Transcript
0:00 Things are in very deep flux. And if you ask me if the the Strait of Hormuz stays closed for more than 4 weeks, I think the world goes into recession. Compared to any other time in the past, we're the best prepared to handle a crisis like this. So, low fiscal deficits, slack in the economy, inflation is low, RBI sitting on reserves. So, so we can tide over several weeks. I'm hopeful that we once this crisis ends, whenever it ends, we would have come out of it relatively unscathed, and the strength of India becomes very obvious.
0:44 >> Hello and welcome to Money Matters by Axis Asset Management. It's a dynamic world. Things are changing by the second. Geopolitics, economics, everything is shifting rapidly by the day. Questions around growth, fiscal, inflation, there are too many questions, not enough answers. But someone who we believe has a real clear head, thinks through the arguments, is on the podcast today.
1:19 He is the chief economist at Axis Bank. and he's I really appreciate the kind of research and commentary that he puts out, and he and his team, I should say. He's also on the Economic Advisory Council to the Prime Minister. Mr. Neelkanth Mishra, welcome to Axis Asset Management. Welcome to Money Matters. >> me, thanks. Thank you, Shiv. >> The recently revised GDP numbers, interesting, you know, level of GDP is about the same, which is a couple of percent lower.
1:43 But I want to take your pick your brains on two aspects. One, the split in share, obviously industry higher than before, estimated before. But two, which I think more interesting to me is that there seems to be a kind of a V-shaped slow recovery over the last four or five quarters that GDP growth capex especially seems to have picked up over the last couple of years as you saw in your last report. walk me through your thoughts.
2:06 >> So, the first thing is that the the previous GDP series had serious flaws. And so, among the most serious ones was that it was outdated. As you know, in in IIP the protocol is that once you start a survey, you must keep surveying the same factories repeatedly. So, for argument's sake, it could be the same old Nokia factory that they would be surveying. And if it is shut, then it is shut.
2:37 all the new factories, the smartphone factories from Foxconn and Tata Electronics are not even part of the survey. >> Yeah. >> and so, I think that methodological problem, they had tried to counter that by using listed companies' data, but even that does not you know, account for say, the Tata Electronics factory coming up which is not listed. and and this would show up in the second revision, which is which would have the ASI data, which is of course slightly more comprehensive.
3:10 so, this adjustment definitely helps the the industrial output catch up much better. the the second thing this does is that the deflator becomes much smoother. >> Mhm. >> and so, so if you if you don't use a double deflator, basically you're not deflating the the So, just for the viewers' benefit, GDP is effectively gross value added. >> Yes. >> So, so you have to look at the revenue and subtract the cost. Earlier, they were deflating the revenue and the cost by the same number. Now, you have to deflate it by a different number.
3:49 >> Yeah. >> Now, the moment you do that, the the real GDP number starts to become less volatile. So, you don't have a 9.1% in real GDP in FY24 followed by a 6.5. So, you instead have seven handles on on both sides. so so it is a much better series. it also I think offsets the what used to we used to call the GVA GDP wedge. Basically, that the the gap between the GVA and the GDP, which is generally you know, accounted for by net government spending is now much narrower. So, so clearly government spending is not that volatile as it turned out to be.
4:34 On the on the capex side, see one of the biggest challenges for for even economists is that the inputs that go into investment are the they're in inflation is a lot lower than that of say services. >> Mhm. >> So, for example, I mean, when I used to be a steel analyst from 2006 to 2000, say, 14 15, we were used to a 600 type of steel price.
5:06 It's still there. And that's $600 a ton. And so so when you're looking at investments, it becomes and and people are anchored to oh, you know, it should be at 40% of GDP because China is 40 45 and you should be investing a lot more. but our challenge was that we or I has been that, you know, so suppose you want to generate power, the as power generation shifts towards towards renewable energy, where actually the cost per gigawatt is falling, not rising.
