This is the reproduction of an article in IFR Asia magazine

One of the key constraints for the Indian economy is the accumulation of non-performing loans in the banking system. Recent figures from the IMF show that, at 5.9%, India’s gross non-performing loans as a share of total loans are the highest in Asia. Including restructured loans, the figure exceeds 14%.

As banks groan under this burden, they are unlikely to be able to support the lending growth required for the economy to pick up. The Reserve Bank of India has taken the first step towards a solution by conducting asset-quality reviews and insisting that all the non-performing loans be recognised for what they are. It has imposed a deadline of March 2017 for the banks to properly classify loans and make provisions.

While this may increase the stress on the profitability and capital ratios of the banks, it is better to accept the truth than to brush it under the carpet. The capital ratios of Indian banks are already among the lowest, according to IMF, and will come under further stress as the banks go through the inevitable pain. While the government has allocated some funds to recapitalise banks, this is by no means sufficient.

Apart from pushing for greater transparency, the RBI has allowed banks to convert loans into equity with a stipulation that they have to find a buyer for the shares within the next 18 months. The challenge for the banks is to convert the debt to equity at a high valuation, manage the companies in the interim, and identify a buyer. The RBI permits the banks to sell as little as a 26% stake while holding the rest, but potential buyers may not like keeping the banks as co-owners for an extended period.

The RBI has also allowed banks to refinance loans to the infrastructure sector for 25 years with refinancing or restructuring every five years. The question is whether banks will apply this option to viable loans or to mask problems.

However, none of these solutions is a genuine attempt to improve the viability of troubled borrowers. If India’s bad loan problems are to be resolved in a meaningful way, a host of supporting systems need to be developed. The recently enacted bankruptcy law goes some way in offering solutions for the resolution of insolvent companies, but more changes are required.

First of all, banks need the freedom to deal with problem loans in the best way possible. Currently they are averse to writing off loans or to sanction additional credit for troubled companies for fear of being accused of underhand dealings. The current RBI regulations are far too constraining for them to try to revive distressed borrowers, as they impose a time limit on re-sales of equity shares acquired through debt swaps, lay down the equity valuation method, and specify the minimum percentage to be sold.

India also needs to develop a strong culture of evaluating credits before the loans are sanctioned and for monitoring the borrowers for early-warning signals of trouble. In this context, it is interesting to note that it is not small-scale industries that have led to this massive accumulation of bad loans, but the medium and large-scale borrowers. So the question can justifiably be asked why the banks tolerated the build-up leverage and not take action sooner.

The concept of independent insolvency professionals introduced in the new bankruptcy law is a positive move, but they need to come from a variety of industrial management, finance and turnaround backgrounds, rather than merely the legal profession. This will happen only if banks are willing to entrust management of troubled industries to turnaround professionals rather than lawyers with expertise in dissolving companies, backed by appropriate incentive structures. For example, banks may agree on an incentive compensation based on an objective measure of improving the value of the borrowers’ business such as a multiple of Ebitda or on specific actionable measures such as completion of specific projects.

Although asset reconstruction companies have existed in India for many years, they are modest in size compared to the scale of the problem. They have also enjoyed a favourable system of putting up a cash outlay of only 5% (recently increased to 15%) and charging a management fee of 1.5%-2% of the asset value. In addition to this model, other models of outright sales, incentive payments and sharing of recovery values would encourage reconstruction companies to maximize recoveries. Unlike China, India could also consider investing public funds in asset reconstruction companies in order to provide a speedier resolution to the problem.

​Any amount of tinkering with rules on recognition of problem loans and provisioning is not likely to lead to a genuine revival or resolution of bad loans. To achieve that, the mindset has to change across the entire range of stakeholders, including banks, turnaround funds, professionals, and even the government.

This is the reproduction of an article published in the IFR Asia magazine.

Asian bonds are yet again likely to generate positive returns this year and provide a measure of stability to investors’ portolios, says Dilip Parameswaran

The year has not exactly started well for many asset classes. Oil has sunk to prices not seen in the last 12 years. With another sudden downward lurch in its currency, China has injected more concerns into the market about its economy, dragging other commodities further down. Equity markets have taken fright, with the Dow already down 9% since the start of 2016.

Against this background, there is one question on the mind of every investor: “With the Fed poised to raise again this year, what does the future hold for fixed-income investments?” In our assessment, the answer is not as negative as you might think: US dollar bonds from Asia can generate a total return of 2%–4%, without leverage.

