#capitalfirst

“Focus is more on structural reforms”

 As expected there is no change in the policy rates in the early Feb policy. There was no incremental data for the RBI to take a decision, whether on inflation or GDP growth. Also, RBI has once again showed that they will be very deliberate in process of rate easing. They will continue to watch for Fiscal Deficit numbers in the budget, and oil price movements that can have an impact on the macro. This gives great comfort that the direction is set, and the process is underway. As far as transmission is concerned, in my estimate, many banks will surely cut base rates within 3 months as the Debt markets have already dropped by 100-150 bps in the last 3 months, and banks  are competing with the money and debt markets.

Preface:

  In this article, I have been attempted to briefly trace India’s economic history, derive a trend line, explore the opportunities India provides as a country from the trend line, and comment on what India can learn from the largest and economically most advanced democracy in the world.

  First, by way of introduction and disclosure: we run a company called Capital First, listed on the Indian stock exchanges are recipients of FDI from the US. As a business, we focus on providing debt financing to SMEs. US private equity firm Warburg Pincus backed us in a Management Buyout, and invested USD 150 million in September 2012, followed with an additional investment of USD 20 million in March ’14. The investment in Capital First was the largest FDI in India in financial services in FY 12-13.

      India had the distinction of being the world's largest economy in the beginning of the Christian era, as it accounted for about 32.9% share of world GDP and about 17% of the world’s trade. The goods produced in India had long been exported to far off destinations across the world.Even as lately as 1700 India's share of world income was 22.6%, almost equal to Europe's share of 23.3% at that time.

  At the end of colonial rule in 1947, India inherited an economy that was one of the poorest in the developing world, with no industrial development, an average life span 32.5 years, a literacy rate of 17%, and an economy that had grown at 0.2% for the last 70 years. In just 270 years, by 1952, India’s share of the world economy dipped to 3.8%, and India was by then among the poorest country in the world in terms of per capita income.

  Madison’s data suggests that for close to these 270 years, India’s annual growth rate was between 0-0.1%. Let’s think for a moment what that means. That for two full centuries, every succeeding generation could, on an average, could expect no increase in living standards. For any country and its people, that is long enough to kill aspirations. It is a miracle that India climbed out of this situation to become an aspirational country within 50 years of this long comatose.

  India was psychologically so scarred after the colonial rule that the leaders vowed not to be taken over again, and unfortunately as an antidote, India closed its economy. So India made its policies with a strong emphasis on import substitution, economic interventionism, a large public sector, and central planning. And profit in business was a bad word in a socialist thought process.

  Fortunately, things changed in 1991. Post liberalisation of the Indian economy,Indiahas progressed by leaps and bounds,India’s GDP has grown from 274 billion in 1991 to about USD 1.8 trillion in 2014, with a per capita income of about USD 1200.

                                          The Changed Political discourse in Elections 2014- a defining moment:An interesting – below the surface- development is underway in India- which probably one of the defining moment in the lifestage of economic development, and this relates to how the political class relates to economic ideologies. India has two national parties, the Congress and the BJP, who have been at the helm of the country since liberalisation in 1991. Other smaller regional parties usually align with either of these two, to form the respective coalitions, the NDA (BJP led) or the UPA (Congress led). The important thing is that both leading national parties profess their commitment for liberalisation, reforms and globalisation, infrastructure, and fiscal discipline.

  India is in the midst of an election as I write this piece, and it is common for parties to trade blows over the GDP growth rate achieved in their respective tenures, and even advertise growth rates during their governance. This new way of political discourse will ensure that no matter which party heads the country for the next 20-30 years, the nation will talk economic growth as a benchmark of success, and this development in itself is a defining moment in the life-stage of India. So in a serendipitous sort of way, the recent slowdown of the economy will be one of great learning for India in the decades to come. Future leaders of the country will take note that they have to reform to keep growth going. And come elections, they have to defend their growth track record.

  The other big lesson learnt over the last few years is that welfare schemes funded by deficits leads to high levels of borrowings, which leads to higher interest rates, which leads to lower investment, which leads to lower growth, which leads to lower job opportunities, lower consumption, and leads cyclically back to lower investment. While the common man (read voter in a democracy) may not understand such economic theories, he feels the impact where it hurts him most - through sticky, high inflation and lower job opportunities.

  Theselearningswill also ensure the country will stay right of center, in a manner of speaking, in the foreseeable future. So it is not just conceivable, but inevitable that over the next few decades, India will retain its mojo, and move towards becoming among the top 3 economies in the world.

  The US experience:One piece of statistic that stuck on me in one of Prof Jeffery Sachs book is that the per capita income in the United Statesin 1800was USD 1000, and that a large democracy can attain a per capita income of USD 50000, even starting from a low base, can be a source of great

  inspiration for us. This one lesson that should not be lost on us – that only growth at 7-8% over 30-50 years, and high per capita income, can help provide world class education, sanitation, roads, clothing, shelter, power, and infrastructure for Indians. Sloganeering for, or in the name of the poor, however well-meant and earnest, won’t take us there.

