The three Ds -- demographics, de-globalisation and debt are dragging global growth lower, said Ruchir Sharma, Author & Global Money Manager, in an interview with Nikunj Dalmia of ETNOW. The opposition has to think very hard about this and find out who is the figure who can stand up to Modi and offer any opposition. It is clearly not Rahul Gandhi, says Sharma
Edited excerpts:
Did the landslide win of the Modi-led NDA government surprise you?
In all my election trips I do not think I have ever been this surprised by what has happened and by surprise I will tell you in terms of what I mean. I think most of us sort of knew that Modi was coming back as prime minister but the conventional wisdom was that he would fall somewhat short of the number in terms of how many seats he would get. Even when you and I had a conversation a week or so ago about this before the Exit Polls came out, we thought that he would be like a few seats short and who would the allies that he would need.
So what is really surprising about this is that this has ended up being a wave election without 99% of the people who have been covering this on the ground detecting or feeling that wave. This time it has really surprised us in terms of what has happened and when I look back at it, there is only one explanation that holds good here as to what has caused this swing of 6% to 7% in favour of the BJP and this is that the first-time voters have voted for him overwhelmingly. They typically tend to side with the BJP, but what they have done this time is just matching it up with some of the data that I have seen and some of the anecdotal evidence in our conversations on the road that they have voted for him overwhelmingly, That has appended many rule of Indian politics including looking at things like caste, incumbency, the kind of stuff that I have been used to looking at for the last 25 years.
In your own assessment, when you speak about the global trend, you have been very vocal about saying that there is a move against establishment. That is the phenomenon which is visible in parts of Asia, Latin America and Europe. But in India, it is the other way round. We are looking at a large democracy here, the youngest population in the world which has voted for an existing establishment. What does that mean for Indian democracy?
As far as Indian democracy is concerned, I still make the conclusion that it is thriving despite all the criticism we have had of EVMs. This is a true mandate and we saw after the results that even the opposition handled it with maturity. Despite some of the fears which were raised, basically Indian democracy is doing really well.
What it means for Indian democracy is that obviously any healthy democracy as even the BJP would admit need some sort of a strong opposition and the fault line is very clear when it comes to national elections. The young voters are voting for elections in a much more presidential format now. Never before in Indian electoral history have we had an instance where a state votes in a landslide in the assembly election and then goes on to vote in a landslide exactly the other way in the general election in a space of six months! And that is what has happened in Chhattisgarh and somewhat similar in Rajasthan and Madhya Pradesh! That just tells you about how the Indian democracy is evolving at the national level. It is turning a bit more presidential and Modi is the ideal figure to capitalise on that in terms of the values that he embodies.
Somebody who has seen, maybe spoken to voters about what is that they speak about Modi. They say that he is really hard working. He works 18 to 20 hours a day. Mehanti hai (hardworking) that is the kind of phases that you hear for him. Imandar hai (He is honest) which basically is saying that no matter what charges are levelled against him, he is perceived as honest partly because he is unattached, he is not associated with any family. So, it is hard to pin any sort of corruption charge to someone like that, who is seen to be working for the country and not really doing anything in terms of helping the family as is typical of so many dynasties in this country.
And, of course, at a time when you feel that the country is under siege because of what has happened against Pakistan, you need a strong leader. Those are the attributes that are really working in Modi’s favour and anyway, the young people are beginning to think of elections in more presidential terms.
Now the opposition has to think very hard about this and find out who is the figure who can stand up to Modi and offer any opposition. It is clearly not Rahul Gandhi. You cannot keep putting the same person out when he keeps getting rebuked by the people. Like on all our election travels, I have never really heard anyone tell me that oh! we will vote for Rahul Gandhi. They may say we may vote for the Congress, I do not hear people saying we will vote for Rahul Gandhi. But when it comes to Modi, obviously you heard many people who may even have negative things to say like we heard in Uttar Pradesh against the chief minister or against the BJP even and the local candidate, but they will still tell you we will vote for Modi. That is the really big difference between Modi and the others at present.
So hypothetically if you were the campaign manager for UPA, how do you think you would have run the campaign differently?
