Why don’t you tell us about how you got into finance?
After I finished high school, I was waiting to get into college, and had already developed a keen passion for global economics and finance by then. In fact, I would sit and track what was happening in all the stock markets around the world and write notes about what was happening back then. But at that age, I could not find any rich people… So the next best option was for me to write about what was happening in the world of global economics and the good news was that nobody in India was really interested in writing about that. As you know, in journalism those days, it was mainly about writing about politics and maybe some economics but very few had any interest in what was happening in global markets, let alone writing. So that is an opening I saw, and the first sort of crack I had it was to start writing a column called Forex Watch. That was the best way of connecting what was happening in India and globally. Some people were interested at least in knowing what was happening to the dollar-rupee exchange rate and how the other currencies were moving. So that was my entry point into writing about global economics and finance for an Indian audience, and it was just good luck then because I started writing in April 1991. As you know, from around July of that year began the significant opening up of the Indian economy. In fact, I was fortunate enough to watch Dr Manmohan Singh’s maiden Budget speech in Parliament from the speaker’s gallery as a kid. It was quite a thrilling experience to watch that in July 1991. India began to open up and the interest in what was happening in the rest of the world increased exponentially after that. So, the two things coincided. My interest in global economics and finance, and the Indian economy started to open up and transformed in a huge way. It gave me more of an opportunity to write about the rest of the world and connect that to India. And what I find really remarkable is how correlated the Indian stock market has been over the last three decades, with the correlation of the Indian stock market with the rest of emerging markets being extremely high. If I were to plot the two graphs, you would not be able to distinguish one from the other. So I think that took a while for people to figure out, but luckily it was something that I was on to at an early age.
What do you think is going to be the future course of Covid-19 in India internationally, and what will be the impact on the economy? The IMF has been sufficiently optimistic to say India is going to have GDP growth of 11.5 per cent this year — the fastest in history. It is a huge bounce back. Is the economy bouncing back after hitting a rock bottom, or is there more pain ahead in the longer term? Do you believe the economy is going to expand at 11.5 per cent this year, and if so, will that be a one-time bounce or is it going to be sustainable?
We have to be careful with these funny numbers just now, because these base effects are causing huge distortion. In 2020, India’s economy contracted very sharply. In fact, the contraction was the sharpest of any major economy in the world. From there, were are getting this incredibly sharp bounce now. So, there are a lot of funny numbers around the world. Now, remember that the global economy itself is going to bounce back and possibly grow by a rate of more than 6 per cent in 2021. The US economy looks set to grow at a pace of more than 8 per cent. So these are some incredible numbers… numbers that we have not seen in post-war history, because of this huge distortion that has been caused by the pandemic. So I would be very careful about just reading one year’s numbers. The more important question you have raised is: what is the trend growth rate? What is the kind of growth rate we can expect to see for the rest of the decade? My favourite line about India has always been that this is a country that consistently disappoints the optimists and the pessimists. I suspect that narrative is not going to change. Yes, in 2020, there was a lot of room for pessimism. In 2021, I think, there is a fair room for optimism. India’s Covid-19 situation in terms of death rates, hospitalisation and infection rates has broadly been pretty good compared to the rest of the world, and this is all relative. I mean it is sad to see the number of people who have lost their lives because of this. So it has allowed the Indian economy to open up despite the small rise in infection rates of late. So, in general, I think as far as the Indian economy is concerned, the trend in growth rate for the next few years is maybe like 5 per cent. When we get some acceleration in economic reforms we are seeing now, it goes over 5 per cent. This is a pretty decent outcome, I think. Because you have to put this in the global context, in the boom years of 2000s… So many economies around the world were growing at a rate of more than 7 per cent, and achieving a 5 per cent growth rate was considered quite pedestrian. But in this decade, even before the pandemic hit, if you look at the past couple of years, there are hardly any economies in the world growing at the rates of about 7 per cent. In a year like 2019, a more normal year, there was just some African nations and maybe just one or two Asian nations like Vietnam that were able to see growth rates of 7 per cent. There is no country growing at those rates anymore. This is a very different world. The demographics have changed. The population growth rates have slowed. We had de-globalisation taking place. In this sort of era, to grow at a rate of 7-8 per cent is nearly impossible. I think if India is able to grow at a rate of above 5 per cent, it will be among the fastest-growing economies in the world, which it should be given the relatively low base. But I think that once these funny numbers are out of the way, we need to think about what India’s trend growth rate is, and need to be realistic about what we can achieve. I think achieving a growth rate on a trend basis of more than 5-6 per cent is going to be extremely difficult, because there is practically no economy in the world currently growing at that pace.
