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The world is going through a period of flux. One person whose assessments have wielded immense influence over investors at such volatile times is Ruchir Sharma, Founder of Breakout Capital and Chairman of Rockefeller International. In a freewheeling interview in New York with Rahul Kanwal, News Director of India Today and Aaj Tak, and Executive Director of Business Today, Sharma talks about what India has done right, where it can improve and on the prospects of the northern neighbour, China. Edited excerpts:
Q: Till a few years ago, governments were talking about double-digit growth rates. Now, 6.5 per cent is all policymakers are talking about. Is 6.5–7 per cent the new normal?
A: If you look at India’s growth trajectory over the last 40-50 years, you [will] find a very tight fit with what’s happening globally. When we had this extraordinary boom in the 2000s, where the Indian economy did grow at 9 per cent or so, the global economy was booming… growing at about 4 per cent or so; emerging markets, in general, were growing at 7 per cent. In the current era, the global economy’s growth rate has slipped to about 2.5 per cent, and in the entire history of India’s economic development, the country’s economy, on a sustained basis, has never been able to grow more than about three percentage points faster than the global economy. So, what’s the logical conclusion? That [if] the global economy is going to grow at 2-2.5 per cent, then for the Indian economy to grow much faster than 5.5-6 per cent is extremely difficult. It’s never been done before.
Why is the global economy growing at this pace? Because the demographics have changed; the world’s population is not growing at the rate it was [earlier]; then factors such as de-globalisation [are] also coming into play… So, these global factors are pulling down India’s growth rate as well… There’s [been] a major shift across the world in growth rates, and that’s what I think is leading to a slowdown in India’s growth rate as well.
Q: Much was made of the fact that by 2027-28, India could emerge as the third-largest economy in the world. How much of that would you attribute to the economic reforms and policy measures undertaken by the Narendra Modi government?
A: One thing I do find quite remarkable about this government is that if you look at most governments in the past—and this is across the world—typically, from an economic management standpoint, the first term tends to be when they carry out the big reforms. The second term is when you end up getting much more complacent. The good thing about the current government is that a lot of the good decisions have, in fact, been taken in the second term… I think it is more than just about reforms; it’s also about not doing the bad things. And what do I mean by not doing the bad things? One thing, which I was completely against, was for the government to go out and do some massive stimulus, as was being recommended by many people in 2020. Now, that would have just been completely irresponsible.
Q: But the government was under a lot of pressure from leading academics for not spending enough…
A: I’m happy that we resisted doing any big stimulus… But a lot now needs to come through in the actual numbers—they’re still a bit slow to move. For example, look at the amount of foreign investment coming into the country today. FDI [is at] just over 1 per cent of GDP. When China was booming, it was attracting FDI of 4 per cent of GDP. Today, on average, other emerging markets attract about 2 per cent of GDP in terms of FDI.
Q: Why do you think India isn’t getting more FDI?
A: I think that these things take some time to come through. But… it’s also a lot about how domestic businesses are investing. Because if you look at India today, where is the investment boom? It’s happening on the government side.
Q: We’re seeing some green shoots of private investment. Do you think that this could lead to a five-seven-year investment cycle?
A: With India, the line I’ve always used is that this is a country that [has] consistently disappointed the optimist and the pessimist. So, I think the pessimists have been proven wrong. My hope now is that the optimists [aren’t] proved wrong as well... the government needs to do a bit more of introspection about why private investment is not picking up.
Q: Why is private investment not picking up?
A: I think one of the factors is that the state machinery needs to be reined in a bit… the amount of power that some of the investigative agencies, tax authorities have in India is extraordinary… If you look at the successful East Asian economies, they were very clear about having a very efficient state, [and its] involvement in the economy, especially in this regard, kept being pulled back. Even in places like China, before Xi Jingping came to power, the private sector had a lot of room to run. I think [in India] there’s the fear [of] whether the income tax department, CBI or ED is on your case. I think that is something we need much more streamlining of. Because I think it’s those kinds of factors that play on the minds of businesses.
One thing I had pointed out earlier is that we need a lot more of domestic businesses to stay in India—data that I had analysed back in 2018. With the number of millionaires leaving India, that number was surging back then. Luckily, in the past couple of years, that number has stabilised.
Q: The government hopes that its production-linked incentive scheme will lead to more manufacturing coming into India. How effective has the PLI scheme been?
A: I think it’s too early to judge. I recently did an analysis, looking at the list of billionaires around the world. Now, if you look at India, we have 169 billionaires—that’s a huge increase… If you look at the billionaires in India today and their share of the total economy, it’s the second highest after Russia among all emerging markets. That’s a bit concerning. But here’s the good news… the maximum number of billionaires, about 35 of them, now come from the manufacturing sector. That’s a huge change, because even five years ago, you would barely find a dozen coming from that sector.
Q: But one of the aspects of the research you’re citing is the concentration of billionaire wealth, which you think is one of the risks that India faces. That 20 per cent of the nation’s wealth is with these billionaires and that concentration is a risk for a country like India. Why do you think so?
