India and The 10 Rules of Successful Nations
What will it take for India to succeed? When will we shed the tag of emerging nation and graduate to developed nation status? Why is 28% of our population still poor? We explore these questions in detail in this article based on the book ‘The 10 Rules of Successful Nations’ by Ruchir Sharma.
The Covid Pandemic has thrown most plans out of the window. Before the pandemic, India was talking about becoming a $5 Trillion economy by 2025. While there were questions raised on the path to this goal even before the pandemic, the current struggle seems to be around how to get back to the pre-covid growth trajectory with the second wave and the many regional lockdowns. We are also seeing news of the wealthy and well-footed making plans to emigrate permanently amidst the collapsing health infrastructure of the country. In contrast, there are many who can afford to leave but are vowing to stay back and rebuild the country.
Before all these chaos began, any Indian who has ever visited a developed country and experienced their public infrastructure, transportation and health facilities would have wondered at least once, “When will India reach this level?” “What is stopping us?” Most people answer this question with one word Overpopulation. We are a nation of 1.3B people and unless we control our population growth we will always struggle. I wanted to understand this in depth and began reading up on what makes nations successful, the history of nations like South Korea and Japan that went from Emerging to Developed Nation status in a few decades and what is holding India back? There is no better place to start this journey than with the many books by Ruchir Sharma – ‘Breakout Nations’, ‘The Rise and Fall of Nations’ and ‘The 10 Rules of Successful Nations’.
Over the last few days I have been reading ‘The 10 Rules of Successful Nations’. Each chapter in the books lays down a rule and goes on to explain the same with the help of supporting data. I decided to evaluate India’s performance across these 10 rules to understand where we are doing well and where we are faltering.
Rule #1 : Population – Successful nations fight demographic decline
Most productive age of a human being lies roughly between 15 – 64. Countries like Japan, Germany etc have a shrinking population in that age group. Bringing more women into workforce, increasing the retirement age to 70, encouraging couples to have more babies by providing subsidises, welcoming immigrants in this age group (especially students who are then allowed to continue working in the country), automation and adding robots to workforce are some of the things countries do to counter the threat of a shrinking working age population.
India is lucky in this regard. We have a huge population that falls in the productive age range of 15 – 64. We will continue to enjoy this advantage dubbed ‘the demographic dividend’ for around 37 years starting back in 2018.
Rule #2 : Politics – Successful Nations Rally behind a Reformer
Politics seems to follow a circle where a national crisis leads to reform which leads to good times which in turn leads to complacency and from there to another crisis. During times of crisis, nations tend to elect a reformer as their leader. More often than not these are fresh faces with a massive support base. The first terms of these leaders are filled with promise and action but by the second year of their second term they tend to stagnate unable to push big reforms. Democracies tend to fare well compared to autocracies with a reformer at the helm and politicians with massive support bases tend to do well compared to technocrats.
India seems to be following this rule to the T.
Rule #3 : Inequality – Successful Nations Produce Good Billionaires
Good billionaires come from industries that make products and services that increase productivity like technology, manufacturing, e-commerce and entertainment whereas Bad Billionaires come from rent seeking industries that mainly involve extracting resources from nature like mining, real estate, construction etc. Two metrics we can keep track in this case are % of wealth held by billionaires vs GDP and % split of Good and Bad Billionaires. The former should be less than 10% and the latter should be 75:25 for emerging countries.
The numbers for India are
Total Billionaire Wealth / GDP = 14%
Good Billionaire : Bad Billionaire = 71 : 29
In both these metrics we don’t score that bad.
Why should Total Billionaire Wealth not exceed 10% of GDP?
Any economy works when people spend money. The problem with the rich becoming richer is that there is only so much money one can spend on food, clothing, appliances etc.
How does the rich keep getting richer?
Money introduced into the system by stimulus programs announced by governments during downturns, low interest rates etc aimed at increasing productive investments instead ends up getting diverted to purchasing stocks, luxury homes and other financial assets pushing up their prices. Most of these assets are owned by rich people and hence they end up getting richer. it is not the poor getting poorer but the rich getting richer that widens the gap.
Rule #4 : State Power – Successful Nations have Right-Sized Governments
A right sized government for a country like India is one whose spending is around 31% of the GDP. This spending should also go to productive investments for the economy to keep growing at a healthy pace. The ideal budget deficit should not exceed 3% of the GDP. While over spending is bad, underspending is equally bad. Underspending leads to creation of a black economy in the country. Once the black economy is a certain percentage of the GDP the tax revenue of the government drop as people avoid banks.
In India the government spending as a % of GDP stands at around 17.7% for FY22 and the budget deficit is around 9.5% of GDP. While the government spending at 17.7% looks reasonable if we were to look at what the government is spending on we will come to the conclusion that most of the money goes into subsidies and schemes.