  At the heart of the growth of the US economy is business and free enterprise, low levels of government involvement, which maximises the efficiency of the economy and the welfare of the people.Moreimportantly, US enablescreativedestruction - this quote sums the ethos: “Capitalism without bankruptcy is like Christianity without hell.”India should enable minimal entry and exit barriers from business, particularly labour laws, and proceed to improve its “ease of doing business”  ranking from its currently low ranking of 134. To pick from the US experience over the last few centuries is a good place to begin, more so because US is a large democracy- this is often used as a ruse in India as an impediment for growth. Fortunately, as discussed earlier in this note, there is a 

structural change in ideologies since 1991, about encouraging private enterprise to flourish.

  Indian entrepreneurs can tremendously benefit by attracting FDI from US. India can draw a lot of FDI from the $17 trillion economy, growing at 3% per annum. Capital First Limted, for example, has raised additional equity from the local markets in addition to the FDI of USD 170 million received from the US, then leveraged it with local debt, and lent over USD 1.5 billion to over 4,00,000 customers in India. Over 95% of the lending is for micro entrepreneurs, and the rest is for consumption. Hence FDI from the US in this example,has had a multiplier effect on the economy of India, as the local entrepreneurs have enjoyed the fruits of the FDI in the form of debt capital for the growth of their business. Now consider that India attracted FDI of USD over 200bilion over between 2000 to date, and you see the significant impact this has already made to India. 

  Opportunities that India offers at a macro level have been rather well documented,so I wouldn’t get into much detail here. The first driver for a surcharged India is aspirations for a better life, making up for lost time fuelled by India’s middle class, estimated at around 300 million. On demography, India did not control birth rates in the last century as compared to what China did, this may have dragged our per capita income down, but this will keep India young for a long while. In 2030, when the average age for the Japanese will be 52, and an average Chinese will be 42, the average Indian will be still young at 31. The third lever is consumption, again fuelled by aspirations. Lastly, entrepreneurship, large and small corporates (India is estimated to have30 million MSMEs) is driving the new India. Finally, fortuitously, the British taught India a language that connects her to the rest of the world. It’s paying off today in our edge in IT, BPO, and a lot more.

  Tailpiece:In 2003, Goldman Sachs predicted that India's GDP in current prices would overtake France and Italy by 2020, Germany, UK and Russia by 2025 and Japan by 2035, making it the third largest economy of the world, behind the US and China. India maybe a few years behind schedule, but surely on its way to get there.

Preface:

  In this article, I have been attempted to briefly trace India’s economic history, derive a trend line, explore the opportunities India provides as a country from the trend line, and comment on what India can learn from the largest and economically most advanced democracy in the world.

 First, by way of introduction and disclosure: we run a company called Capital First, listed on the Indian stock exchanges are recipients of FDI from the US. As a business, we focus on providing debt financing to SMEs. US private equity firm Warburg Pincus backed us in a Management Buyout, and invested USD 150 million in September 2012, followed with an additional investment of USD 20 million in March ’14. The investment in Capital First was the largest FDI in India in financial services in FY 12-13. 

  India had the distinction of being the world's largest economy in the beginning of the Christian era, as it accounted for about 32.9% share of world GDP and about 17% of the world’s trade. The goods produced in India had long been exported to far off destinations across the world.Even as lately as 1700 India's share of world income was 22.6%, almost equal to Europe's share of 23.3% at that time.

 At the end of colonial rule in 1947, India inherited an economy that was one of the poorest in the developing world, with no industrial development, an average life span 32.5 years, a literacy rate of 17%, and an economy that had grown at 0.2% for the last 70 years. In just 270 years, by 1952, India’s share of the world economy dipped to 3.8%, and India was by then among the poorest country in the world in terms of per capita income.

 Madison’s data suggests that for close to these 270 years, India’s annual growth rate was between 0-0.1%. Let’s think for a moment what that means. That for two full centuries, every succeeding generation could, on an average, could expect no increase in living standards. For any country and its people, that is long enough to kill aspirations. It is a miracle that India climbed out of this situation to become an aspirational country within 50 years of this long comatose.

 India was psychologically so scarred after the colonial rule that the leaders vowed not to be taken over again, and unfortunately as an antidote, India closed its economy. So India made its policies with a strong emphasis on import substitution, economic interventionism, a large public sector, and central planning. And profit in business was a bad word in a socialist thought process.

 Fortunately, things changed in 1991. Post liberalisation of the Indian economy,Indiahas progressed by leaps and bounds,India’s GDP has grown from 274 billion in 1991 to about USD 1.8 trillion in 2014, with a per capita income of about USD 1200.

