A simplistic bull case

Abeguiling theory is doing the rounds in India’s financial circles — that the country’s stock market has become unusually attractive for foreign investors; if only the billion-dollar global funds with the best of talent wised up, they can grow their investment eight times in dollar terms over the next two decades.

- DEBASHIS BASU

According to this theory, India will enter a prolonged period of high growth, low inflation, and minimal currency depreciation, thanks to continued structural reforms, improved labour productivity, higher female labour-force participation, transition from an informal to a formal economy, and deeper credit penetration. Foreign investors would miss this “golden age” prosperity at their own peril.

This proposition rests on two heroic assumptions. First: India can sustain an 8 per cent annual growth rate for decades. Second: Inflation will remain subdued enough to prevent meaningful depreciation of the rupee.

That easy 8% growth

In theory almost any economy can grow at 8 percent for a few years. Doing so for decades is far rarer. It requires policy continuity, relentless implementation, and an ability to correct course when things go wrong. India faces several structural frictions. The most immediate is the weakness of private capital expenditure. During the boom preceding the 2008 global financial crisis, the country’s investment rate rose to almost 38 per cent of gross domestic product (GDP), supporting several years of rapid expansion. Since then it has slipped back to the low 30s. Public spending on infrastructure has risen sharply, but government investment alone cannot replicate the dynamism of a broad private-investment cycle. Many firms remain cautious, wary of uneven demand and an uncertain global environment.