Last year, Asian bonds generated a total return of 2.8%, split into 2.2% for investment-grade and 5.2% for high-yield bonds, according to JACI index data. This year’s returns are likely to be on a par with those.

When considering the outlook for this year, the first point to appreciate is that Asia is still an attractive growth story. China’s economic slowdown being partly compensated by India’s pickup, Asia ex-Japan is still set to grow at 5.8% this year and next, according to the IMF’s forecasts. This stands in stark contrast to the outlook for other emerging markets, which are suffering from a mix of problems, including low commodity prices.

THIS YEAR’S EXPECTED total return from bonds depends on many moving parts. The first is, of course, the likely increase in the Fed funds rate and the medium-term Treasury yields. Economists hold different views on how much the Fed would raise the target rate. Some point to the persistently low inflation, others talk about falling unemployment, and some highlight the potential for global issues (including China) to slow the pace of rate increase. But overall, the Fed funds futures are currently pricing in a Fed funds rate of 0.6% for the year-end. That indicates the potential for medium-term Treasury yields to rise less than expected, perhaps by 50bp.

The second key element is the credit spreads. According to the JACI data, the average Asian bond at the end of 2015 traded at 293bp over swaps, broken down into 222bp for investment-grade and 596bp for non-investment-grade. These spreads are eight times the pre-crisis levels for investment-grade and over six times for non-investment-grade. Although one may argue that the pre-crisis levels reflected unjustified and unsustainable exuberance, the current levels are still higher than the post-2009 average spreads by about 25bp for investment-grade and 140bp for non-investment-grade.

Compared to the US credit markets too, Asian bond yields are still higher, by about 90bp for investment-grade and 50bp for high-yield.

In our view, the current spreads reflect neither a significant overvaluation, nor undervaluation. Consequently, they indicate the potential for the spreads at the year-end to stay close to their current levels, perhaps within 20bp.

The third determinant of returns is defaults. At a global level, high-yield default rates are likely to pick up: Moody’s expects the global high-yield default rate to reach 3.7% by November 2016, a level that is higher than the 3% for last year, but still lower than the longer-term average of 4.2%. In Asia, most of the defaults have been triggered by the crash in commodity prices and the economic slowdown in China. These factors are likely to keep Asia’s default rates elevated, but should not lead to a spike.

THE TECHNICAL FACTORS for Asian bonds are likely to be supportive this year. Already, many major issuers have turned to Chinese domestic bonds instead of US dollars, as it offers them cheaper funding and reduces their currency risk. This year’s supply of new bonds is also likely to be restrained by the same trends, particularly in the China high-yield sector.

At the same time, the demand for bonds has remained strong, in particular from the institutional investors in the region, who picked up 63% of new issues in 2015, up from 58% in each of the three years prior to that. For most investors, Asian bonds have become a mainstream asset class, rather than a frontier asset class; and they are likely to maintain their presence in Asian bond markets in the medium- to long-term.

Based on these factors, we expect Asian bonds to generate total returns of 2%-4% if five-year Treasury yields rise by 50bp. Even if the five-year rates rise by 75bp, which seems aggressive given the uncertainties surrounding further rate increases, Asian bonds can still generate positive returns in the range of 0.7%-3%.

Given the higher yields and lower duration, high-yield bonds on the whole are likely to generate higher returns than investment-grade bonds by about 200bp in the base case. However, the challenge for investors is likely to be one of avoiding the potential defaulters. That is no easy task, since the defaults are triggered not only by economic, but sometimes by political factors as well. Another challenge of investing in high-yield is the lower liquidity due to the shrinking capacity of banks to hold inventories and make markets.
​
In an environment of so many uncertainties – including those around the Chinese economy, commodity prices and geopolitical risks – we believe investors should maintain a reasonable allocation to fixed income to provide stability to their portfolio returns.

The Modi government’s first budget for the year 2014–15 failed to seize the possibilities in front of it. India elected Narendra Modi last year largely on the hopes that he would deliver growth and jobs. Based on his track record in Gujarat of running an efficient, corruption-free government, everyone hoped that he would quickly deliver the reforms needed to power up India’s growth rate and deliver jobs to realise the demographic dividend and avert a demographic disaster.

Instead of concrete steps, backed up by real money, to address the problems that shackle India, the latest budget contains yet more plans and dreams of future action.