In India, historically we used to put this fairly close relationship between how much you invest and how much of that translates into growth. They said 4 was kind of a good incremental capital output ratio. If I invest 28 per cent of my GDP and divide that by 4, I should make 7 per cent growth, and so on. Isher Ahluwalia once said that in the 1970s, it became very bad because the ratio changed from 1:4 to 1:5. But if we invest 30 per cent of GDP today, and divide that by 5, we still get at least 6. In some sense, the efficiency of investment is going to go down everywhere. The world is suffering, they say, from a savings glut. More money is available for investment than ever before but the productivity of that is going to be pathetic. Why do you think there is going to be this huge amount of money available for investment, and yet it is not going to translate into growth?
Again, it is a global trend. Productivity growth around the world has been slowing in recent years. This is because a lot of innovation that is happening is happening increasingly at a consumer-facing level. There are many more apps; there are many more consumer interactions you can do with so many online platforms. But the business productivity around the world has not been that good. In fact, there has been a declining trend in global productivity over the last couple of decades, not just in India but everywhere. So I think that is something which we have to take into account. That brings me to my other point. Like you mentioned this money that is available in the world and yet we are seeing this decline in productivity, that is something I have been emphasising for a while. Central banks can print all the money they want, and we can have all the liquidity in the world that we want, but a lot of it increasingly finds its way into financial assets rather than the real economy. I think that it is a great time to be a financial investor because the returns in many parts of the world have been terrific, not necessarily in emerging markets, over the last decade, but certainly in places like the US. But the gains for the real economy despite this incredible amount of money flow have been quite slow because productivity growth everywhere has been lower, with the new innovations being more consumer-facing, focused more on the entertainment side and less on enhancing business productivity. Now we hope that following this pandemic, one of the upsides could be that maybe productivity improves. Everyone is reordering their workforce, thinking much more about how to reorganise their workforce, so it is possible that that changes. But this trend of declining productivity is again a global phenomenon. We used to have productivity growth of well over 2 per cent around the world in the 50s and 60s. Now the global productivity growth is barely 1 per cent, and this is a huge change across the world. That is something I think is something India also has to live with.
Some people like Google Chief Economist Hal Varian say that the problem is that we are not measuring the output properly anymore. Would you agree that we are therefore doing a disservice by using old measurements, not measuring real GDP growth and productivity properly? Therefore, by sticking to statistics that are not relevant, we are underestimating the real dynamism of the Indian economy and the world economy?
That is entirely possible and there is some element of truth in that because corporate profits around the world have certainly been a lot stronger than implied by GDP growth. But I have heard these arguments forever, even in the 1990s. And I think that this is a global phenomenon about mismeasurement of data that we keep hearing about all the time. As you know you have the other side of the argument also which has been put forth by many people: innovations are not that productive anymore. Historically, we got such innovations as the steam engine or even air conditioning. Is having 10 apps on your phone as productive as those innovations? Some people say no. Since the industrial revolution, we have seen so much innovation around the world. So to say that in this particular period, innovation and productivity are not being possibly captured, maybe there is some truth to it. But I think it may be true in every era because we have seen huge productivity explosions and even bigger innovations arguably. The electricity and the light bulb were huge innovations in that era. So this could be something which is true for every era, not just this era. Yes, the only reason I have some sympathy for that argument is that corporate profits around the world have been much stronger. But otherwise, I am not entirely convinced that we should just say that this is being mismeasured because over the last 200, even 300 years, we have always seen innovation take place every few decades in a very major way.
But if corporate profits are going to keep increasing and the stock markets soaring, then from that point of view actually, the future is very good. From the point of view of people interested in business profits and the stock markets, financially, we are going to have a fantastic future. Would you agree with that?
The good thing about Corporate India is that it has adjusted to this new reality. We saw this in the late 1990s also. The Indian economy, in the first few years after liberalisation in 1991, saw an explosion in GDP growth rate or a pretty significant step up in GDP growth rate. Then you had the east Asian crisis in 97-98, and the growth rate fell again. It took a while for Corporate India to adjust to that. The cost basis was still too fat, and it took a while for them to adjust for that until the new cycle began. I think the good news for Corporate India today, and we have seen this even over the past year during the pandemic, is that cost bases have adjusted quite a bit. They have cut costs very significantly, so many organisations and many firms including those watching us I think will agree that they have cut costs quite significantly over the last year even during the pandemic, and in general over the last 3-4 years. So, I think that Corporate India today is linear, it is fitter and it is poised to do better in the coming years, because their operating leverage will be far greater from a reduced cost base. So any top line growth you get will have a multiplicative effect as far as profits are concerned. So, yes, I do feel more optimistic about corporate profitability as far as India is concerned or emerging markets in general.
India is a country where there can be huge democratic resistance to reforms. We have PM Modi in a much more aggressive and radical reform mode than in the first term. How far are these reforms going to succeed? Will he be able to overcome these vested interests which are coming in the way?
