Why India is as risky as it ever was

The most beguiling thing about long-term data is when it tells you something completely different to what you were expecting. An analysis of 37 years of sovereign data on Asia does exactly that.

A case in point is India. Since 1982, when Euromoney’s country risk survey began, India has emerged from being an introspective, centrally planned former colonial state to one of the growth engines of the global economy.

In the first year of our study, a strike of 250,000 workers in 80 mills crippled the vital textile industry for the whole year.

Subsequent years have brought Rajiv Gandhi’s tax reforms; the launch of the Sensex index and the establishment of the Securities and Exchange Board of India; the Rao era of liberalization; the launch of the demutualized and electronic National Stock Exchange; Indian companies raising money in the international markets; and the ascent of globally recognized companies, such as Infosys, with related domestic IPOs.

The period has seen the launch of private-sector banks; the convertibility of the rupee on the current account; the opening of the country to foreign direct investment; groups such as Tata going out into the world and acquiring western businesses; and the development of Aadhaar and the Unified Payments Interface, perhaps the most ambitious biometric payments infrastructure ever attempted.

This year India is likely to overtake the UK and become the fifth-largest economy in the world, while also passing the $2,000 threshold of per capita GDP, up from $1,452 as recently as 2013, according to the World Bank.

All of which raises the question: why is India one of the world’s worst-performing countries in terms of overall ECR score during the life of the survey?

It started with a ranking of 72.6 in 1982; it hit 53.52 in 2019. That’s a drop of over 19 points, worse than any other Asian nation bar Sri Lanka, which endured a 26-year civil war that started a year after the survey began, and, by a hair, Indonesia, which suffered more than any other nation in the Asian financial crisis.

India in 1982 was under the third term of Indira Gandhi, who had returned as prime minister in 1980 following the country’s worst ever recession and with rampant inflation. Her policies were broadly socialist, bringing power to the centre and businesses to the state. She had nationalized 14 big commercial banks during an earlier term in 1969 and went on to do the same to coal, steel, copper, refining, cotton textiles and insurance.

In fact, 1982 brought Operation Forward, the first attempt at any kind of reform, but that wouldn’t be reflected in that year’s numbers; the India reflected by the 1982 survey was as far from its modern incarnation as it is possible to be.

A closer look at the annual data shows 15 years of volatility in the score before it settled into a range after the Asian financial crisis, where it still resides today. Between 1982 and 1997, when the Asian financial crisis began to kick in, India’s score often shifted by as many as 15 points from one year to the next, between a low of 44 in 1992 and a high of 74 in 1987 and 1988.

One thing this tells us is that socialist policies, while anathema to capitalist ideas, actually perform quite well in emotion-free surveys of economic data, because – based on official numbers, at least – they convey a great deal of stability. India at the start of the ECR survey had inflation under control, solid economic growth (5.7% during the 1980 to 1985 five-year plan), and falling unemployment.

Reform, on the other hand, is painful and takes years to come through in positive outcomes, particularly in the world’s most vibrant democracy, where any idea can be challenged and delayed.

There are also specific moments that influence a country’s outlook. India’s number dropped precipitously to 58 points in 1985, which followed two things: the Indian army entering the Sikh Golden Temple to fight militants, leading to political and religious instability; and then, in the aftermath, Indira Gandhi’s assassination in October 1984.

Her son Rajiv took office with an economic reform agenda, reflected by India’s score reaching all-time highs in the late 1980s. His defeat in the 1989 election was followed by three prime ministers in two years and the Indian economic crisis of 1991 – it’s at this point that India hit its all-time low of 44.07 in 1992. Only after this did India’s economy truly liberalize, and only after the Asian financial crisis did its position in the ECR survey stabilize. But it has never got back to the levels of the 1980s.