You can refer the linked PDF for more details – https://www.indiabudget.gov.in/doc/Budget_at_Glance/bag6.pdf
Rule #5 : Geography – Successful Nations Make the Most of Their Location
Location still matters in the Internet Age. Physicals goods amount to $18 trillion of global trade compared to $4 trillion of services. Being located near and around trade routes matter a lot. Countries that don’t actively work towards building this connectivity to global trade routes suffer. Equally important is to distribute the wealth thus amassed by port cities to other provinces in the interiors of the country. China is the master of this game building many ports along its coastline devoid of natural harbours. Income earned through export allows a nation to build factories and roads, import consumer goods without building up foreign debt.
When it comes to India the Trade as a % of GDP has been hovering around the 40% mark. This percentage is fine for countries like India with a huge domestic market.
What India doesn’t do well is in terms of spreading the wealth across the country. The biggest marker for this failure is the lack of metropolitan regions across the country. While China has around 100 cities with more than a million population (the threshold to qualify as a metropolitan region), India has just 50. This means that the bulk of the population is concentrated in the main metro cities because the bulk of the opportunities are limited to those cities.
Another marker is the absence of boomtowns or towns where the population went from around 2.5L to 10L in a few decades. While China has 19 such boomtowns, India has just two and that too were created when authorities redrew the local administrative maps.
Rule #6 : Investment – Successful Nations Invest Heavily, and Wisely
Economy grows strongly when investment is somewhere between 25 – 35% of GDP. Now the problem with investment is that you can invest in good things as well as bad things. Good things like technology, roads, ports and factories fuel growth. Bad investment binges in things like real estate and commodities don’t fuel growth or raise productivity. In fact when investment in real estate becomes 5% of GDP there is a good chance of a bubble burst following.
Going by this rule, India’s investments hover around the 30% GDP mark. But very little of that investment goes to manufacturing. Most of the factories in India are also in the Small and Medium categories as larger factories tend to attract more bureaucratic scrutiny.
Rule #7 : Inflation – Successful Nations Control the Real Inflation Threats
Inflation refers to the uncontrolled increase in prices of goods and services. It is denoted as a % increase from last years prices. For emerging economies inflation ideally is in the 4% range and for developed nations it is in the < 2% range. There are two ways to control inflation. One is by increasing competition in the market thereby forcing companies to maintain or reduce their prices. The second is by raising the interest rates as people are reluctant to borrow money at higher interest rates. The opposite of inflation is deflation where prices of goods continue to fall year after year. There are two kinds of deflation, the good one is created by advances in technology that lowers the labour and other costs involved in producing goods thereby reducing its price. Then there is the bad deflation caused by a shrinking demand amongst consumers.
Inflation is tracked by a metric called CPI or Consumer Price Index. To calculate CPI, you first choose a base year (t1) and figure out the cost of goods (p1) for that year. Then to find the CPI of a subsequent year (t2) when the prices are (p2), you use the formula
CPI = (p2)/(p1) * 100
CPI has been steadily increasing in India for the last many years.
Rule #8 : Currency – Successful Nations Feel Cheap
US Dollar is the most traded currency in the world. For this reason most countries hold bulk of their foreign exchange reserves in US Dollars. In the event a country’s currency under goes a rapid devaluation, the dollars from the reserve can be used to pay the various import bills. For countries doing a lot of exports it is in their best interests to keep the value of their currency low compared to dollar. This means 1 dollar can buy more goods in a country thus attracting more people to trade with you. Subsequently your dollar reserves also increase.
To know how much a country exports and how much it imports we look at the Current Account of the country. When the exports of a country is greater than its imports we have a Current Account Surplus and a Current Account Deficit in the opposite scenario. A deficit means the country is importing or consuming more than it is exporting or producing. This excess has to be funded by borrowing from abroad. If the Current Account Deficit of a country keeps growing for 4 continuous years and peaks at the 5th year above 5%, trouble follows. Foreign investors and even domestic investors will start fleeing as they lose confidence in the economy.
source: tradingeconomics.com – India Current Account Deficit
When we look at the Current Account data for India, at least for the past 10 years our Current Account Deficits have been dropping consistently settling to around -1.7% of GDP for Oct – Dec 2020 quarter as per RBI data. Running a Current Account Deficit is not all bad if the excess imports being made are in productive sectors. Importing plants and machinery for manufacturing, state of the art telecom equipments are examples of productive imports.
Rule #9 : Debt – Successful Nations Avoid Debt Mania and Phobia
When private sector debt grows faster than the GDP for 5 straight years, crisis follows. The pace of growth of debt is more important than the size of the debt. When government intervenes to save the economy it is usually done through assuming some of these private sector debts. They also come in the form of bail outs and write offs. When a 5 year increase in Private Debt to GDP goes beyond 40% an economic downturn is imminent.
Debt mania is something India seems to have been successfully avoiding. But India has been plagued with a lack of private credit especially for small and medium businesses. This gap is estimated to be around the Rs. 25 Lakh Crore range.
Rule #10 : Hype – Successful Nations Rise outside the Spotlight
Success comes through hard work and hard work is often done in silence away from all the hype. By the time media hype comes around usually a nation might have already peaked in terms of success. It might very well be on its way down or regressing to the mean. Ruchir Sharma calls this the Cover Curse. By the time a story reaches the cover of Time or Newsweek, it’s dead. So it might be a good idea to look beyond magazine covers if you are looking for upcoming successful nations.