5:45 >> Yeah. >> you can generate, you know, comparable amounts of power with progressively less amount of capex. So, so I think some of these adjustments and the right right sample set have come out and which has resulted in some of these like industrial output indicators, capex indicators starting to look much better. >> What I was specifically getting to is the old series seemed to suggest GFCF, that's gross fixed capital formation, roughly steady over the last several quarters, but the new series suggests there was a slowdown, but there's actually a pickup. So, that kind of goes back to I think your view that economy has been recovering in the last few quarters. So, that's what I was getting at. It's not about the absolute level, but more the trend.
6:28 >> Yeah, so so exactly. So, so even the trend, so you're right, that FY25 was a period of simultaneous fiscal and monetary tightening. And, I think the monetary tightening was unintended. there was an intended part which was smaller, but I think the the restrictions on loan deposit ratios, the the attempt to peg the USD INR which failed and then it created a lot of damage, the inability to manage the liquidity, I think all of that, became simultaneous headwinds at a time when the government was also, consolidating and there was also half a percent of GDP of, I would say, unannounced consolidation which was the GST >> Sure.
7:15 >> compensation cess collected but not spent. And so, that is why suddenly you saw the economy, behaving badly, badly meaning, doing things which were much slower. And, so analysts were cutting estimates because they were surprised by what was happening. and then in FY26, I remember in December '24 saying that FY26 will see 7% plus growth. And everyone was asking why. I mean, what will pick up? Will it be consumption will be the basic argument was that the headwinds to growth are fading and therefore natural growth then starts to come out. And so so you're right.
7:53 thank you flagging that we were saying this for a while that that we we saw that once the headwinds, the fiscal and monetary headwinds faded, the normal growth started to emerge. >> this is the I think that's that's very very under appreciated that how much of fiscal and monetary together >> Yes. >> acted at the same time. I think it's very very under appreciated. And given the lags of monetary transmission and to to some extent fiscal transmission the tightening that we saw of pretty much every year since post since COVID in the case of fiscal and for a fair amount of time 2022-23 onwards in monetary, the impact came through in 2024-25. I think that's very very under appreciated. So I think the fact that yeah, you take the brake foot off the brakes and they you know, you go back to a reasonable growth.
8:38 We will probably want to come back to this, but I was I do want to sort of spend a moment on what your expectations are for profit growth then because you know, even nominal GDP is all that matters when it comes to making investment decisions most of the time because real is real is virtual and nominal is real. So where does that take us and you know, maybe you can spend a minute on that and then we can deep dive a little bit later.
9:00 look, post 27th Feb, things have changed. So so as we record this on 13th of March things are in very deep flux. And if you ask me if the the Strait of Hormuz stays closed for more than 4 weeks I think the world goes into recession. there is a parallel crisis brewing on private credit markets in the US.
9:31 if it stays contained, though generally these things don't stay contained then the direct impact on India should be minimal. but if it does become a lot more serious, and the Fed now has limited leverage. See, see the the challenges are one that the energy shortage, which is almost 7% of of of of total energy demand or energy supply in the world, is just to give you the math, oil is 32% of global energy supply.
10:09 Gas is natural gas is 24% of global energy supply. 20% of 32% is 6.4. And that is the Strait of Hormuz supply. and 2 and 1/2% of world energy flows through the Strait of Hormuz. So, so that's what, 0.6%? 2.5% of 24%. 6.4 + 0.6 is 7% of world energy supply is currently stuck. even if you build in certain certain substitution, like in India, because we know that gas won't be coming, so we reallocated and said power plants are not getting any gas because we know there is enough coal-fired capacity and so there'll be more coal.
10:53 Similarly, I think other countries will make optimizations. I believe Taiwan, Korea already moving to work from home and all that. So, so some of these adjustments maybe will save you 1% 2%. But at least 5%. So, if this does not end quickly, in addition to all the supply chain disruptions that are happening, I think the risk of a severe depre- I would say recession globally, is now rising. the only reason why I think it's not likely to happen is that it is so painful for everyone that they will make sure it doesn't happen.
