3 min read.Updated: 21 Jan 2021, 11:05 PM ISTPuja Mehra
Ruchir Sharma—head of EMs, Morgan Stanley Investment Management—reflects on what India needs to do to join the comeback he expects to see in emerging markets in the 2020s
The author of Breakout Nations and The 10 Rules of Successful Nations, Ruchir Sharma has been studying emerging markets for close to 30 years. He was 17 in 1991 and remembers watching from the visitors’ gallery in the Lok Sabha as then finance minister Manmohan Singh delivered the pivotal budget speech. Sharma reflects on what India needs to do to join the comeback he expects to see in emerging markets in the 2020s.
It is said the economy moved from business-friendly to market-friendly after 1991. Have you seen this change?
The 1991 reforms were really about integrating India with the global economy. It marked a major change in the mindset. The notion of socialism made way for consumerism. It was a heady time of the entry of major foreign brands into India. The economic freedom, the freedom of personal choice it brought—that’s how I read the reforms. The distinction between business-friendly and market-friendly, that hasn’t been resolved yet. One of the big faultlines of the boom of the 2000s is that it ended up in so much crony capitalism. That is a very big problem for India.
Are we seeing a new wave of reforms in India now?
Like most emerging markets, India seems to carry out reforms when it has its back to the wall. Once every 10 years, we get a major burst of reforms. We saw it in the early 1980s when India had to go to the IMF. That was the first time India started reforms. 1991 did much more to integrate India into the global economy; then we had the East Asian financial crisis in the late 1990s. There was exasperation in the (Atal Bihari) Vajpayee government about India’s slowing growth and that led to another wave of reforms, including privatization, in the early 2000s. In 2012-13, we had a crisis which led to some course correction.
Now, there is a recognition that the finances don’t allow the country to carry out a major stimulus, so they’re carrying out reforms. Only in a crisis does India reform and we’re seeing signs of it now.
For the first time since 1991, hard-earned gains in trade policy are being given up. Some say the model is not delivering for all. Is the noise muddling decision-making?
These put into context why carrying out reforms in the early 1990s was easier than now. In the early 1990s, the consensus around the world was in favour of globalization, with the collapse of the Berlin Wall, the demise of the Soviet Union. Today, we are in an era of deglobalization; many countries are turning protectionist. We are forgetting what life was like under socialism. Young generations romanticize the idea of socialism, partly because capitalism in the way they know it hasn’t delivered in the past 20 years. Therefore, it is more difficult to build up a consensus to carry out traditional economic reforms.
What reforms would you like to see in the next few years?
There are four factors that make me optimistic about emerging markets such as India over the next decade. One, we don’t have the means to stimulate our way to prosperity, so we are carrying out reforms. Second, there is a digital revolution. Third, traditional models of manufacturing and exporting have become difficult in an era of deglobalization. But countries such as Vietnam and Poland are seeing some economic growth on the back of old-style export manufacturing. And fourth, commodity prices are poised to rise in the 2020s. Generally, when commodity prices go up, it tends to help emerging markets.
These are the four factors that can help emerging markets over the coming decade but it depends on how much momentum India puts behind these. Despite reforms, India ranks relatively low on the index of economic freedom. I wish the political class would do more to increase economic freedom. The irony is that we got a fair amount of political freedom quite early after Independence but we haven’t got the commensurate amount of economic freedom. The reforms of 1991 were one step in that direction but we are still far behind many other countries on that key metric of economic freedom.