Since Narendra Modi came to power in May 2014, India has become an emerging market darling. The country’s GDP growth has climbed, inflation has eased, industrial production has picked up and the current account deficit has shrunk.
These have been significant changes in a country whose currency was originally included as one of the ‘fragile five’ in 2013. Over the last year, while emerging market currencies have been under significant pressure and the rand has declined over 22% against the dollar, the Indian rupee has lost less than 5%.
“India is going through a very bullish time,” Dr Martyn Davies, managing director for emerging markets and Africa at Deloitte Frontier Advisory, told the Momentum Summit in Cape Town. “It is not about Chinese big bang reforms, but small incremental improvements – a little more operational efficiency, a little more infrastructure spend, a little more tax collection, a little less corruption.”
The changes have been driven by Modi’s economic reforms to remove structural rigidity, improve the country’s institutions and encourage investment. In a nutshell, it is a move towards an environment more encouraging for business.
This, Davies believes, is not just a lesson that all emerging markets need to learn, but that reaching a point of major reform is essential for their development.
“Countries in emerging markets need a ‘Modi moment’,” he said. “To break the cycle of structural economic decline, I argue, you need a dramatic political event or shift.”
Given the difficulties in South Africa’s economy at the moment, many would agree with him that this country needs to see a dramatic change. However, Davies is not optimistic that this might happen soon.
He points out that from the time Mahatma Ghandi was pushing for independence in India until Modi came to power was almost three generations.
“We revere Ghandi, but what came next was the further impoverishment of India under the Indian National Congress party,” he said. “From democracy until Modi came in, it took 66 years to remove the fantasy left wing ideological party that Congress became progressively after liberation from colonial Britain in 1948.”
It could be argued that modern South Africa faces different pressures and that changes will be more rapid. However, as Davies pointed out we are dealing with the same competing ideologies.
One is the idea of free markets. The other is the ‘development state’ where the state puts itself at the centre of economic development.
The distinction between these two ideologies may have seemed less material in recent years. Leading up to the financial crisis, the world was in such a cycle of growth that economic policy was less critical. The whole world was growing in a synchronised wave of confidence and this may have clouded that impact of structural inefficiencies.
“We have been living for a decade and a half in artificial economic times,” said Davies. “It has been incredibly enabling for companies, careers and most importantly for countries.”
To illustrate this he points out that in 2007, only three countries did not grow – Zimbabwe, the Democratic Republic of Congo and Fiji. In the same year, 114 countries grew by more than 5%.
“This was because of massive global liquidity, a high growth-low inflation environment, and high confidence,” Davies said. “But the tide has shifted dramatically. This high growth artificial period covered up structural deficiencies – the dysfunctionality, fantasy economics and anti-business environments in certain countries.”
What we are seeing now in many emerging markets, he suggested, is the reality of poor policy being exposed. The illusion created by the artificial economic conditions that existed in the early 2000s is falling away.
“The great expectations of the last decade are likely to be dashed,” Davies said.
Evidence of this is South Africa’s pedestrian growth rate. While India’s growth rate is now surpassing China’s, South Africa is barely recording positive GDP growth figures.
“My view is that if you are not growing, you are regressing,” said Davies. “When you have the combination of talent, financial and intellectual capital, growth is natural.”
To return to growth, Davies argues, South Africa therefore needs its ‘Modi moment’. It needs to learn the lessons of history and implement the reforms that will put it on a sustainable growth path, just like India has done this past year.