11:30 >> Great. So, so so so I do So, so coming back to maybe we'll discuss this later, but you know, the point being that till 27th Feb, if you'd asked me, the 16% earnings growth expected in FY27 for Nifty 50, I would have said I would have backed it up strongly. Now, I'm having second thoughts. >> More uncertainty or you're sure that there's likely to be some There will be some downgrades, but material downgrades. >> No, I think the first quarter is gone.
11:59 >> Yeah, fair enough. >> And so April, May, June, I think they will because it's almost like, you know, when you're traveling on the road and sometimes you wonder you see the traffic has slowed and then you cross that area and you say, "Why did we slow?" It is actually, if you remember the fluid mechanics lessons, that if you if you have a wave coming back, right? So, and and so this wave is what is a problem in many supply chains now.
12:27 So, so for example, you know, one jewelry retailer said that our store expansions have slowed because you don't have tiles. So, if 20% of tile production is slowed, so real estate industry starts slowing. auto producers are saying that the paint guns they use to paint the cars use LNG and so you know, the cars are not getting painted, they slow down production, which means there's a whole wave going upstream again. so, I I was talking to one very large industrial goods capital goods company and they are asking they were These are hard decisions, right?
13:04 that should we bid for this contract? And if you're bidding for this contract, should we take fixed cost of steel and energy and all that or should we just make it variable so that the risk is shared? So, so there are some hard decisions that have to be made in this uncertainty and that itself slows things down. So, so I can tell you that I think first quarter numbers will need to be downgraded because there's so many meetings that for me that have been cancelled because you know these global boards that come traveling and they want to meet. It's just today I mean a very large global shipping company the board cancelled.
13:40 We in fact our analysts when they are going out to marketing to Hong Kong, Singapore they are not badly affected. Singapore has very high percentage of energy that is imported but but it's unlikely that you know that economy will get affected but still you know the uncertainty around around flights etc. So we are saying that if it is not necessary let's push it out by a couple of weeks. >> Understood. Let's go back a little bit more into the structure of Indian economy and how much resilience we have. Yes we are on an optic economically. Is this I mean assuming that this is a short war we have to do a scenario maybe you know one scenario where we believe that's a short war and one where this last for longer. Assuming this is a short short war this is like a one quarter pain and done?
14:26 Two quarters pain maybe? >> Yes because a lot of the growth in India is is domestic. And as you were discussing earlier we have done the hard miles on fiscal consolidation. So the fiscal headwinds have faded and as you very very evocatively put break has been taken off. And and and the real estate cycle is in a good place the cost of capital is low it can be lower there issues with liquidity management which of course we can get to.
15:04 The cost of equity capital is low availability of equity and debt capital is improved. I call it the golden age for Indian entrepreneurship. >> Yes. >> There is massive reform happening. State governments are allowing women to work the night shift. There was this ridiculous constraint that 15% of a factory's landmass should be used for green cover. Which, given that less than 1% of India's landmass is in the factories and is the most expensive piece of land you can find because of all the approvals you need to take in the boundary walls you need to make.
15:39 Is that the only place where you can expand green cover, right? So, those things have been removed. many states are removing constraints on land use conversion. and they're not done. So, there's another 23 28 reforms happening this year. So, given all of these things that are happening, I'm really really positive about the underlying momentum. and the two vulnerabilities that we have, one on energy and the second on capital inflows. The first is currently my biggest concern.
16:13 >> on the capital side and in general on the external side. I mean, what is happening in the US economy because you mentioned weekly about the credit private credit issues there. But, isn't it a little broader than that? Because you all of 2025, US 300 plus million people, they created 1.8 lakh jobs, 15,000 jobs a month. Now, they are negative. isn't the US already kind of in a slowdown, perhaps close to recession and then this crisis hits them, credit may become more expensive.
16:42 What happens? >> So, you know, that's a great a great question. I think China is going through the same problem. where people obsess about K-shape recovery in India. they have no idea how bad things are in China and the US. so, so, what's happening in so, let's start with the US. Now, in the US, a disproportionate part of the growth is actually coming from AI and data center investments. >> Yes.