There is absolutely sort of no way that you could have done much different in this campaign. If you were to have a new campaign now, then the issue is that it has to be about an alternative personality who stands up to Modi and Rahul Gandhi is not the man for that. The question is whom. Unfortunately, we just cannot see the right person. As a document in my book, when we first met
Priyanka Gandhi back in 2004, she seemed to have a lot of the right traits. She was connecting very well with the people, much more eloquent, fluent in Hindi, more comfortable on the stage. When we saw her just now when we campaigning in Rae Bareli, she does not seem to have that sort of novelty value and it just seemed as if India had moved on a bit where just charisma could do something but at this stage, it is very hard to see who else apart from her on the other side.
But in the absence of that, now we are back to really an era where this is going to be Modi versus Modi that the only way that you can think or sketch out a scenario where if Modi by any chance loses five years from now, it will be entirely due to him because I do not see who is going to be challenger who comes up in such a strong way in the next few years unless some magical thing happens and Priyanka or someone else is able to build that aura to take him on.
In your book you have explicitly expressed that India is a country of 29 nations and that is what we need to focus on. At the state level, people are voting differently and then at the central level the voting is different. What does this mean for economic growth which still according to you has 29 small countries within it?
I really feel we need much greater devolution to the states in terms of the power and this is where that it will be great to see some change as far as Prime Minister Modi is concerned in his second term. When we used to meet Modi when he was Chief Minister of Gujarat back in 2007, he would speak to us a lot about states having more power. He bristled at having to go to the Planning Commission and having to tell them about how much funds the state needs and the Delhi-centric way of policy making.
He did not like a lot of that and he kept telling us that the only way India can do well is if more power is transferred to the states and that is what I would like to see him do in the second term which is make decision-making less centralised. Give more power to the states and you end up getting better decision making. For example, you cannot have a national literacy movement when you have states in the south like Kerala where literacy rates are already 100%.
Similarly, the population policy or something has to be very different because in the south, there is a very different demographic profile compared to many states in the north. More devolution to the states is what I would like Mr Modi to do in the second term and this is where he could take a leaf out of both Indian and global history. He should really think about the second term as his legacy term. This is the term for which he is going to be remembered in the history books rather than think about how to win a third term because as we know, the longer a leader stays in office, historically the efficacy goes down and the energy comes down. It is difficult to sustain this momentum particularly for someone like Mr Modi because already people talk about him as extremely hardworking.
It is very hard to sustain this momentum as we have been recommending that the campaign times need to be shortened or at least the various elections need to be clubbed together. Partly the reason he is saying that is because it is so much up to him to keep lifting the party and he has to be in campaign mode far too much even in the state assembly elections, even though he is not such a big factor in those compared to the national elections. So he should look at the second term as about legacy for which he will be remembered rather than thinking about a third term.
You have mentioned the word slowdown and said on various forums that the peak global growth is behind us, India is feeling the pinch of a consumer slowdown already. Fresh capital formation is at a multi-year low. What can the current administration do to kick start the consumption engine and also reboot the entire capital formation engine?
Right so. A lot of this has to do with setting the architecture right for the states to start competing a lot more with each other for funds and also for a lot of the policy making including things like labour laws and even land laws. A lot of the decision-making has to be done at the state level and the BJP governments in the state levels need to start showing this as a model in terms of reforms, in terms of what they need to do. The decision making devolving to the states is one big step that I would say can be done.
Of course, I would aspire for things like privatisation as I have long argued that we have no business in this country for the public sector to be so large as it is. Every country needs a public sector but the fact that two-thirds of our banking sector is still controlled by public sector banks is at least twice as high as any other emerging
markets on average.
That needs to be corrected. Government needs to reduce the stake but in a meaningful way in which the nature of some of these banks change because we know that what has happened in Europe like a big reason for the differential in the economic recovery between Europe and the US is because while the European banking sector is still impaired, the banking sector in the US was sort of resuscitated much more quickly following the global financial crisis of 2008.
You cannot have an economy that grows rapidly if the banking system is impaired and I do not think that just throwing more good money after bad is going to solve that problem. So, a very fundamental approach about the banking system and how to reduce the government’s involvement of the public sector should be a very high priority.
I said this also at the beginning of the NDA-1 and nothing much happened about it. So, I do not want to go on about recommendations but in terms of that would be the single biggest positive surprise to me if something fundamental was done in that space.
Do you think there are some deep rooted structural reforms which have been conducted in the last couple of years and months which did not see benefit in the first term of NDA but will definitely see benefit in the second term? Could we be on a cusp of a) earnings recovery and demand expansion or b) I am being too optimistic here and optimists in India always get disappointed?