The budget has to be judged in two contexts. One is the historic opportunity facing the country, and the other is the urgent need for reform.

India faces a fortuitous situation of falling oil and commodity prices. Since India is a large importer of oil, the falling oil price would benefit it in many ways: it would contain the current account deficit, lower the fiscal deficit and temper inflation. In many ways, this frees up resources that can be invested in infrastructure and education to take the country to a higher level of sustainable growth.

But the government has not taken full advantage of this opportunity. Other than fuel, the budget has actually raised the subsidies for food and fertilizer. It even increased the allocation for the rural employment guarantee programme started by the previous government. Without cutting these expensive subsidies, the country is going to find it difficult to generate resources for investment. This failure to curb the subsidies is one of the most significant shortcomings of the budget.

The budget does plan to provide more funds for developmental expenditure – roads, railways and infrastructure – but only by assuming high GDP growth and tax collections. It assumes nominal GDP growth of 11.5%, which could translate to a real growth rate of 8% to 8.5%. Although the recent revision to the GDP growth calculation has pushed up reported growth to 7.4% in the last quarter, it remains doubtful whether growth can rise enough to match the budget’s assumptions. After all, everyone was forecasting a rate of about 6.5% not long ago. The expected tax revenue growth of 15.8% also looks problematic, coming after a more modest 9.9% for the last year. If the tax collection ultimately falls short, the government will find it difficult to fund all its promises and still restrict the fiscal deficit to the planned 3.9%.

TO ITS CREDIT, the budget contains several good ideas for the future. The planned reduction in corporate tax rate from 30% to 25%, while eliminating many of the tax exemptions, is a step in the right direction, but it will be done over four years. After several years of planning and discussion, the implementation of the national goods and services tax is targeted for April 2016, provided that legislation is agreed. The government has also announced plans to turn the gold holdings of Indians into monetary savings. It aims to improve the ease of doing business and reach a ranking within the top 50 from the current 142. It is considering establishing ‘plug and play’ infrastructure projects with all regulatory clearances and coal/gas links in place. It is planning a new bankruptcy law to deal with non-performing bank assets.

Another positive step announced in the budget is the agreement with the Reserve Bank of India to target inflation of 4% within a band of 2% to 6%. This is likely to bolster the independence of the central bank in setting monetary policy. Once the required legislation is passed, the government intends to set up a monetary policy committee rather than leave decisions to the central bank governor, although the danger is that the committee would be seriously compromised if it is stuffed with political appointees.

THE ISSUE IS that these ideas are all promises for the future. In the meantime, the government has failed to reallocate hard money from wasteful expenditure and subsidies to development. It is not clear if the government will have the luxury of low oil and commodity prices for the next few years. If oil prices start rising, India’s finances will again be squeezed, and these plans may never make it to reality.

The government has also postponed the target of bringing the fiscal deficit within 3% by one year – it now expects to achieve it by 2017–18. While a lower fiscal deficit need not be India’s sole focus, the achievement of that target also depends on oil prices remaining benign.

It is not easy to turn around a large democracy like India, and the Modi government deserves praise for thinking through some important ideas for the future. But it could have been so much bolder in reallocating resources from wasteful expenses to productive uses. After all, opportunity knocks but once.

This is a reproduction of an article in Reuters published on September 11, 2013.

Ever since reports emerged that the United States might taper off its bond-buying program, emerging markets have whipsawed: falling currencies, rising rates and fleeing funds. India and Indonesia have been two of the most affected countries in Asia.

The Asian dollar bond markets have also been affected by the fear of tapering. On the one side, longer-term bonds have lost substantial value as U.S. interest rates have picked up. Additionally, investors have discriminated between bonds from vulnerable countries and those from stronger countries.

In India’s case, state-linked entities such as banks and oil companies have issued most of the bonds. Since May 22, when the word “tapering” burst into financial markets, the Indian rupee has plunged by 23 percent. At the same time, spreads for Indian dollar bonds widened by as much as 130 basis points, even for five-year bonds. The spreads on the benchmark 2018 bond from State Bank of India widened by 120 basis points from end-May until end-August.

There were many underlying fears that led to this. One was a potential downgrade of India’s rating, currently at its lowest investment-grade level. Standard & Poor’s, in particular, has a negative outlook on its rating, and has remarked that there is a one-third chance of a downgrade in the next one to two years, which may well be accelerated if things do not improve. The other fears are rising inflation, a slowdown in growth and the consequent deterioration of business fundamentals.