We can learn something by contrasting this with China. At no stage in the survey does China ever appear in a decade-long ranking of the highest climbers or steepest decliners. After some fluctuations at the very start of the ECR survey, in the earliest days of China’s engagement with the outside world under Deng Xiaoping’s ‘Open-Door’ policy, the country’s score is range-bound and predictable from 1989 to the present day.

The difference in the experience of state-controlled China and democratic India is not a coincidence. China has reformed on its own terms, at its own pace, controlling its currency, learning as it goes and facing no opposition or parliament telling it what to do. This explains the steadiness of China’s score throughout our survey. India, with 11 prime ministers from four different political parties, not counting junior coalition members, during the life of the survey, has had a necessarily uneven road to where it is today.

If that’s an uncomfortable truth, then there’s more where that came from.

The overthrow of an autocrat, tyrant or military strongman in favour of democracy does not, it turns out, reflect particularly well in economic indicators.

One of the worst-performing countries in the world between 1982 and 1992 was the Philippines, which suffered a huge 35.23-point decline during that time, second only to Panama, which was invaded by the US in the middle of that period.

This is, at first glance, surprising. The dictator, Ferdinand Marcos, was overthrown in 1989, ushering in democracy under an iconic leader, Cory Aquino.

Similarly, the period that included the overthrow of Indonesian dictator Suharto coincided with Indonesia being the worst-performing country in the world between 1992 and 1999, dropping 27.16 points.

This doesn’t appear to speak well of the economic impact environmental, social and governance values. But let’s look more closely at those numbers.

The Philippines appears to be a case of recovery coming slowly after momentous change. Starting with a high score of 69 in 1982, when public anger and suppression was being masked by decent economic indicators, the country had plunged irretrievably by 1985, hitting 33 points, and it dropped to a low of 27 in 1989 when it looked like Marcos would only be removed after military confrontation (in the end he fled to Hawaii).

But he left a mess, so for two years the Philippines’ score stayed at 30 while the country transitioned to democracy. Not until the mid 1990s was the score sustainably back in the 50s, which is where it stands today.

In Indonesia, Suharto’s removal came in the middle of the Asian financial crisis, which hit Indonesia particularly hard. He left amid riots. This period saw a drop in Indonesia’s score from 70.95 in 1997 to just 36.37 in 1999.

Clearly, it’s not just the transition to democracy that hit Indonesia here but the broader macroeconomic environment. Indeed, the transition was prompted in part by the macro circumstances, because Indonesia under an autocratic government proved to be dangerously exposed to global market problems.

But, as with the Philippines, it is notable that a transition to democracy isn’t immediately reflected in better economics. Indonesia fell still further in 2000 and its score remained in the 30s until 2004. Even today, in a model democracy with a progressive president, Joko Widodo, who pleases the IMF with his commitment to infrastructure development and economic discipline, the country scores 52.78 – well down on the scores in the 60s and 70s that the country held through the 1980s and 1990s under Suharto.

Of course, life isn’t all about economic indicators: the Philippines and Indonesia have gained vital freedoms along the way and, for many people, a better standard of living. And we can find brighter news for reformist principles in Myanmar.

The best-performing Asian country in the world between 2009 and 2019 was Myanmar, rising from just 10.95 points to 30.97. This coincides with the dissolution of the military junta in 2011 – a dictatorship that had been in place since 1962 – and the 2015 election that gave Aung San Suu Kyi’s party a majority in both houses.

It is fair to say that global opinion on Aung San Suu Kyi has soured in the years since, but nevertheless, here the data is unequivocal: embracing democracy and markets has led to a far better standing in economic data, although Myanmar’s score of 30.97 is still a long way below its peers. Sri Lanka, for example, stands at 45.6.

A strange thing about Sri Lanka: its ranking today is not really much better than it was during the civil war, which ended in 2009. Its score that year was 42.81, and 41.83 the year before. In the mid 1990s it reached the 50s and has been there again only once since, in 2011. When a war lasts a generation, it takes some recovering from, it seems.

There’s nothing quite like data to challenge what you think you know.