A: Generally, if you have too many billionaires in a country, it sows the seeds for some sort of a populist backlash… in places like Russia, the reason why [President Vladimir] Putin has so much control over the billionaires is because they are hated by the population. But there are two other aspects of the analysis. Billionaires who are self-made are more celebrated than those who have inherited their wealth... The second is that you want the billionaire to be created in the so-called productive sectors with not too much government help. That is where India scores relatively well. Of course, India has one structural problem—and this is like more of a cultural problem—that India ranks the highest in terms of the number of people who inherited their wealth. But the good thing is that at least we’re seeing new billionaires come through the route in manufacturing and healthcare; [and] many of them are first-generation billionaires.
Q: What’s your view on the Indian stock markets? Many market analysts are speaking about how 100,000 is only a matter of when, not if. What’s your view?
A: It’s a matter of time. Over time, the Indian stock market in dollar terms has given a return of around 10-12 per cent or so every year. And in inflation-adjusted terms too, the Indian stock market has been the best-performing emerging market over the past 20 years or so. When I had done my last analysis nearly a year ago, when India was about to turn 75, I projected that the Sensex would hit 100,000 within a decade. I think that is a pretty reasonable assumption. Just to put this in perspective, in terms of how much there is upside potential in India, the entire stock market of India—if you look at the stock market worth—is the same as the market cap of one company in the US, which is Apple. So, I’d say that there’s ample potential for the Indian stock market to do well. The issue is the pace at which it does well… Today, India is also the most expensive emerging market in the world… So, coming back to my original point, that the expectations of India today are very high; those expectations are reflected in the valuations of the stock market.
Q: One of India’s big advantages is that it has a young population. But we’re also in the age of AI (artificial intelligence) where the reports say that 300 million-plus jobs would be automated. Does this then put India in a very precarious position?
A: The jobless threat coming from automation and AI, let’s acknowledge, has been grossly exaggerated because these projections have been around for the last 5-10 years… What is the ground reality? The global unemployment rate today is extremely low… the US has an unemployment rate of only 3.5 per cent. So, these projections of joblessness have not happened so far.
Q: But does AI pose a threat?
A: I like the old line on this that the history of development is that it’s not jobs that are lost, but professions that are lost. So, we will see a big professional churn, which is that some professions will go out of business. But I always believe that there will be jobs around… but the professions will change. What those new professions are is always harder to predict.
Q: Is this likely to play out to India’s advantage or disadvantage?
A: The thinking on this keeps changing because now the thinking is with AI, it’s the white-collar jobs that are at greater threat than the more routine function jobs, whereas earlier, the automation threat was much more for blue-collar jobs. But I remain relatively optimistic that humans know how to navigate these issues. The bigger challenge is, of course, for places like India and China. The most shocking statistic about China today: its youth unemployment rate is over 20 per cent.
Q: Many analysts said the Chinese economy would bounce back on the back of the pandemic. But recent growth numbers from China seem to suggest that corporate growth is struggling. Is China facing a temporary blip?
A: I think China’s growth rate had already been slipping consistently over the last 15 years. In the 2000s, the Chinese economy grew at a rate of 10 per cent; last decade, the economy grew at a rate of 6 per cent; in the coming decade, my projection is the Chinese economy will grow at a rate of 2.5-3 per cent every year… China’s population growth is declining. In the history of economic development, there has never been a country that has been able to grow at a rate of even 2 per cent, when its population growth is declining. Two, China’s debt level today is higher as a share of its economy than even the US. I think those demographics and debt dynamics are likely to handicap China’s economic growth rate. Therefore, I don’t see the Chinese economy, on a trend basis, growing at a rate of more than 2.5-3 per cent. This year it’s expected to grow at 5 per cent, but that’s as per official data.
Q: But China is becoming kind of anti-capitalism…
A: I think this is where India needs to draw a lesson. That China did very well when it was supportive of foreign investment... And now China has totally vacated that space…When China was booming, it was attracting FDI of 3-4 per cent of GDP. Now, it doesn’t do, I think, even 1 per cent. I think that’s where India needs to learn that, ‘Okay, this is what China did right. This is what it’s doing wrong. Now, how do we offer an alternative?’ And as I said, the biggest thing I’d like to see in India today is for the state to rein in its various arms. Now, you can argue that the random targeting is happening because of some political motivation… But I think what’s very important for the government to realise is that this has major collateral damage, as far as private investment is concerned.
Q: For two-and-a-half decades, you were at Morgan Stanley as a global investor. Now you’re doing your own gig. Are you enjoying your entrepreneurial journey?
A: It’s an evolution. As someone said, that being at these firms is like being in university. Beyond a point, you have to graduate. I think investing is very much about a person setting out on their own after a point in time. So, I see it as a natural progression. I had a great learning there at Morgan Stanley, and now I feel that for the next 25 years, hopefully, this is the way to go.
Interview: Rahul Kanwal
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