For Indonesia, the currency depreciation during the same period was 16 percent; but the 2018 and 2023 Indonesian sovereign dollar bond spreads widened by 140-150 basis points. This is despite the fact that Indonesia took some strong steps to control the situation, including raising petrol prices by 44 percent and diesel prices by 22 percent in June, and raising interest rates by 125 basis points.

During the same period, the spreads on dollar bonds issued from stronger countries have hardly widened. For instance, from Hong Kong, Hutchison’s 2019 bond spreads are up by only 10 basis points; from Singapore, Temasek’s 2023 bond’s spreads have not changed; from Korea, the 2019 sovereign bond’s spreads have risen by only 5 basis points.

Chinese dollar bonds present a different story. Their performance has been driven more by evolving views on Chinese growth, rather than U.S. Fed tapering fears. While bonds from cyclical sectors, such as Cement and Steel, have widened by 50-150 basis points, those from property companies have held well (for instance, the benchmark Country Garden 2018 bond has actually compressed by 40 basis points in terms of spreads).

The overall picture in the Asian dollar bond market, then, is one of rising discrimination between bonds from weaker and stronger economies. Similarly, even within the same country, bonds that are more vulnerable to economic slowdown have underperformed. For instance, in India, bonds issued by private-sector banks and companies have outperformed those from state-linked banks and companies.

In a way, this is a testament to the market’s ability to distinguish specific kinds of credit in terms of their strengths and weaknesses, rather than lumping all of them into an “emerging market” bucket.

As we look ahead, one key question is whether potential tapering has been fully priced in to the Asian bond markets. While U.S. 10-year rates have gone up by more than 120 basis points, many emerging-market currencies and equities have slid, and bond spreads have risen, there is still likely to be a residual effect which will kick in once the tapering plans are confirmed and the actual tapering begins. When that happens, the discrimination between credits in Asia will only strengthen.

In that sense, India and Indonesia cannot rest easy yet. Their struggles with currency, inflation and their balance of payments are likely to spill over into their dollar bonds too, taking their spreads higher as and when tapering begins in  earnest.

At some point, though, some investors will find value in these bonds. There is some evidence that Indian spreads reflect about 60 to 70 percent of the impact of a rating downgrade. If that number inches towards 80 to 90 percent, that would be a good time to buy those bonds.

India’s economic growth has slid inexorably from a height of 9.4% in the Jan-Mar 2010 quarter to a low of 4.8% in the latest quarter. Although India’s prime minister fervently argues that it is just a cyclical slowdown and will reverse soon, there are many structural factors too behind the fading of growth.

I was surprised to read the recent article by Raghuram Rajan on India’s slowing. In his piece, he identifies two reasons: one, he says India’s economic institutions were not ready to support a high growth, and two, he points to global financial crisis. But in both cases, he argues that the political system stepped in to save the poor and the weak against institutional failures and against unbridled development; and the political reaction led to the fall deceleration.

It is indeed a strange take on the recent issues in India. The first question to ask is this: if indeed the economic institutions failed the people, who created those economic institutions? It is the politicians! The political class has been far from being the saviors of the poor, weak, oppressed, swindled and the trampled masses; indeed, it is the political class that has been doing the oppressing, the trampling and the swindling of the people.

I am not sure why Rajan argues this way, but I hope that he has not become a part of the “system” after serving as the chief economic advisor to the government. I also hope the possibility of his nomination as the next governor of the Reserve Bank of India has nothing to do with this line of argument.

Unsustainable structure

Why, then, did Indian growth decline back to the disappointing “Hindu rate of growth”? There are many structural imbalances in the economy that have impeded India’s potential to achieve high growth rates. To start with is the persistent fiscal deficit (4.9% of GDP for 2012-13), which can be traced not only to the traditional food, fuel and fertilizer subsidies, but also to the newer employment guarantee programs started by the current Congress government. 

The high fiscal deficit also leaves little money for infrastructure investment or development expenditure. India’s power sector, for example, has perpetually run at a deficit of 7-10% and suffered a power blackout in July 2012 that left 620 million people or half of the country’s population without power! In the southern state of Tamil Nadu, for example, my mother still suffers from power cuts of 2 hours when she is in the state capital of Chennai, and 10 hours when she travels to the other cities in the state.