Well I should hope so. But I think that what you have pointed out is very important and this is a trend I am seeing across emerging markets, which is that developed countries have spent all their energy in this crisis on enacting greater and greater stimulus plans. Emerging markets have also done stimulus plans but at only a fraction compared with developed countries. And this is because the emerging markets just did not have the resources to spend as much as the developed countries. By some estimates, I think that the developed countries have spent more than three times as far as the total stimulus is concerned, if you include everything from credit guarantees to QE. And obviously the fiscal impulse that they have adopted compared to emerging markets. So it is a huge difference. The emerging markets have been forced to carry out more economic reforms that enhance productivity over the medium and long term, and I think that this is where India also has played a very important role. The narrative has changed of this government, which I think is something worth noting. As you pointed out that before the past year, all the reform efforts were largely very incremental in terms of what was going on, and some of them even back-sliding in terms of increased tariffs and protectionism. So at least there has been a change in the narrative. A lot has been spoken about how the word privatisation now is openly embraced by the government. So there is reason to still be skeptical as to how much of this can be implemented and that is always going to be the case in India that you are never going to be able to steamroll your way through economic reforms. There is always a lot of resistance along the way. But at least the direction has changed and that is worth something. Now the entire hope is that there will be follow through. There will be no complacency that we will begin to see what we spoke about at the outset of this dialogue, that we will begin to see 11-12 per cent GDP growth numbers… There is a recognition that reforms have to be carried out. Even if half of what has been promised is delivered upon, I think is a pretty significant achievement. So I think in that way let us at least be optimistic about that that there has been a shift in direction.
The role of the RBI has been a big thing. There was earlier on this focus on trying to target inflation, then the question was what inflation is. You have now come forward with this new idea that there is huge inflation of asset prices. Anybody who has been a shareholder in Amazon or Tesla has made more money than they could have dreamt of in a lifetime. So have we got our entire concept of inflation wrong? If so, should the RBI take note of this, and should India have a completely new monetary policy?
I think this is a question that all central banks around the world are facing and my point is that policy needs to evolve. So for many decades, the world was on this gold standard, and then that gold standard broke. Then there was a total lack of policy clarity in the 1970s. In the 1980s, the natural policy response was to start moving towards inflation targeting and we had an inflation targeting regime that many central banks around the world adopted in the 1980s, 1990s and the 2000s. In fact, the RBI was among the last major central banks in the world to adopt an inflation targeting regime when inflation went out of control a decade ago or so. At that point in time, I was supportive that at least the RBI needs to have some policy focus and some discipline. But I think that policy needs to evolve over time. All central banks around the world have been too focussed on a very narrow concept just now of consumer price inflation, with the thought that consumer price inflation around 2 per cent is fine in a developed country, and 4 per cent in an emerging market. I think that is way too narrow, because by keeping the focus on that we are missing out on the fact that we have other factors as such as technology, automation and globalisation, which have kept consumer prices relatively low. But asset prices have been booming around the world and it is not just stocks and bonds, but property prices too. Now India has not participated in this global property price boom, but from China to Scandinavia, you have seen this incredible boom in property prices, and a lot of the excess liquidity has been finding its way there. So I think that this is a wakeup call for central banks around the world that the focus cannot be just that narrow anymore. As long as we have consumer price inflation under control, we can afford to keep printing as much money as it takes to get unemployment low or to revive economic growth without understanding that there are other consequences of your policies, including asset price inflation and asset price inflation. There can also be very negative outcomes in two ways. One, when asset price inflation takes place, it leads to much greater income inequality and wealth inequality, because assets by definition are owned by the rich and many of the poor do not own these assets. And two, an asset price inflation that turns into asset price deflation is terrible for the economy. As we learnt in places like Japan or even the US in the 1930s, you can live with these consequences and take a long time to clean up your balance sheet. So I think what the RBI and other central banks in the world need to do is to widen their focus to not just consumer price inflation but also asset price inflation.
Would you favour a ban on cryptocurrencies or rather say we actually have to go that way because the future is there?
Yes I think that I am not in favour of these bans because that is really like playing whack-a-mole, in a way that if you have too much liquidity out there, you knock something in one segment, but it shows up somewhere else. So why are cryptocurrencies doing so well? I think we have to think deeply about this. It is also because of the entire amount of money that the central banks around the world had printed. There is one statistic that is really eye-popping. Think about this: 20 per cent of all the dollars in circulation in the world today were printed just last year. Even in places like India, the RBI was forced to print a lot of money to revive the economy. Nearly 10 per cent of all the rupees in circulation were I think printed just in 2020. So not as much as the Federal Reserve did. But even there, to print all this amount of money and expect no consequences is wrong. There will be consequences. On the cryptocurrency front, the supply is very limited. A lot of the young generation, the millennials etc, think that cryptocurrency is like a store of value for them. It is the alternative to gold, so they are rushing there. Of course, there is some speculative element to it when an asset rises exponentially, but you have to think about what the root cause of this incredible inflation in cryptocurrencies is coming from, and all this money printing that is going on which is finding its way in different places. Now if you ban something in one place, it will show up somewhere else. So these bans are just like playing whack-a-mole, where you put the lid down somewhere and something else will pop up at another point.