17:13 >> Now, as you can imagine, this is done by a handful of companies. And the beneficiaries of this are also a handful of companies. Everyone else is not party to this. So, there is a lot of value add happening. So, so Nvidia is adding a lot of value, but all of that is going to surpluses. And they're finding ways to keep that share out growing. For example, it's very possible that OpenAI given how much market share they've lost to to Anthropic over the past 1 year. They were at 90% of corporate. Now they're at 30% of corporate. Anthropic is at 70% or maybe it's even lower than 30% because Gemini is also getting in. So, given all of that, so Nvidia Broadcom Google Microsoft, so these are the handful of companies which are biggest beneficiaries of this.
18:04 Maybe some power generation companies. And you can see that in the stock market. So, so so it's a very unequal, but the economy growth is real. it it how how deeply it is spreading, time will tell. but or how how fast that that that gains will be distributed, time will tell. because productivity boost will also benefit companies and small businesses. And we can come to that when we think about the Indian impact. But at this stage, it's a very unequal economy.
18:33 The second and important issue that we must keep in mind is that job creation is also a reflection of how your labor force is expanding. Given all the immigration curtailment, given all the illegal immigrants being thrown back, and all the negative message which has been done, the controls on the Mexican border, the if they needed to generate 1 and 1/2 to 2 lakh jobs a month to keep the labor market unchanged or or you know, balanced, today that number is maybe 10,000, so so the or maybe even negative because the without immigration, the workforce may be shrinking. So, so I don't take the absolute reduction number too negatively in the sense that, it is, their productivity is going through the roof, because of all these AI investments and these very, not very labor-intensive. but they don't need to create jobs to to sustain that. China is going through the same problem.
19:35 China, I think we've often discussed, tax to GDP is falling and been falling for 12, 13 years. The, the labor force participation rates are coming off. So, in an economy where labor force is shrinking, participation ratio is still coming off because real wage growth is pathetic. their their exports grew 21% in the first 2 months this year. But, you know what grew? Autos, semiconductors, solar panels. All the labor-intensive stuff. So, apparel, toys, furniture, down.
20:09 So, even in the hottest of cities of Shanghai, Shenzhen, and you the labor markets are dead. So, so it's again a very deeply unequal economy, and the, the tax to GDP falling is, in many people's views, a sign of the economy informalizing. >> Meaning that >> Yeah, because this is what Mexico went through in the '90s, where, you know, you have a bunch of people who are who are excellent at factory work and at assembling things and all that.
20:42 But, your factory work goes down because you're having so many robots and dark factories and automation, semiconductors, and all that. you don't need that many people, and those people can be redeployed potentially in services. But, given that they haven't finished high school, and, they can't do services. They can't run Excel sheets and so on and so forth. So, so then all they can fit to do is is to, delivery jobs and and run noodle shops. I mean, that's a caricature. It's a very unfair caricature, but anyway, it is what it is. So, and these jobs then don't have to pay taxes.
21:16 >> Yeah. >> So, so this is why I think China is going through another I think very serious inequality problem. >> How much of that is the so-called involution and anti-involution? So, basically, grow growth without profitability, right? That was That was the old thesis of China. And then post-September 2024, you know, a little bit more balanced approach of, you know, let's also go let's also allow companies to make profit. So, is it lag? Meaning, is is is the fact that taxes coming has not kept up with GDP growth? Is it just a fact that corporate profits have been constrained for so many years? And maybe we are just waiting for the turnaround.
21:55 >> so, I I I I think that is a that is a very important observation that the Chinese are trying to control involution. But, if they are able to control involution, it is worse for wages. >> Yeah, it's working. >> Because as you know, GDP is wages plus profits. >> Yes. >> So, the the the >> So, you're saying that it's more about the distribution rather than the total value? Even value will not go up. >> Value will not >> So, so, that is the problem.
22:25 that that you know, the Chinese socialism with Chinese characteristics was about the fact that you know, why do you need profits? You need profits because you want to reinvest. and also because you want to signal to capital providers, either debt or equity, that you're a viable business and you deserve that capital or you will be willing to give returns or or at least pay back. When the Chinese government effectively signals they don't write it down on paper, but that's the signal that we will allocate the capital.