 The Changed Political discourse in Elections 2014- a defining moment:An interesting – below the surface- development is underway in India- which probably one of the defining moment in the lifestage of economic development, and this relates to how the political class relates to economic ideologies. India has two national parties, the Congress and the BJP, who have been at the helm of the country since liberalisation in 1991. Other smaller regional parties usually align with either of these two, to form the respective coalitions, the NDA (BJP led) or the UPA (Congress led). The important thing is that both leading national parties profess their commitment for liberalisation, reforms and globalisation, infrastructure, and fiscal discipline.

 India is in the midst of an election as I write this piece, and it is common for parties to trade blows over the GDP growth rate achieved in their respective tenures, and even advertise growth rates during their governance. This new way of political discourse will ensure that no matter which party heads the country for the next 20-30 years, the nation will talk economic growth as a benchmark of success, and this development in itself is a defining moment in the life-stage of India. So in a serendipitous sort of way, the recent slowdown of the economy will be one of great learning for India in the decades to come. Future leaders of the country will take note that they have to reform to keep growth going. And come elections, they have to defend their growth track record.

 The other big lesson learnt over the last few years is that welfare schemes funded by deficits leads to high levels of borrowings, which leads to higher interest rates, which leads to lower investment, which leads to lower growth, which leads to lower job opportunities, lower consumption, and leads cyclically back to lower investment. While the common man (read voter in a democracy) may not understand such economic theories, he feels the impact where it hurts him most - through sticky, high inflation and lower job opportunities.

 Theselearningswill also ensure the country will stay right of center, in a manner of speaking, in the foreseeable future. So it is not just conceivable, but inevitable that over the next few decades, India will retain its mojo, and move towards becoming among the top 3 economies in the world.

 The US experience:One piece of statistic that stuck on me in one of Prof Jeffery Sachs book is that the per capita income in the United Statesin 1800was USD 1000, and that a large democracy can attain a per capita income of USD 50000, even starting from a low base, can be a source of great

  inspiration for us. This one lesson that should not be lost on us – that only growth at 7-8% over 30-50 years, and high per capita income, can help provide world class education, sanitation, roads, clothing, shelter, power, and infrastructure for Indians. Sloganeering for, or in the name of the poor, however well-meant and earnest, won’t take us there.

  At the heart of the growth of the US economy is business and free enterprise, low levels of government involvement, which maximises the efficiency of the economy and the welfare of the people.Moreimportantly, US enablescreativedestruction - this quote sums the ethos: “Capitalism  without bankruptcy is like Christianity without hell.”India should enable minimal entry and exit barriers from business, particularly labour laws, and proceed to improve its “ease of doing business” ranking from its currently low ranking of 134. To pick from the US experience over the last few centuries is a good place to begin, more so because US is a large democracy- this is often used as a ruse in India as an impediment for growth. Fortunately, as discussed earlier in this note, there is a structural change in ideologies since 1991, about encouraging private enterprise to flourish. 

Indian entrepreneurs can tremendously benefit by attracting FDI from US. India can draw a lot of FDI from the $17 trillion economy, growing at 3% per annum. Capital First Limted, for example, has raised additional equity from the local markets in addition to the FDI of USD 170 million received from the US, then leveraged it with local debt, and lent over USD 1.5 billion to over 4,00,000 customers in India. Over 95% of the lending is for micro entrepreneurs, and the rest is for consumption. Hence FDI from the US in this example,has had a multiplier effect on the economy of India, as the local entrepreneurs have enjoyed the fruits of the FDI in the form of debt capital for the growth of their business. Now consider that India attracted FDI of USD over 200bilion over between 2000 to date, and you see the significant impact this has already made to India.

 Opportunities that India offers at a macro level have been rather well documented,so I wouldn’t get into much detail here. The first driver for a surcharged India is aspirations for a better life, making up for lost time fuelled by India’s middle class, estimated at around 300 million. On demography, India did not control birth rates in the last century as compared to what China did, this may have dragged our per capita income down, but this will keep India young for a long while. In 2030, when the average age for the Japanese will be 52, and an average Chinese will be 42, the average Indian will be still young at 31. The third lever is consumption, again fuelled by aspirations. Lastly, entrepreneurship, large and small corporates (India is estimated to have30 million MSMEs) is driving the new India. Finally, fortuitously, the British taught India a language that connects her to the rest of the world. It’s paying off today in our edge in IT, BPO, and a lot more.

  Tailpiece:In 2003, Goldman Sachs predicted that India's GDP in current prices would overtake France and Italy by 2020, Germany, UK and Russia by 2025 and Japan by 2035, making it the third largest economy of the world, behind the US and China. India maybe a few years behind schedule, but surely on its way to get there.