Aresh Shirali in conversation with Ruchir Sharma, Author and global investor
INVESTORS TEND TO watch ‘uncertainty’ like few else, a nerve-wracking exercise when plenty is at stake, and among those who insist on a close ear to the ground for rumbles of political change is Ruchir Sharma, a New York-based investor who appears restless to hit the road and get out there this campaign season. It’s an election wide open, as he sees it, a perspective that appears to prevail all the way from Dalal to Wall Street nowadays. His influential 2012 book Breakout Nations broke some of that period’s hype around ‘BRICS’ in favour of a more nuanced view of an economy’s emergence and warned of bloated government, crony capitalism and other ills as threats to India’s own. In his 2016 The Rise and Fall of Nations, he called out grand illusions that lay shattered by the Great Recession and condensed diverse insights drawn from dusty places and various datasets into ten vital signs of a country to watch out for. With his special mix of offbeat observations and conventional crunches, Sharma’s brand of analysis has fans far beyond the field of finance. Why this should be so is evident in Democracy on the Road: A 25-Year Journey through India (Allen Lane, 389 pages, Rs 699), his account of the 30,000-plus kilometres he has covered on election trails—along with journalists, psephologists and others—quizzing voters as well as vote-seekers to get an inside track on the pursuit of power in a country that often puzzles the most earnest of observers. From an early brush with caste in small-town Uttar Pradesh to encounters with India’s foremost leaders, the 44-year-old author lays out an electoral map that is both vivid in texture and easy to zoom out of for big-picture answers on the persistence of old policies that mould markets and constrain growth. Sharma is also an avid art collector, and in an apartment adorned with some of his treasures in Delhi, he discusses how iffy any bet on the outcome of this year’s General Election would be and whether the country’s prospects of an economic ‘breakout’ have gone up or down. Edited excerpts from an interview with a seasoned India watcher:
To what extent were your rides motivated by personal interest and to what extent professional?
Our first ride consisted of five of us in 1998 and it has always been my personal initiative. In my view, it’s a great way of understanding India, but I wouldn’t say it was officially linked to my job [as a global investor]. You know how life is. Sometimes the line between the personal and the professional is blurred. I’ve been an investor since a very young age, and for me it was always like a hobby and something I could do as a profession.
Of the 2004 General Election that saw BJP get ‘gobsmacked’, you say it reinforced ‘the point that India, in essence, is not a single country’. Was this because the result was a surprise?
No, I think this is a constant theme that we’ve picked up in India over the years, and 2004 was a great illustration of that. There was no great wave one way or another, yet it was the biggest upset election in India’s history—because the Congress just happened to have better state alliances from Tamil Nadu to Maharashtra, with Tamil Nadu being the key swing state. It just reinforces a recurring theme in my book, one of many Indias. It’s really true. If you go to south India, the questions asked are ‘Modi who?’, ‘Rahul who?’ Sub- national identities are stronger than the national identity. Not that people don’t believe in a national identity, it’s just that people think of themselves first as Gujarati, Marathi, Tamilian, Bengali, and then think of themselves as Indian.
And you don’t think that has changed?
No… Even in this upcoming election, I feel that while the debate in Delhi is structured between the BJP and the Congress, [Narendra] Modi and Rahul [Gandhi], the regional narrative gets consistently underplayed. We may once again be at an instance where we may be underestimating what is happening on the regional fronts.
You also speak of an Indian urge to ‘toss the bums out’ and how the odds in general are against politicians retaining office. Are you convinced that anti-incumbency is the basic factor in every election here?
No, I think anti-incumbency in this country has ebbed somewhat, compared to its peak, [which] I’d say was possibly 2004, when it appeared that more than 70 per cent of governments were getting thrown out. Since then, it has ebbed a bit. But still, just step back for a long-term picture: since we became a multi-party democracy in 1977, two out of three governments have been thrown out of power. And this is the highest rate of any major democracy in the world. In the US, it’s the opposite: two out of three presidents and governors, the equivalents, end up getting re-elected.
“We should always look at culture. We go on railing against ‘the dynasty’; fine, dynasties are maybe a bit of an issue, but it’s reflected in your business, your films—it’s societal. And caste is also deeply societal, and it still runs. To ignore it is to deny the reality of India”
You seem to complain that nobody wins an outright majority.
No, I don’t complain about that, I think it’s to be celebrated. [It’s true of] any country that is deeply diverse and heterogenous. The coalition culture of this country, the fact that no party is able to win 50 per cent of the vote is a reflection of India.