Yes, keep your expectations in check. We will all be happier in terms of both. People have spoken about the bankruptcy code, people have spoken about GST and the fact that the negative effect of demonetisation begins to trail off. That could be the upside and some of the shocks like demonetisation was a self inflicted shock or GST which had to be done but it takes a long time for things to get sorted out.
I still remember going to Malaysia in the summer of 2017 and when I met the Finance Minister he told me that India is carrying out GST, I would just caution that it took us two years in a country like Malaysia for sorting out the problems with GST. So, India should be prepared for something like that given that this it is a larger, more complex country. Some of the negative effects of demonetisation and GST have begun to fade away and we have begun to see that the upside of things like GST could be positive in the next few months or even years.
But there are lots of other things which need to be cleaned up like the fact that the government’s borrowing programme is still quite heavy, the revenues coming in are still falling short or what the government would ideally like or had budgeted for. It is really still a very tight environment but it seems like earnings growth has bottomed out and at least for this year all expectations are that of all other emerging markets, earnings growth will be the highest in India although we tend to start every year saying the same thing.
Peak America, the theme which you have identified everything is good for America, their market cap, unemployment rate is low, profitability is high, margin expansion at its peak; American investors have forgotten the importance of cynicism, they are ignoring risk completely. The minute I imagine a scenario involving contraction in American growth and a drop in American stock markets,it reminds of gloom and doom in the world?
Every decade, there is some theme which captures the imagination of the world and this decade has been clearly America’s decade. The American stock market has tripled in value whereas emerging markets in dollar terms their total returns have been zero. So that has been a really tough environment but last decade was exactly the opposite; the American stock market in dollar terms went nowhere, it was zero return in fact and emerging markets had doubled and tripled in value because it was the era of BRICS and other emerging markets.
My Peak America thesis is not necessarily about the fact that the American stock market contracts. I agree that you got a sharp correction in the American stock market and the rest of the world goes down with it but it is the fact that the relative returns in the rest of the world should be better in the coming decade. That is what the Peak America theme is about. Now whether we end up having a period where if America goes through a recession like 2000-2001 and then we get the transition to the rest of the world, that for me is a subject of debate. But Peak America is about peak performance relative to the rest of the world rather than just about the American stock market collapsing because that is not going to be good for the rest of the world at least in the short to medium term.
This has been America’s decade like never before. America today is a financial superpower like never before, 55% of the world’s market capitalisation is America even though its economic size is 25%. It is a huge gap. Similarly, just look at the strength of the dollar and how the American policy making now is able to use that dollar as a weapon for sanctions as we with oil or even in cases of Russia, Venezuela. The dollar is so powerful that the American’s can really impose sanctions and cripple financial systems of other countries if they want to because you cannot do any transactions in the world today without using the US dollar.
As a financial superpower this is as powerful as America has ever been and maybe this is just mean reversion theory but I think that in the next decade. this power is bound to ebb and so that is what Peak America for me is all about.
What kind of world do you think we could be staring at in the next two to three years? Are we looking at a stable environment or an environment which could be very choppy, very volatile and highly unpredictable?
We are basically in a slow and fat world and what I mean by that is the fact that global growth everywhere is slower, it is not what it used to be. The American economic expansion even in the global economy currently are in the midst of close to being in the midst of the longest expansion in history. That is the good news. Problem with the growth everywhere is slower for the reasons that you have identified. I call them the three Ds; demographics, de-globalisation and debt, those are the three Ds which are dragging global growth lower. This population change argument is something which is underappreciated even in India. The population growth rates which typically account for half of the economic growth rates, historically has slowed down everywhere.
There are more than 40 countries in the world today where the working age population is actually contracting including in China. Even in India, the population growth rate is something we keep complaining about but the growth rates have dramatically slowed down in the last few years. So you have lower population growth rate. We have a lot of debt which will be built up with this heady financial deregulation that took place in the 1980s, 1990s and the last decade. But ever since we had the global financial crisis of 2008, people have become much more debt averse in general except some pockets like China which keep on building up debt and de-globalisation and de-globalisation now is happening on all five fronts.
Like I have spoken de-globalisation in terms of global trade volumes are contracting for the first time in decades, global capital flows have slowed down, global migrant flows have also slowed down and increasingly what we are seeing is that even digital flows between countries may begin to slowdown because you have countries like US and China who are very keen to keep their ecosystems interdependent of each other that is the big thing about this trade war that is turning more and more towards tech and targeting the tech companies. The era of de-globalisation is here to stay.