THE GREAT Mahatma Gandhi was shaped in South Africa, which could find inspiration from India to lay a path for the future. Why India you may ask? There is the Brics (Brazil, Russia, India, China, South Africa) connection but, as freshly elected Prime Minister Narendra Modi put it, India, once the land of snake charmers, is now spinning the world around its finger with a computer mouse.
Emerging from an era of cumbersome communist-style central planning, the new government is unleashing market forces by embracing the private sector and demonstrating much needed policy initiative. Here are some lessons from the subcontinent:
Lead from the front
It is important for the chief of a nation to pick the best team to ensure services are delivered. Modi has recruited ministers across the party line such as chartered accountant Suresh Prabhu as Railway Minister, while retaining the services of a Chicago professor, Raghuram “Rambo” Rajan, as Reserve Bank governor. The leitmotiv is that even if individuals are not on the same page, as long as they are in the same book, they can collaborate.
Modi has identified some ambitious projects in his first term. One of the most complex is the introduction of a single Goods and Services Tax which will substitute various state sales taxes. More uniformity should make revenue collection more efficient and could reduce India’s fiscal deficit by 1 percent. There is a “Make In India” drive to revive the contribution of the manufacturing sector while continuing driving IT as an enabler in the country. India is capitalising on the lower oil price by reducing the diesel subsidy, helping the oil importing country balance its books.
Enabling infrastructure
To bridge the divide between urban and rural areas, the Indian government will focus on developing new cities. This will dovetail with the launch of industrial and freight corridors. Reminiscent of our electricity issues, India is tackling its power deficit head-on by passing legislation to revive coal production to assist electricity generation. Public Private Partnerships and investment in the power sector will be sought and more efficient transmission mechanism investigated requiring co-ordination between various government departments including minerals, environmental planning and legal among others.
Funding
In South Africa, there is talk of a state-owned bank. In India, state-owned banks have 70 percent share of the market. Privately-owned banks have proved more efficient and grown faster by means of innovation and more judicious lending. Yet the country is still credit starved with private credit at 50 percent of gross domestic product (GDP), unlike South Africa where private credit to GDP stands at 150 percent, according to the World Bank.
Unfortunately, it would appear that credit penetration in South Africa has been directed towards consumption, with the recent collapse of African Bank a grim testimony to this. While some of the forms of prescribed lending in India appear archaic, the government has spurred lending to small enterprises by providing credit guarantees against defaults to banks engaging in that sector. Non-performing loans in the Indian business and retail lending sectors remain manageable. The launch of such a scheme is South Africa may be what is needed to drive entrepreneurship.
Corruption
India was ranked 94 out of 177 countries by Transparency International and the government has vowed to tackle this. For example, India’s new Aadhaar identification system with biometric features will allow the delivery of government grants direct to beneficiaries from the centre. This will also help reduce fraud.
While South Africa seems to be ahead of India in terms of disbursing social grants, the system has been subject to controversy and is under review; we have room to improve on the global corruption scale with a ranking of 72 out of 177 countries.
Innovation
The curse of a middle income country like ours means that we need to innovate to graduate to the next level. We need to harness our intellectual capital as India has developed its world-class science and software engineers.
In our case, we have many global entrepreneurs such as Elon Musk, who is the founder of US-based companies SpaceX, Tesla Motors, and Solar City. He is someone who could help develop the green energy sector in South Africa and inspire research and development.
Final word
An ancient Indian treatise on statecraft called Arthashastra extols that an autocracy can enable an efficient economy where the welfare of all inhabitants is enhanced. While China showed the power of an autocracy, the Indian government intends to show how a strong core can deliver on policy from the centre, thereby harnessing further democratic support. It is a model that our own politicians should study and learn from.
Too often South African economic policy appears to be shaped by the developed world which is hamstrung by a lethal combination of deflation, poor demographics, and deleveraging. India, though, is fast becoming a better role model for emerging nations like ourselves.
With vibrant demographics, a strong democracy, and untapped internal demand, India is learning to leverage its own strengths by aggressively attacking the bad habits that have plagued emerging economies in the past and find a path mid-way between US-style capitalism and Chinese autocracy. In order to revive our lacklustre growth path and benefit from the rest of Africa’s untapped potential, we should rather try to emulate the new emerging superpower and hop on a karmic growth cycle.
Patrice Rassou is head of equities at Sanlam Investments.