India’s current-account deficit has soared in the last five years from 1% to 4% of GDP,  thanks to global oil prices and Indians’ insatiable lust for buying gold. (In fact, the deficit hit 6.7% of GDP for the Oct-Dec 2012 quarter.) At the same time, exports have faced headwinds from the economic slackening in the U.S. and Europe. Besides, barring a few companies, Indian manufacturers have not risen to the challenge of building themselves into sustainable exporters in terms of scale, technology and cost-competitiveness. 

India’s balance of payments has always been dependent on foreign capital inflows (except for a couple of years in the mid-2000s when the current account moved close to break-even), but the recent widening of the current account has made the task of attracting foreign capital  even more critical. 

Confidence

Investment, both domestic and foreign, depends ultimately on confidence. After all, investors are trusting that their money would come back to them with a reasonable return. Indian politicians have singularly failed to create and sustain confidence in the economy.

For many years, the Congress-led coalition has governed the country without instituting any meaningful structural reforms. Even the few initiatives that it tried to advance, such as the nuclear agreement with the U.S. and opening up of the multi-brand retail sector, faced considerable headwinds in the political system. Congress’s allies also put up a price for their support on every single issue. Although now postponed to 2016, India’s attempt to change the taxation principles for foreign investors investing though third countries such as Mauritiusalso produced considerable uncertainty for investors.

Corruption has played a big role in turning off investors. Instead of positive reforms, corruption
scandals emerged with regularity. Who would want to invest in the telecom sector if they faced the prospect of the licenses being cancelled? Coalgate (as the coal-sector scandal is popularly called) managed to slow investments in the coal sector. Before that, the 2G telecom licensing scandal led to the mass cancellation of licenses, leading to the withdrawal of some international telecom companies.

It is clear that India is fighting the fire with some measures to control the fiscal deficit, retain the investment-grade credit ratings, ease the flow of investments into infrastructure, and revive the economic growth. It is the long-established pattern again: India will act only after facing the crisis.

Who is responsible for this mess? Rajan may feel that the political process is the necessary corrective factor against unbridled market forces. In reality, it is the political class that has brought the country down.

Ideas under progress

The next section in the book, "Imagining India", contains the ideas that are being debated, shaped and molded in the Indian society today. Nilekani starts this section with state of school education. There is much that is wrong with India’s primary education, despite the excellent mage of Indian education in the eyes of the outsiders – after all, they only meet the highly educated finance, IT and engineering professionals from India. Nilekani discusses several of the challenges in Indian education, including the limited attention paid to primary education, the increasing politicization of even excellent institutions like the Indian Institutes of Technology (IITs) and Indian Institutes of Management (IIMs), lack of accountability by the teachers, the overall failure of the state education system which has forced the society to seek private education at considerable cost, and the use of reservation policies as bargaining tools by politicians.

Another idea in progress is the role of urban centers, and the love/hate relationship that politicians have with them. The Gandhian heritage (“India lives in its villages”) makes it difficult to acknowledge that much of the growth in the future is going to be based on cities. The sooner India takes up the urban problems in a no-nonsense way, the better it would be able to
manage the impact of growth on the rural and urban areas. Nilekani speaks hopefully of government programs such as Jawaharlal Nehru National Urban Renewal Mission as one of the catalysts for reform.

Speaking about infrastructure, Nilekani makes the usual points about the lack of different types of infrastructure, but believes that it has now become a key political point such that politicians can no longer ignore it. He then discusses the efforts to build a common market and credits the Vajpayee government for most of the progress that has been made. Much of the momentum has, however, been lost in the last five years under Manmohan Singh. 

Ideas being debated

Then, Nilekani moves on to a third set of ideas, those about which there is fierce disagreement in the society. He starts this section with economic reforms. Nilekani feels that politicians have not openly embraced reforms as an idea and they are falling back into populism. He writes about a few aspects of reforms that no politician has been bold enough to handle, in particular the caste-based reservations and the role of subsidies. However, he feels that reforms have begun to succeed as a political argument. A case in point is Narendra Modi, who is feted for the economic dynamism of Gujarat, despite the reservations about the role of his administration in the 2002 massacre of Muslims. But then, the Congress government has resorted to populist programs such as the Rural Employment Guarantee Scheme.

