RUCHIR SHARMA - Donot take India's growth for granted

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RUCHIR SHARMA, MD of Morgan Stanley Investment 
Source: Economic Times 

RUCHIR SHARMA, MD of Morgan Stanley Investment  

Don't take India's growth for granted

Regarding the wall of-money argument - What is apparent now is that while central banks can print all the money they want, they can't dictate where it goes. This time around, much of that money has flown into speculative oil futures, luxury real estate in major financial capitals and other non-productive investments, which last year led to an inflation problem in the emerging world and continues to undermine the purchasing power of consumers across the globe. As speculation drives up oil prices, consumers now spend a record amount of their income on energy needs. 

On economic growth and fast-growing companies - While there are instances where a fast growing company could well be in a slow growing economy - as exemplified by Mexico and South Africa - and also when a fast growing country does necessarily result in strong stock market gains - as has been the case with China - in most emerging markets, we have seen a strong relationship between economic growth and stock market returns.

So, getting a country's economic growth rate right is particularly important for the investment equation. Of course, what matters the most are expectations as well. In 2011, a growth rate of 7% was enough to trigger a bear market in Indian stocks as the prices in the Mumbai stock market were based on what Indian companies would be worth down the road if the economy continued to grow at a sustained pace of at least 8%. 

On GOIⳠmeasures to Transform INDIA become a breakout nation - The premature creation of a welfare state, falling turnover among the rich and powerful and a disturbing tendency of farmers to stay on the farm are some of the key issues that need to be addressed for India to become a breakout nation. It was easy enough for India to increase spending in the midst of the global boom, but the spending continued to rise in the post-crisis period. If the government continues down this path, India may see the same fate as Brazil in the late 1970s when excessive government spending led too persistent inflation and crowding out of private investment. 

Is democracy or an authoritarian political system more conducive for an economy to be a breakout nation - It's not the type of system that matters, it is the stability of the system and, even more important, whether the leaders running it understand the basics of economic reform. The chance that any particular system - democratic, authoritarian or any other - will have a positive impact on a country's breakout potential is about 50-50.

Our research found that in the 1980s, 32 nations were growing at a rate faster than 5%, and 59% of them were democracies; in the 1990s, 59% of the 39 high-growth nations were democracies; and in the 2000s, 43% of 53 were democracies. The total for the 3 decades: 64 (52%) of 124 high-growth countries were democracies.