23:02 they don't need the companies to report profits. So, the economic model does not require profit making. but yeah, clearly that creates a problem and they are seem to at least the top level is serious about involution fighting and allowing private sector to make money. But, there are some serious issues coming up. So, there's a very nice Economist article this week which talks about this is the first generation where the youngsters will inherit a lot of wealth from their parents.
23:35 So, there's the the writer of this piece of Chinese origin journalist. She says that you know and and this is something that you you and I will relate to that till my generation the the wealth and income always flew flowed up because you know, every sub- sub- subsequent generation was richer than their parents. but she says that when I went to the US, I I was surprised that so many of my college friends were inheriting a lot of wealth from their parents.
24:08 And she's saying that now that that is starting to happen in China. So, so imagine this issue of socialism or the rise in inequality that that President Xi she was was forced into into this, you know, curtail the private sector. We don't need the private sector anymore. I think there's serious structural issues in the Chinese economy as well. So, so coming back to the question of the US are they going into get into recession?
24:41 >> I know it's a little interruption here. How much of that money which is going into data centers and AI is coming from the West Asia from West Asia? So, is there is there an issue that because of this disruptions funding for the AI data centers and all that also gets to >> I think quite a bit quite a bit. But, that's committed and and I mean, so a month or 2 months of disruption won't won't create a problem.
25:02 I do worry about global growth. >> Mhm. >> but but in in in see See, a significant amount of investment that is going in is the surpluses that Google and Microsoft and Amazon and some of these had parked in US Treasuries in Ireland or you know, some of these tax havens. so, that money is now getting deployed into actual capex. The folks who are you know, doing their own or raising capital are the Anthropic's and Open AI's of the world. and of course, the whole slew of other startups in in a whole range of sectors, meaning associated with the data center boom.
25:45 but Yeah, so that I I think is is a concern, but not over 1 or 2 months because they will not dishonor their commitment because they will stand in line or take their capital. So, you have to be really desperate to to to to not do that. but, that's a risk perhaps that can emerge in a year or so if this continues. but but, I think the bigger risk is is political. I think less economic. The US to a large extent is somewhat protected because you know, we're energy exporters.
26:22 they still have a market-based pricing. So, they it will create inequalities, meaning that the consumers will have to pay more and the oil companies will generate more profit more more surpluses. but that is is I think less of a risk. The The bigger issue I see is if we get into a global recession, see, and this it's a it's a very big if. and we can do the scenarios maybe after this. That so, if the if the Strait of Hormuz stays closed and the bargaining between the Iranians, Israelis, and Americans really gets hairy.
26:59 and that so there's a fascinating book I read just now called Unrestricted Warfare. It is written by two Chinese colonels who in 1999, so it's a very old book who said that the first Gulf War 1991 was well it just changed the nature of warfare because it was all aerial and technology and it was the first big war that America fought and and after Vietnam and so you could see that they were really afraid of loss losses of life.
27:34 And so it was all technology. But they say that it also ended conventional warfare because now wars are also about about cyber security, about about narrative, about media, about about financial markets. And they they they spend a lot of time explaining what they call the site principle. The site principle is that you say you're fighting an opponent who's who's much stronger than you. The opponent will be throwing missiles and warships and and and and aircraft at you.
28:06 but what you can do is hit them in the financial markets. So so now what has happened is that America went in and the Israelis went in thinking that, you know, we'll just destroy and there's there's not much left to bomb. But if the Iranians are mining the Strait of Hormuz demining it will take at least 50 days. So even if you get a truce today, you're stuck for 2 months. And if the world doesn't I mean also that 7% analysis you were doing earlier if energy supply despite substitution and all that is still down 5%, that's 5% of world GDP gone.
28:42 And even before the impact of that starts showing up in terms of activity levels. The financial markets, which are forecasting engines and you and I have been part of this, so they they will respond way earlier. >> Yes. >> And then new types of concerns will start emerging. so we were doing modeling for India that is it going to be an availability problem for us or is it going to be a price problem for us? Because see if 7% of world energy is disrupted, 10% of our energy is disrupted.