One of the key points that investors have always made about India is that the country is firmly set on a path of economic reforms, and no party will be able to reverse the process. But that argument addresses only one half of the issue: the point really is not about the direction, but the pace of reforms. If Indian reforms stop after doing the easy bits and there is not enough political or social will to handle the difficult ones, then the biggest opportunity in the history of the country may be lost. I only wish it does not turn out to be the case. Everyone knows the next set of reforms needed is more challenging, most of them related to the various subsidies and price distortions. It is not knowledge, but political will and implementation that are required. Unfortunately, the current government under Manmohan Singh has done precious little to push reforms forward in the last five years.

Nilekani’s next topic is jobs and labor. He traces well the cornering of privileges and resources by the workers in the organized sector, leaving little for the rest. He also points to the fact that organized workers end up setting the political agenda, simply because they are more organized. I was staggered to read that 14 million people are entering the job market every year. Nilekani also mentions that the IT and BPO sectors have created 1.6 million jobs so far. Contrast these two figures and the problem becomes apparent. There is therefore no surprise when Nilekani says, “A population of India’s size, and with its upcoming demographic surge, cannot rely on the services sector to create the mass of jobs it needs, and a large mass of unemployed and seasonal workers is a recipe for instability.”

As the next idea that is being hotly debated, Nilekani discusses the state of higher education. There is little that is unknown in the chapter. People from foreign businesses, who are used to dealing with highly educated Indians, may find it surprising that most of India’s higher education is failing to produce people with good skills. Politicians, again, stand in the way of improvement. It is saddening to read Nilekani’s description of how he and the Gujarat government successively offered to finance new facilities in IIT Bombay and how the then Education Minister, Arjun Singh, obstructed it. But Arjun Singh was not alone; BJP’s Murli Manohar Joshi too did his best in trying to interfere with IITs and IIMs. I was also shocked to read that St Stephen’s College in Delhi, one of India’s most reputed educational institutions, announced that it would reserve 50% of its seats for Christians. Why?! The whole aspect of reservations remains a mess that is dragging India down (although I must confess I do not have data about how well the Supreme Court’s decision of excluding the creamy layer from the “Other Backward Castes” reservation is being implemented).

Ideas for the future

The fourth section in the book comprises ideas which are not being considered in the society, but which will nevertheless prove important in the future. The first of these is the power of IT. Nilekani argues for introducing a national identity card for citizens (and for using it to target subsidies directly to the citizens by way of a bank transfer for them to spend as they please). Now that Nilekani has become the chairman of the ID card authority, he is trying furiously to implement it. Perhaps direct cash transfer of subsidies will gain political acceptance if it is seen as a way to obtain votes. Nilekani also discusses the various other areas where IT can make a difference, such as land records and government services.

Health and social security for the aged are two topics that are not being discussed actively, according to Nilekani. As a result, he believes that lifestyle diseases are likely to explode – something that India is ill prepared to face. It is perhaps true, but even I found it difficult to place it in the same order of importance as several other economic issues. Nilekani also argues in favor of creating a sustainable social security system while the demographic dividend lasts. Environment, says Nilekani, is another topic that gets scant attention. The basic warning here is that unless India manages to achieve environmentally friendly growth, growth may not be sustainable. Perhaps true, but the chapter did not convince me – I still think there are more important, and more accessible, reforms that need to be carried out first.

Nilekani classifies India’s energy needs and solutions as another idea that is not being debated
well. I am not so sure; most citizens face power cuts everyday, and when oil prices touched USD 150 per barrel, there was even some fuel rationing in some cities. However, it is not the solutions but the political will to implement them that is missing. India still relies too much on coal – Nilekani says that India is likely to import a staggering 95% of its coal needs by 2030. There is little resolve to carry out reforms in the usage of power. I read some years ago that all the states had agreed to charge at least half-a-rupee per kilowatt-hour for the power used in agriculture. But then, it looks like many parties are winning elections by promising free power to farmers. Nearly a quarter of total power generated was lost in transit (genuine losses or theft) in 2011. In the southern Indian state of Tamil Nadu, I regularly hear from my friends of power cuts of 9-12 hours a day! It is important to use the available sources well even as new sources are being sought. So far, China has shown great foresight in securing its energy and mineral needs by entering into deals around the globe, and India will need to catch up fast. I think Manmohan Singh has done India a great service by firmly sticking to his bargain with the USA, so that India can generate more nuclear power, potentially the only solution to the country’s future power needs.

Finally, in his concluding remarks, putting all this together, Nilekani passionately argues that “after a long and convoluted path, after many a stumble and wrong turn, a different kind of moment seems to be upon us. For the first time, there is a sense of hope across the country, which I believe is universal. There is a momentum for change.”

