are going to be disappointed. When people tell me what if the current government comes back to power in 2019 with a bigger majority, will that accelerate the reform process? My answer is ‘why, when has this worked?’”
Sharma could certainly be wrong, but the list of Asian leaders who rested on their laurels after subsequent re-elections is long and cautionary: Susilo Bambang Yudhoyono in Indonesia, Shinzo Abe in Japan, Benigno Aquino in the Philippines and, of course, India’s Manmohan Singh. Modi could indeed be the exception to a well-established rule. If so, there’s not a moment to waste to get busy on land, labour and tax reform, opening contentious sectors like retail and eradicating corruption.
Modi needs to avoid another Asian megatrend of sorts: the Cult of GDP. When rapid growth appears, all too many governments shelve reforms and move on. With India neck-and-neck with China on top line growth, Modi may be tempted to declare victory and shelve touchier upgrades.
India’s demographic imperative argues against it. With 24.3% of India’s 1.3 billion people under 15, the nation boasts what economists call a demographic dividend. But as populists like Modi must understand, that dividend becomes a nightmare if employment growth and wage gains don’t keep pace with new workers pouring into the market.
The danger is that Modi takes his cult-like popularity too seriously and believes his own press. The past 1,187 days have seen some important steps, but it remains to be seen if we are in this-time-things-are-different territory. As we’ve learned from Abe in Japan and Xi Jinping in China, the longer you delay disrupting the status quo, the harder it gets.
With enviable majorities in Parliament and control of virtually every state of consequence, Modi should put bigger wins on the scoreboard to fill booming cities with jobs. If not, the vast potential Oxford sees from New Delhi to Bengaluru will be squandered by a government celebrating too early.
William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.
His Twitter handle is @williampesek
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