29:13 And so my assessment is that for us it will be a cost problem. I mean, we are no longer at the bottom end of the curve. So the reason prices go up is that you eliminate the the buyers who can only afford cheap energy. so so maybe you know, at $150 or $200 or I don't know where it goes. we'll also have to start curtailing and we'll have to pass along the fuel price hikes. Hopefully not. I'm praying not. but but in any case, there are enough countries that are poorer than us who will not be able to afford even $100, $120 oil for a long time.
29:50 And but it's definitely going to be a price problem for us. But all the economies that are unable to even move because energy is so critical. And this is also not something that you know, you can stimulate through fiscal means. And because this is hard shortage of energy. which is why suddenly Russia is free to sell oil and they're giving all the kinds of freedom because they want that leverage and the more time to to beat the Iranians into submission.
30:18 So So so this is a very very critical risk in my view for the markets and we saw today what's happening. I fear it gets worse. the the the the optimization in my view that is now important is how much pain can China take? So remember that 90% of Iranian oil exports go to China.
30:52 45% of Iranian government resources receipts come from China. So, effectively the only country though the Iranians must be upset also that China didn't come to their help militarily. or is not you know beyond as they say in Hindi go and in the garden in the you know there's not much that has come out in terms of support. but I'm sure they they realize that you know China says seriously that look guys, you got to stop.
31:23 because China is is also deeply because China is more than any other country dependent on global growth to happen. And so so their economic vulnerability is also high which is what the reason why I don't think this is going to last very long. But at some point they'll have to put pressure on the Iranians. Now, this is also a great opportunity for China to humiliate America. because they'll have to give concessions to exit now. So, as I was reading I was listening to this podcast where where the speaker said that the Iranians have their leg I have I have bit into the the leg of the Americans and they're not going to let go.
32:05 Which is very very very evocative very strong imagery. and so so what this means is that it's an optimization between how much economic pain China thinks it can take it it needs to take so that Americans are sufficiently humiliated but they also have a threshold. and and so so that's the optimization. The second optimization is how much control do US and China have on their proxies?
32:37 >> Before it just gets very dark, couple of scenarios, right? One is how do you play this? So, you know, it's all one two two two weird, you know, armchair war gaming here, but how do you play this? So, one is to look at this like a COVID-like situation where you have a large external shock. You're right, fiscal stimulus is not or demand stimulus is not the really necessarily the right response. and similar to the post-COVID situation, people may have to rework supply chains and you know, so so a lot Are we really Are we looking at another post-COVID type of path out of this keeping aside the geopolitics?
33:11 >> Absolutely. Yeah. So, you see a sudden shortage of supply. So, someone was saying that they're doing their interiors and suddenly the rug, which is made out of some oil extract, not available. and so those shortages will start showing up. Yeah, I think 450,000 containers which are stuck around the Strait of Hormuz. And even if you find a ship, you won't find containers.
33:44 >> Yeah. >> And someone was saying that their car is gone for repairs, but that part is on some container which is stuck in the Strait of Hormuz. So, so what I'm saying is that this is exactly the same kind of cascading supply chain effects. >> therefore, the exit is probably also likely to be something like that in terms of the way people rewire their economies and supply chains, etc. So, it brings some very couple of interesting thoughts. One is linked to your work on the supply semiconductor mission.
34:16 Where does this place India on the China plus one story? Is there a Is you know, assuming that you know, this whole geo little bit of supply chain fragmentation and you know, people will want to diversify, maybe continue this if China continues to be a risk and so on and so forth. where does it place India? That's one specific to that sector, but also a little bit more broadly, if US has its problems, if China has its problems, does India then begin to look a little bit more like the gem in the rough? Is it Is it that are we looking stronger than others you know in a peer group analysis?