Just do it

Nilekani has done India a great service by putting a comprehensive and thought-provoking book together. After all, how many entrepreneur-industrialists have the intellectual ability and rigor to compile such a commendable treatise on India?

One point that keeps recurring through his discussions is the futility of the Nehruvian socialist model and the irrelevance of Gandhi’s economic ideas. India has paid dearly by holding on to both and the sooner the country gets rid of them, the better it would be. The other aspect that
surprised me was Nilekani’s assertion in many places that the Indian government finances had become much more comfortable. He quotes several programs that the government has taken up, all of which need massive financial investment, but he says repeatedly that the government has enough money. India’s investment-grade credit ratings from Moody’s, S&P and Fitch hang in balance, thanks to the struggles of containing the fiscal deficit. India must get back to controlling the deficit, rather than expand the list of spending programs.

One thing that shines through in the book is his love for the country and his dreams for its future. Sometimes, I had the feeling that this passion had colored his vision and made him see the glass as ‘half full’ all the time. Earlier, I had read another book on India, “In spite of the Gods” by Edward Luce, who was the correspondent in India for Financial Times. In that book, Edward had done a great job of describing many of the social pressures and changes, but had left the conclusion much more open by listing out the areas on which India needs to work if it is to progress. Luce’s book had much less economic analysis than Nilekani’s. But, as the Economist magazine opined, both are indispensable introductions for anyone wishing to understand contemporary India.

As both the books make it clear, the trouble is not in identifying what needs to be done, but in actually getting it done!

Many times, I have felt that India is like a bowl of spaghetti. In such a diverse country with so many things going on at any time, it is difficult to sort out the issues and make sense of what needs to be done. 

In the book, “Imagining India”, Nandan Nilekani (co-founder and ex-CEO of Infosys and the current head of the national identity card project) tries to view the country in terms of the ideas that define it. He sorts them into four categories: ideas that have been accepted in the society; those that are under progress; those about which there is still considerable debate and disagreement; and those that will be relevant for the future, but are not receiving the attention they deserve.

As I kept reading the book, I found myself arguing with the author. While I had my  preconceptions, I also found myself learning many new facts about India. Nilekani's understanding of the country is impressive, and his arguments are supported by well-researched data and statistics. As a co-founder of Infosys and one of the corporate leaders of India, he has had tremendous access to other leaders: finance ministers, Nobel Prize winners, economists, social workers, historians, and even a foreign country's prime minister.

This book is a "must-read" for anyone interested in understanding today's India and its future. It is the most balanced of the three books that I read recently about India, the other two being "India: The Emerging Giant" by Arvind Panagariya and "The Indian Renaissance: India's Rise after a Thousand Years of Decline" by Sanjeev Sanyal. Panagariya's book is packed with facts and figures, but much of it historical; Sanyal's book is good, good but does not address the challenges deeply. Nilekani's book not only discusses the issues deeply, but provides enough facts to support the arguments.

Accepted Ideas

Nilekani starts the first section with the argument that India has finally started viewing its people as assets rather than liabilities. He cites the now-famous concept of demographic dividend as the foundation of India's future. Of course, having led Infosys for many years, Nilekani cites the IT and BPO sectors as evidence of the positive role that a well-educated population could play. But as I read the chapter, I kept wondering if his views were not tainted by his IT  experience. For instance, he does mention the fact that the southern states have  crossed their peak period of demographic dividend, while the population of the lower-developed BIMARU (Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh) states are still growing and getting younger. But he does not discuss the implications of this split fully. Unless the BIMARU states manage to develop, and that too at a rapid pace, the population profile of those states may become a curse, and the current regional imbalances may intensify and lead to social problems.

Besides, how can one conclude that the human population of India has become its asset, when over 60% of the population still depends on agriculture for a living, and even in that sector, the labor productivity is very poor? Whether India's young demographic profile may turn into a blessing or a curse depends on how well other areas of the economy are reformed to produce the growth and jobs necessary to satisfy the people. And that is where Nilekani's other ideas become relevant.