On the BJP’s extraordinary vote- share-to-seat conversion ratio in the 2014 General Election, wasn’t it a result of electorate micro-targeting and clever ‘marketing’ in that sense?
No, I feel in this election the opposite is likely to happen. Even if the BJP gets a vote share of 31 per cent like last time, the number of seats it’ll get is likely to go down because the opposition is getting much more united in many states. So I think 2014 was almost a freak event, given the way the [same] opposition was disunited. And I think the BJP knows that it has to raise its vote share to counter how the opposition is coming together in these states.
In an earlier book, you refer to Turkey’s Erdog˘an and seem bullish on the idea of a strong leader pushing reforms…
I won’t say ‘bullish’ on Erdog˘an, but I felt that people misunderstand him. When he first came to power, in the first few years he was an economic reformer, and he changed subsequently, but as far as India is concerned, my constant narrative in this book is that this idea that a strong leader is going to carry out some breakthrough reform in India at the Centre—I’ve given up on that hope. I just don’t feel that this country is ready for that kind of thing. It’s far too diverse.
Had you expected Prime Minister Narendra Modi to play such a role?
Yes, when he first came to power, I wrote an op-ed for The Wall Street Journal saying that this could be India’s ‘Reagan moment’, basically because somewhere deep down my economic ideology—for whatever it’s worth—is very much about giving people more economic freedom….
But sometimes I think I superimpose my views on what I want out of others. And I have this account in the book of meeting Sonia [Gandhi] and Rahul in 2002, and I’m this idealist naïve guy trying to have the same conversation with [Rahul], and it’s just not how it turned out.
But you seem to believe that if you convince a top leader to use his political capital for economic reform, it’ll work. Is that true?
No. If you want something big to be done, that’s been the cross- sectional example of different countries, but in India my big point is that the only way it can be done is at the state level.
“The one concern I have of late is that we seem to be getting onto this path of competitive populism. Everyone is trying to outdo each other on ‘what do we do for the farmer’, for example. It’s a bit of a vicious cycle that we’ve gotten into. Modi, too—even he’s going down the same path”
Are you disappointed with Modi?
No, I’d say the expectations of him were unrealistic. I remember a 2014 trip. When we were travelling in UP, such were the incredible expectations that the joke in our caravan that would go along was that every time we’d hit a bump in the road, Modi would fix it…. To have any expectation of a leader in India is extremely difficult. So I have [taken] a reality check: to transform this country from the Centre is very difficult. It’s like impossible to do. My slight disappointment is that on some of the slogans, ‘Minimum government, maximum governance’ and all that, I wish there were more follow-through. I feel that the hand of the Government is still very very strong in this economy.
Have you given up on big free-market reforms?
There is no constituency for that at the Central level. Agendas like large-scale privatisation and stuff appear to me off the table. The best we can hope for is that you end up getting more power at the states and some of them have chief ministers who can get more done. Even Modi, when he was Chief Minister of Gujarat, his effectiveness in getting stuff done was far greater than as Prime Minister from an economic transformation standpoint.
Could reforms follow the Hindustan Unilever model, say, of 14 sub-markets?
Yes. Hindustan Unilever is not a model but a reflection of reality. Look at what’s happening in this country, the way that state positions have changed. The most transformed state we ever saw was Bihar. We did five election trips in Bihar, starting in 2005, and the last one was the Assembly election of 2015. Its transformation was by far the most dramatic of any state we’d ever seen… On the other hand, you do have regression too: Tamil Nadu, for example.
Do you still give India a 50 per cent chance of a ‘breakout’?
No, I’d say this political journey that I’ve done over 25 years has on balance made me more optimistic about India on a couple of levels. One, forget the economics for a second, what I’m really happy about is that democracy in this country is truly thriving. The fact that this election is so competitive, despite the obvious advantages that the incumbent enjoys—the money power, spending power, organisational strength— offers an estimate of the deep roots of Indian democracy. And second, it’s state by state. The one concern I do have, though, of late, is that we seem to also be getting onto this path of competitive populism. Everyone is trying to outdo each other on ‘what do we do for the farmer’, for example. It’s a bit of a vicious cycle that we’ve gotten into. Modi, too—even he’s going down the same path. More sops, more giveaways, rather than the Chinese model, which was that you first create great infrastructure from which people can benefit, and then you create a welfare state when you have the money to do it.
Has India fallen victim to an ‘early onset of overconfidence’ that you warned of in Breakout Nations?
In India, we always feel that no matter what happens, life will go on. So I don’t think we’re at that stage. When I wrote that book, the context was very different. At that point I felt that the entire focus was on the decade-long boom, and back then we thought nothing would ever derail us. I think we’ve got past that [phase].
