Selling India’s Business Story

Ashok V. Desai

Buy Borrow Avoid

Investing In India’s Emerging Resilience;
By Sivaprakasam Sivakumar; Macmillian Publishers India, 2009;
Pages: 262; Price: Rs 325

This book argues out the case why foreign investors should invest in India. While doing so it gives a review of India’s economic landscape. It requires some gumption to tempt people to invest in India at a time when its growth is declining, balance of payments worsening and budget in a yawning deficit.

Sivakumar would argue that these are short-term factors — the wrong ones to look at in taking long-term investment decisions. What matters in his view is what he would call the underlying strength of the economy. He argues that the reforms of the early 1990s changed the economy in a fundamental way: they not only freed entrepreneurs from licensing constraints, but the subsequent rapid growth gave them confidence. He would argue that India has sound institutions — that its regulators are thoughtful and powerful. He stresses India’s education system, which churns out employable graduates. Deregulation has led to a rise in India’s links with the world — in its export and import ratios, and in capital inflows. He points to the rapid productivity growth unexplained by labour and capital inputs. These, in sum, are the factors that in his view give confidence in the long-term prospects of the Indian economy.

Sivakumar points to three major sectors which offer investment opportunities: agriculture, industry and finance. Towards the end, he takes up the question of India versus China. He thinks that they are not competitors, that their specialisation is extremely different, and that they will complement each other to make the 21st century an Asian century. It is altogether an extremely upbeat message. Those who are coming for the first time to the subject will find this a useful and cheerful introduction.

Sivaprakasam Sivakumar is the founder of Boston-based Argonaut Global Capital, a financial advisory firm focusing on emerging markets. After a management degree in India, Sivakumar did his doctoral studies in economics from the University of Nebraska, Lincoln. He has published research work on topics such as currency swaps, risk management, capital-account convertibility and rising liquidity in the Indian stockmarket.

Sivakumar has been an effective promoter of the India story in this as well as other books. Some of the points he makes are telling. For instance, he points out that India cannot have a mortgage crisis like the US, because whereas mortgage loans come to 80 per cent of GDP in the US, they are only 6 per cent in India. India cannot have a banking crisis because banks are extremely conservative on collateral when they give loans, and they never sell off loans. More than 60 per cent of India’s GDP consists of domestic consumption, and is, therefore, more immune to international influences. India has a coastline of 7,000 km, but has hardly any coastal trade, whereas in Japan, 41 per cent of the trade is coastal.

These arguments come close to a view that India is decoupled from the rest of the world economy; they also echo the view that India and China will provide a new epicentre of growth as the western world declines. Sivakumar does not dogmatically take these positions; he recognises that the world recession has impacted India already. But he thinks that the peculiarities he has mentioned will ensure a less extreme trade cycle in India than internationally. Whether they will or not will be tested in the next few quarters. But even if there is a serious downturn, Sivakumar would continue to argue that India’s long-term prospects make it a good candidate for investment.

Is this irrepressible optimism convincing? There is no gainsaying the fact that India is far behind the advanced world — that its productivity is a fraction of what has been achieved even in once-poor countries like China or Thailand, and that its trade ratios are tiny compared to almost all other nations. The distance between India and other countries also represents an opportunity, and the practices which have made other countries so much more productive are available to India to exploit without having to work on innovating its own way into the future.

But all developing countries are far behind advanced countries, and some have caught up much faster than others. India was a laggard till the 1970s. Since then its growth rate has increased, but it still has a long distance to go; and China has consistently grown much faster than India. That raises the questions: How could India grow faster? What is holding it up? The answer relates to the pathology of Indian economic governance and institutions. This is a question the author omits.

Sivakumar would probably argue that his book is really meant for foreigners and that he would not like to get them stuck in domestic Indian controversies. But they too ask why India is growing more slowly than China. They not only ask, but act on the difference: they have invested far more heavily in China. It is a question that Sivakumar may do well to take up in his next book.

---

This review was published in the Businessworld issue dated Dated 21-27 April 2009