Page 60 - Nuvama | IC Report 2023

• DE-GLOBALISATION • DEREGULATION • DEBT • DEMOGRAPHY • DEMOCRACY

In his classic essay “The use of knowledge in society”, economist and legal theorist Frederick Hayek
argues that too much planning confronts the problem of knowledge. Knowledge is dispersed, tacit
and contextual, which is to say that knowledge resides in nooks and corners of the society, not in one
centralised authority. Humans are not angels that can apprehend reality in its entirety, instantly. Rather
human knowledge accumulates over time through learning. And therefore, too much authoritarian
planning over a sustained period of time could lead to unforeseen and unpalatable consequences—
misallocation of capital, loss of productivity, accumulation of debt, uneven development and,
at times, political upheaval.
Recall that Asian Tigers’ experiment eventually ended in tears and, of late, China too is running
The instinct into structural problems, including high debt, loss of productivity and stagnation. Notably, China is
and practice of
authoritarian regimes becoming old before it could become rich—a consequence of its authoritarian one-child policy.
is to repress or bottle Dr. Jagdish Bhagwati, one of the most influential trade theorists of our time, makes a similar argument.
up problems; these He argues the instinct and practice of authoritarian regimes is to repress or bottle up the problems
problems accumulate and – over time – these problems accumulate and reach explosive levels—and thus crisis erupts, with
and reach explosive serious consequences for citizens, businesses and investors alike. The Soviet Union, which unravelled
levels—and thus crisis when nobody expected, is a case in point.
erupts, with serious
consequences for Democracy, on the other hand, through institutional checks and balances, political competition and
citizens, businesses freedom of press allows for a continuous process of evaluation and adjustment, a safety valve of sorts
and investors alike that safeguards against abrupt upheavals. In a way, one could say that what democracy is to a country,
corporate governance is to a company. For a while, it is possible that companies with poor standards
of corporate governance may outshine others, but history shows that investors in such companies
have had to face sudden and outsized losses.
22
Exhibit 1:
India has always
commanded a 20
higher valuation
premium to EMs
18

16
(X)
14

12

10

8
Dec ’10 Dec ’12 Dec ’14 Dec ’16 Dec ’18 Dec’20 Dec’22
Nifty 1Y forward PE MSCI EM 1Y forward PE
Source: Bloomberg, Nuvama Research

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