And to what extent does India’s ‘high-context’ culture hold the Indian economy back?
I don’t think high-context is the issue. What I find fascinating is the uniqueness of India. When my American editors were reading [Democracy on the Road], what they found most fascinating was the unusual intimacy between politicians and the people. I have four accounts where we’re meeting leaders in their bedrooms! Mayawati, Lalu, Ram Vilas Paswan, and this southern politician— and there’s a photograph in the book where he’s trying with sheets to hide… y’know—Captain Vijayakanth. And then the warmth and hospitality, the doors flung open, and the chai, the paani, the Parle-G biscuits, the whole thing….
“A year ago, I’d made a forecast—which got me a lot of heat and pushback—that the chances of Modi getting re-elected have gone down from 99 to 50 per cent. That was seen as heretical back then. I see no reason to change that forecast”
Another indicator you watch is the billionaire-to-GDP ratio, on which India stands out rather starkly. How much of this is traceable to the economic setup and how much to a hierarchical culture with caste as a major determinant?
I have this statistic in the closing chapter where I say that 68 per cent of India’s billionaires come from 1 per cent of the caste equation in India. There’s something to be said for that, for the cultural roots of it, and the fact that two-thirds of [the top roles] of the top hundred Indian companies are hereditary in nature. We should always look at culture. We go on railing against ‘the dynasty’; fine, dynasties are maybe a bit of an issue, but it’s reflected in your business, your films—it’s societal. And caste is also deeply societal, and it still runs. To ignore it is to deny the reality of India.
Are you saying wealth concentration is a function of the kind of country this is rather than the sort of economic policy framework it has had?
Yes, that’s right. In terms of policy, I think most emerging markets tend to have a higher concentration of crony businesses because the state hasn’t yet got out of many sectors. So yes, it’s mostly societal, but as the state withdraws, we should naturally expect more businesses to come. So this decade is very interesting. There has been a change in the billionaire list. Now you have more of them coming from industries such as tech—the ‘good billionaires’.
And now that globalisation has turned into deglobalisation— or ‘slowbalisation’—have the rules of an economy’s emergence changed?
It has become much more difficult now to export your way to prosperity. If you look at all the high-growth nations historically, that was the way to do it. You had a big manufacturing base, and you exported a lot out of it. The East Asian model. Now in the world of deglobalisation, that pie is not growing anymore. Having said that, there are gains to be had from China vacating some of the space, and we’ve seen countries like Vietnam, Bangladesh, Cambodia benefit. That should’ve been an opportunity for India, but unfortunately I don’t see any sign of taking that vacated space. But overall, with deglobalisation, it has become much more difficult for emerging markets to converge with the developed world. This big tailwind in your favour is gone.
But is this a blip or a trend? All this deglobalisation, hyper- nationalism, xenophobia?
Usually these things tend to last longer than a few years. That’s the historical experience. Particularly deglobalisation. Other fronts, I’m not that sure, but deglobalisation [could] last for decades.
And how is India faring on your Rise and Fall scorecard?
We do a ranking of all these countries, typically, and I update these constantly. The thing about India is that it never changes much. Volatility in India is much lower than other countries. Brazil can swing, Russia can swing, and Turkey swings wildly. In India, on all these metrics, volatility tends to be much lower. On some, changes have taken place. On ‘good’ and ‘bad’ billionaires, as I said, there have been more good billionaires who’ve come up because of the tech boom of the last decade. Of the rest, on inflation things have improved. On some, things have gone bad. On reduction of the role of the state, there has been some disappointment. As we head into an election, there’s a bit more populism going on. So there’s some movement, but India’s position doesn’t change much. Overall, India is still cruising along.
And you’re not being over-optimistic?
My big risk for India today is if this competitive populism gets out of hand.
Do you see Modi getting re-elected?
I’ll be going on my 28th election trip now. This is a completely competitive and open election. A year ago, I’d made a forecast— which got me a lot of heat and pushback—that the chances of Modi getting re-elected have gone down from 99 to 50 per cent. That was seen as heretical back then. I see no reason to change that forecast. Every scenario is in play: which is that Modi comes back; that the BJP loses enough seats so it tries to look for another leader (a least likely scenario I think); that there’s a new government led by the Congress; or one led by a regional leader, like 1996. And if I’ve learnt anything from my election trips, it’s this: that when you hit the road, do so with as open a mind as possible; otherwise, your preconceived bias is likely to get you to forecast the wrong result. And what’s heart-warming for me is that democracy in India is thriving while it’s in retreat in many parts of the world.