Nilekani next discusses the acceptance of entrepreneurs in the society. He traces the dominating influence of Nehru's socialist policies on India's early economic path as an independent country, and their failure to produce  sustainable growth. He then goes on to discuss the Bombay Plan devised by the industrialists as a compromise to the fiercely socialist government, and describes the eventual rise of the entrepreneur after Manmohan Singh's 1991
liberalization. As I read the chapter, I could not but feel angry and disappointed at the missed economic opportunities, thanks to the failed Nehruvian policies. I also remembered the futile rules that curtailed production of various products, even as demand was booming. (My father wanted to buy a Bajaj scooter in 1987 and found that he had to place a deposit and wait for three years for his turn to buy one; so he  eventually bought one in the black market by paying a premium of about 25% of the actual cost, and had to run the scooter in someone else's name for a year before it could be transferred to his name!).

The overall thrust of the argument that private enterprise is now encouraged is fine, but it is difficult to agree with Nilekani when he says that the ineffectual economic policies are what bought the Congress down finally and led to the rise of multi-party democracy. In fact, in many other parts of the book, he does a masterly job of describing the rise of multiple identities that led to a regional and multi-party political system.

The other problem with this chapter, and indeed the whole book, is that Nilekani scarcely mentions the role of corruption in holding down India's development. There is no doubt that the nexus between the politicians, bureaucrats and businessmen twisted the system to their benefit rather than that of the common people. This omission also made me think about Dhirubhai Ambani, who had brilliant ideas about business (in particular, his conviction to build world-scale capacities and his use of capital markets), but who nevertheless manipulated the system to his unashamed advantage, including blatant scandals such as smuggling and duplicate share certificates. But now, there is even a book on “Ambanism” as if it is a legitimate economic philosophy!

The next accepted idea that Nilekani talks about is the growing use of English across the country and its almost universal acceptance by politicians. No disputes on this point, happily! It reminded me of a discussion in my business school about what unites India. After considering different ideas, we settled upon commerce and business that keeps India united. English is, of course, the glue that links Indians and keeps the commerce flowing.

Next to come is IT, Nilekani's home subject. His description of how Rajiv Chawla, a cunning bureaucrat, slipped computerization quietly into the land records system of Karnataka is hilarious. The government workers had not realized what was going on, and by the time they woke up, it had been done! It is indeed heartening to see IT being used in many key private sectors, such as banking, railways and insurance, and it is seeping into core government services.

When Nilekani talks about globalization as an accepted idea, he again falls back on IT as the main example. While that is indisputable, there is much work to be done to reap the benefits of globalization in the manufacturing, agriculture and financial sectors. There are good examples of some Indian manufacturing companies benefiting from access to global markets, but what has been achieved falls far short of the overall potential of the country. I am also not sure how Indian agriculture would react to globalization in terms of input and output pricing, as well as product choice. For instance, what kind of crops might be produced if all input and output are priced at international levels? Or, what kind of agricultural imports and exports might take place? Will Indian agriculture benefit from globalization without first eliminating the structural inefficiencies such as small farm holdings and land ceiling legislations? These are complex questions, but Nilekani does not carry the argument about agricultural globalization to its logical end. While he has covered so many important aspects in the book, I wish he had discussed the agricultural sector more thoroughly, instead of just mentioning it in passing in different contexts.

Nilekani's final accepted idea is democracy, and it is also one which I found most difficult to digest. For all its positives and ills, democracy is an idea that has finally been accepted in India as the political system of choice. Nilekani has provided a good description of the rise of regional parties and factions, but it is not clear what his judgment is about the phenomenon: is he just describing, bemoaning or celebrating? He argues that the caste, language and regional identities grew in prominence due to the failure of the state to provide  broad-based growth. The question is not whether India has accepted democracy, but whether the current form of democracy is not turning into kleptocracy.

He believes that the new identities are coalescing into an Indian identity, but in my view, he is treading on thin ice when he says that. On the other hand, I feel that the multi-identity democracy is serving to hinder progress rather than enable it; and whatever progress is achieved is in spite of it rather than due to it. After all, how many regional parties have an overarching view of Indian progress and society? How many of them function on the basis of any principle, except that of taking care of their own supporters and constituents? At the extreme instances, when I think about the unprincipled bargaining between different parties, I only get the image of hyenas tearing at the prey from different directions, getting their fill of the meat. Finally, even Nilekani is forced to acknowledge the inescapable, but he still gives it a positive spin when he says, “this period of stonewalling, backtracking and accommodation is essential ... it is the only way we can frame policies that are truly sustainable.” It is a shame that even after 60 years of independence, a discerning writer like Nilekani has to call India's democracy young in trying to justify what is happening.