India has a 50% chance of making it economically – Ruchir Sharma

India has a 50-50 chance of being a ‘break-out nation’ economically, Ruchir Sharma, managing director and head of emerging markets and global macro, Morgan Stanley said at an event held in New Delhi today.

Being at the right stage of its reform cycle coupled with a healthy investment to gross domestic product (GDP) ratio and local investors not rushing abroad are the positive factors for India, but corruption and other negative factors pose a real threat to the growth story, said, Sharma who heads one of the world’s leading emerging market funds at investment management firm Morgan Stanley Investment Management in New York.

“Lack of trade with neighbours, deteriorating levels of corruption, high current account deficit and inflation woes and same government being in power for about nine years are certain negative factors leading to slow growth of Indian economy,” said Sharma, inaugurating 93rd Foundation Day of The Associated Chambers of Commerce and Industry of India (ASSOCHAM).

“India is a very stable growth story and will continue that way but to grow at 7-8 per cent we need to take really tough decisions over the next couple of years,” said Mr Sharma while delivering the lecture on “Prospects of India as a break-out nation.”

Praising the recent reform momentum initiated by the government, Mr Sharma said that it will help economy to grow further. “There is a large amount of liquidity in the global economy and FIIs would keep a check on the current account deficit but any event on the macro front may put serious strains on the inflows.”

Mr Sharma listed among the negative factors outgoing FDI level here as “too high”, “disproportionate inflation ranking of the country”, inadequate trade within the region and corruption.

According to him emergence of new billionaires and new industries in which this wealth is made was a strong indicator of a nation becoming a break-out level.

Illustrating this connection with examples of Russia and China and comparing performance of billionaire emergence in India over the last few years.

On the positive growth factors and prospects for the future, Sharma said governments that come to power tend to push up growth rates as they experiment with new ideas while those long years in power tend to become sloppy.

However, he conceded that in recent days the Central Government here was taking the right steps for economic reform to make the economy more competitive. He said that there would be a fresh government in 2014 was a good sign as whoever would be in power would also bring new ideas.

He also found hopeful prospects in the fact that states that were once considered as backward like Bihar, Madhya Pradesh and Chhattisgarh were doing well raising their state GDP growth 10 per cent and beyond and chief ministers are displaying leadership in this development.

“India’s states with effective Chief Ministers are emerging bottoms up,” said Mr Sharma. He commended as a positive sign for the country that more and more chief ministers are considering that their re-election depended on better delivery in development.

Debunking the focus on 20 to year long-term perspective in economic assessment, Mr Sharma said that a two to three year term was what the investors were looking for and governments that have to get fresh mandate every five years would now be judged by short term perspective by the people.

The current deficit of the country was symptom of investment being too low, slide in the growth for a economy with low per capita income, the rupee exchange rate was not competitive and the confidence in the economy was too low as exemplified in the rise in the gold import.

Mr Sharma suggested that India should fix an explicit inflation target of five or four per cent and work out policies to achieve it. He also questioned the high focus on innovation pointing out China had achieved a per capita income of 7,000 USD with right investment in infrastructure rather than great new innovations.