Ruchir Sharma manages $20 billion in investments at Morgan Stanley and is a well-known columnist and author in the financial world. He spoke to Barron’s, a US financial magazine.
That diversity also makes economic reform hard. Over the past 20 years, you have had the chance to talk to the Gandhis, Modi, and other leaders and have lowered your expectations for reform. Why?
I’ve become more of a realist, realizing this country will change at its own pace. This isn’t a country where you can go and tell them to be like [Ronald] Reagan or be like [Margaret] Thatcher. It isn’t going to work that way. All the leaders tend to be statist—they believe too much in the state. Whatever reforms or focus on development there is, I tend to see much more of it with the state governments. It is very hard to get top-down change in India.
The last time Modi won, investors were excited about the prospects for economic reform and the reduction of bureaucracy. The market has been rising on similar optimism lately. Should investors temper expectations?
It is good to keep expectations low. The reform and change [Modi brought] is different than what was anticipated. He wants to fix things here and there, but it isn’t free-market reform or liberalization—or the kind of change that, for example, is expected from Brazil today, under [President Jair] Bolsonaro.
What is one big thing investors should know about India?
Forget the India/China comparisons. Apart from the large populations, these two great nations of Asia have nothing in common. Nothing. Everything you say about China, the opposite is basically true of India.
Where China is more homogenous, India is as heterogeneous as they come. The risks China’s leaders have taken for economic liberalization are very different compared with what Indian leaders have done over time.
People always think of China as an authoritarian state-driven model, but the share of the Chinese government in the economy has come down dramatically over time. They took some big calculated risks with reforms, often with new leadership—not because of crisis, which is usually the catalyst for other emerging markets. During the reform of the state-owned enterprises in the 1990s, they let go of 70 million employees. That is what kept China ahead of the curve. In the past few years, China is showing some signs of reverting, but that doesn’t’ take away from the big picture. China gave its people much more economic freedom than India did. And that is ironic.
Give us an example of India’s failure in this regard.
Look at demonetization [Modi’s goovernment voided 85% of the currency overnight in November 2016]. India wanted to move to a cashless society, but China has moved to a cashless society much quicker with the private sector. In Beijing or Shanghai today in the middle classes, cash is nonexistent. It happened organically through the tech revolution and the development of some great payment solutions, and not through some massive state intervention or something as draconian as demonetization. India’s not going to become the next China.