34:53 >> Yeah, so so great. I I think I think both are both are excellent questions. one on how does this rewire global supply chain? Second, is the market and economy does India look much better now? let me take the first one first the second one first because that's somewhat simpler to answer. So absolutely resounding yes. I was at the Raisina Dialogues. I I heard from several commentators that it's amazing how every participant of course this was a subdued participation because every >> Sure.
35:28 >> global leader is stuck in their own country figuring out how to deal with this crisis, but about how important India is as as a as a natural I would say neutral party. And so the Europeans are exploring you know increasing exposure. and so but that from a market's perspective look if oil prices you we are deeply vulnerable to energy imports. Meaning that we are very deep price shocks because 50% of our dense energy demand is is imported.
36:07 And so if energy prices are resetting higher and I'm not saying that 200 will last very long because the world can't afford it. So so it'll settle much lower even if this is disrupted for a long time. I don't think it'll be. My base case is this ends in 4 weeks. it will be a hairy ride for people like us in the market. where we will both be made to doubt whether am I taking too much risk by buying right now.
36:34 But at some point it will be the right point, the right decision will be to buy. but but anyway, we'll see when we get to that. but once so once there is clarity on where the energy prices are settling, then there would be a growth adjustment, there's a fiscal adjustment, and FX adjustment. So all three needs to happen need to happen. but once that is done, I think then the rest of it is reasonably straightforward. So so suppose oil stays at 100, and gas and edible oil and and fertilizer and every other form of energy import is suitably priced, our assessment is there's an 80 billion dollar impact, which is 2% of GDP.
37:20 it is very unlikely the government will let all of that 80 billion hit the economy. Maybe they'll step in with one bi- 1% of GDP, 40 billion or so. which means the fiscal deficit goes to 5.3. and 1% is the growth impact. The FX so given that, you know, FDI repatriation will slow down because stock markets are dead, so there's no VC selling and taking money out. the BOP impact will be lower. So maybe 60 billion dollars.
37:52 but it's very hard to do these assessments, but based on some models that RBI and economic survey published, we assess that what is 7% decline in the currency should be able to offset a 60 billion dollar balance of payment deficit. you know and I know that's never happens very smoothly. So it could be a 12-15% drop and then an appreciation. RBI burning a lot of reserves. Good thing is that we are sitting, you know, so compared to any other time in the past, we are the best prepared to handle a crisis like this.
38:22 So, low fiscal deficits, slack in the economy, inflation is low, RBI sitting on reserves. So, so we can tide over several weeks. Most countries can't. so, so yeah. So, once people see that, I think the core attractiveness of India will become very obvious to to to to investors and and and companies. On the supply chain rerouting, I think more these kind of shocks, the more the swing towards resilience versus efficiency. Every supply chain, you're optimizing between resilience and efficiency.
39:03 so, when you have low inventories, you're targeting efficiency, but you're giving up on resilience. it's like what happened with Indigo. Like that, you you can handle 3 4% disruption. The moment it goes to 7 8% disruption, the whole network collapses. Because the flights are not going from point A to point B and all that. So, it's it's the it's the similar kind of challenge, and therefore, I think most supply chains will try to build resilience, which means that even if they have China as their core supplier, because value chains are so tightly linked and the cost of capital is so low and talent is available and all of that, you will still want an alternative.
39:42 So, that's a good thing. the slightly negative is that negative issue is that if it still has to cross the seas, then you would want near shoring even more. but but my sense is the first of these trends will prevail more. Because, you know, even if you want to find industrial workers, however few you may need, you're not going to find them in even in Eastern Europe. The average median age is 43 44. So, some are at 48 49. So, so I think they are still I think India does end up becoming a decent alternative.
40:20 so yeah, so we have to tide through this these tough times. And the fact that I'm hopeful that we once this crisis ends, whenever it ends, we would have come out of it relatively unscathed. There will be a lot of damage done in many other economies which are not prepared for this. and then the then the strength of India becomes very obvious for a number of people who were just thinking of India as an AI colony.
40:49 and that a loser AI loser. >> AI loser. >> also an AI colony, by the way. But but that I think message will change and and I think we'll see we'll see much better sentiments towards India. >> Thank you. That was a That was I think a long series of questions with fantastic answers. Thank you. I want to sort of spend a minute or two on some of the things that you mentioned. You mentioned some books including Can I have the name of the the war The Chinese interest >> unrestricted warfare.
