India’s public sector is too large and is proving to be a hindrance to growth, especially in the banking sector, according to Ruchir Sharma, head of emerging markets and chief global strategist at Morgan Stanley Investment Management.
Wealth concentration
Mr. Sharma also added that most billionaires in India who had emerged over the last decade were ‘bad billionaires’, whose wealth was created in sectors where government help was needed to create that wealth. He also rated India poorly in terms of the skewed nature of the concentration of wealth.
“India’s track record is mixed when it comes to the question of how meddlesome the State is,” Mr. Sharma said in a talk organised by FICCI on Wednesday.
“The State is largely dysfunctional. One good indicator to gauge how much the State meddles is to see how free businessmen are to express their opinions about the government. My experience is that they are not very free. Their public comments do not express their private opinions,” Mr. Sharma said.
“The large share of the State is holding back India’s progress,” he opined.
‘North Korea’
“The share of the public sector, especially in the banking sector, is too large. In the banking sector, the public sector is two-thirds, the highest proportion among developing countries, except for, maybe, North Korea. The average in emerging markets is one-third.”
Mr. Sharma said that the gradual shrinkage in the business activity of the public sector enterprises in favour of their private counterparts was ‘privatisation by malign neglect’, adding that this had happened in the telecom and airlines sectors.
“In the last three years, two-thirds of the incremental loans have been given by the private sector,” Mr. Sharma said.
“If there is too much wealth concentrated in one region of a country, it leads to social unrest in the other parts,” Mr. Sharma said. “India needs new cities to come up. China added 20 new cities (with populations of more than 1 million) while India has not added even one over the last 2-3 decades.”
This means, he said, that the rural and semi-urban population in India was moving to existing cities, which are getting strained. “A healthy growth process needs urbanisation and the creation of new cities,” he said.
Mr. Sharma said that typically manufacturing was the key to economic success, while commodity-producing economies do poorly over time. “Yes, investment has gone up in India, but manufacturing is not where it should be,” he said. “Even from a job creation standpoint, most jobs are generated in manufacturing.”
He added that another concerning aspect was that while foreign investment was flowing to India, domestic investors were choosing to go abroad instead. Last year, 6,000 millionaires left the country, compared with 4,000 in the previous year, he said.
Mr. Sharma did, however, praise the Indian economy on inflation, saying that it was now back at the developing economy average.
