Forbes India 15th Anniversary Special

India's pulled the trump cards out of the card deck. They've got a good hand. But you can play a good hand badly: Aswath Damodaran

The finance professor and the dean of valuation on how India can learn from the economic consequences of 'overreach' in China and avoid the trap of chasing 'double-digit growth at all costs'

Neha Bothra
Published: Dec 1, 2023 11:57:36 AM IST
Updated: Dec 1, 2023 02:24:09 PM IST

India's pulled the trump cards out of the card deck. They've got a good hand. But you can play a good hand badly: Aswath DamodaranAswath Damodaran, professor of finance, NYU Stern School of Business Image: Jerod Harris/Getty Images for Vox Media

On Thursday, India reported a GDP growth of 7.6 percent for the September quarter which was higher than the RBI and Street estimates of 6.5 percent. Although not insulated from global headwinds, India, the world’s fastest growing major economy, has shown a high degree of resilience and is relatively better placed than most of its emerging market peers.
“India has been one of the winners because it had a combination of healthy economic growth and inflation that's not out of control,” Aswath Damodaran, a widely respected professor and investor, who is popularly known as the dean of valuation, said in a wide-ranging conversation on Forbes India Pathbreakers in August. Importantly, nearly 66 percent of India’s population of over 1.4 billion people is below the age of 35 years, and this makes India one of the most attractive markets for global companies.
However, Damodaran had a note of caution: “The danger for India is it shouldn't overreach.” In the last of a special five-part series from the interview, Damodaran, professor of finance, NYU Stern School of Business, shares his views on what India can learn from the unfolding economic chaos in China and how, for the first time in nearly twenty years, India as a democracy has an advantage over China. Edited excerpts:

Emerging markets: ‘A mixed bag’

I think emerging markets are a mixed bag. Brazil is very different from India, is very different from China. So, you almost have to name the emerging market. I don't think there's a collective statement you can make about emerging markets. Emerging markets that keep inflation in check are in much better shape than emerging markets that don't. So, I would argue that we need to start to stop bunching countries together. And this is true not just for emerging markets, but for developed markets too, and start separating countries that are being run sensibly from countries where you know the bill is going to come due. So, I think rather than bunch India with a bunch of other emerging markets with very different issues and problems, I think India has to think about what its specific problems are and what policies might be needed to kind of deal with those problems.

Also read: Why India will replace China as the world's growth engine this decade

India: ‘The danger is it shouldn't overreach’

If you look at the last two years, if you looked across emerging markets, India has been one of the winners because it's had a combination of healthy economic growth, lower than it might've been, but still healthy, and inflation that's not out of control. So, so far, India's pulled the trump cards out of the card deck. They've got a good hand. But remember, you can play a good hand badly, so the game is not over. I think, you know, you can't settle on what's been done well, I think you need to keep working at keeping inflation under control and keeping economic growth at a healthy number.
The danger for India is it shouldn't overreach. What do I mean by overreach? I mean, I hear people saying India should be the next China. They need to go for double-digit growth. Sometimes I think settling for a lesser growth rate, but making sure that the growth is delivered in a more healthy way is better than going for the double-digit growth and overreach it. You're seeing the consequences of overreach in China, because some of the hangover that China's going through is because the government got caught up in, ‘we need to keep double-digit growth at all costs’. Guess what? ‘All costs’ is a dangerous word because the costs you bear can be more than you can really deal with in the long-term.
Don't forget the big population. If India had 20 million people rather than 1.4 billion, we wouldn't be talking about India as a success story. This is a big market. It's a young market. It's a growing market. So, you can see why there's so much excitement about the India story. And I think fundamentally, the India story is a really positive one. And that's why I said the danger here is overreach, which is you start to make the story too big. Now, it's like companies that want to make their story too big. Then you overreach. You try to do things you shouldn't be doing. But I think India should also be aware of its weaknesses. The weaknesses are still in infrastructure. India still is a country that lacks the infrastructure to sustain the growth it wants to deliver. And that means that sometimes settling for a slower and steadier pathway might end up being the better strategy.

Also read: The curious case of China's confidence trap


India vs China: ‘For the moment the balance seems to have shifted towards India’

I think for 20 years, we've had this contest between a democracy and an authoritarian regime. As businesses, which one would you rather operate in? For the last two decades, businesses have chosen China, an authoritarian regime, because the rules are set. They said, ‘look, in India things change all the time.’ It's the nature of democracies. Things change all the time. Rules change. Regulations change. In China, it's predictable, it's easier to run a business.
But the dark side of operating in a regime where a government basically sets the rules and there is no challenge, legal or political, to that view is that governments can be capricious. The government that's on your side today can become your enemy tomorrow. And this is not just foreign companies. Take a look at what's happened to the big Chinese tech companies, Alibaba, Tencent, where the government was viewed as an ally for the longest time. But Beijing said, no, guys, you're not our allies anymore. They lost basically 60-80 percent of value and their pathway to being trillion-dollar companies.
So, I think that businesses are recognising, at least in the last two or three years, the downside of being in an authoritarian [political regime]. So, this is a moment for India. They can actually repackage the chaos that goes with being a democracy as chaos that's actually good for business in the long term, because it's risk that's continuous, risk that you can deal with, risk that you can manage, rather than this discontinuous risk that comes from dealing with an authoritarian government. So, I think for the moment at least, the balance seems to have shifted towards India on that basis. It's not permanent. You're always going to have three steps forward, two steps back. But at the moment, I think India does have an advantage over China because of its political system, and that's not been true for much of the last two decades.