41:19 >> Unrestricted warfare. All right, I'll put it on my reading list. You have said that you are an engineer by training and an economist by choice. Isn't that something like that? So those words. Why? Why did you Why did you I don't think I think you just moved straight from engineering into >> No, no. So it was a long and it's a serendipitous circuitous >> It's interesting. This is the kind of stuff we like. >> So I studied computer science.
41:47 I was very happy studying computer science. In fact, my B.Tech project final year project was in artificial intelligence. This was '96 '97. I actually in '95 '96 we'd done work on computer vision which is one of the most advanced stages of AI now. but I was also beginning to realize that this is that I wanted to understand people, businesses, life and just curiosity. So when Hindustan Lever gave me an offer to be a management trainee, they were experimenting with getting CS people. I think they were quite visionary that computers would become very critical to business, so we should get good guys in.
42:30 They couldn't hold us back because it clearly was not a technology firm, but but yeah, so that training was phenomenal. I learned a lot about business. Then I tried to do a startup, didn't work out. I joined Infosys as a technical architect. Did data warehouses, enterprise application integration, very very fascinating stuff. But all through this, I was still subscribing to the Economist, reading stuff and very curious about about the world and then friend of mine, I was thinking of doing an MBA and my friend of mine said was in Credit Suisse First Boston that look we have this opening to cover IT services and we're looking for someone with industry experience.
43:17 And if you're thinking of doing an MBA anyway, I mean this is what people do after an MBA. So I said, "Well, if people do it after an MBA, then will you hire me?" He said, "You apply and you see." So so the person who was hiring, I think was enamored of my JEE rank, so he I think that was the convincing factor. because I had nothing else to show for. So So yeah, so I joined Credit Suisse First Boston. This was in Singapore.
43:44 of course my salary quadrupled, so I wasn't very unhappy. And I loved the fact that all I had to do was read and write. and then associate, when you're junior, you of course you're not facing clients. that's all you do. So in the first 6 months, I was moved to covering semiconductors. That's why I ended up being on the semiconductor mission as well. And so I taught myself how semiconductors are made. I taught myself how semiconductor cycles work, what are inventory cycles.
44:16 and I've always had the good fortune. CSFB, I mean, and Credit Suisse after that was a very research friendly place. meaning that they they give a lot of freedom. I could write whatever I wanted. no one ever said no. And they gave me the right opportunities. So so from there I moved to Taiwan. stayed there for 2 years, covered chip design companies. Then I came back to India because I got married to an Indian doctor and she couldn't work in Taiwan.
44:50 and here there's no semiconductor at that time. So I had to become a healthcare analyst. I chose to become a healthcare analyst, by the way. And then I also picked up metals. 2010, the the India strategist quit. He went to become Asia head of research at another place. And so the firm said, "You want to be the strategist?" And I again told them, "Look, you know that I have no formal training and I don't understand macro."
45:19 they said, "Well, you've learned so many sectors. I'm I'm sure you'll be learning you would have learned this also." So that's why I'm very grateful that I got all those opportunities. so yeah, it was very serendipitous, very circuitous. and I kept asking questions, teaching myself, reading. I still read a book a week. so I found that reading is also compounds. So you you start seeing things that no one else I mean, very few people can because just that you're able to connect so much more.
45:49 >> Because you've read so much more. What does your What's your sort of day look like today? Maybe in contrast to where it was at Credit Suisse or anywhere else. >> so I read a lot more now. so I would say maybe 4 hours on a weekday and maybe 5 to 6 hours on a weekend I spend reading. and it's all kinds of Substack and podcast and and now I engage with some of these chatbots, Gemini, etc., very frequently.
46:29 and when Tyler wrote like I think 1 and 1/2 years back that it's best to read a book with a with a chatbot. I couldn't appreciate it as much. Now I do. >> Well, he did a book and then he put a whole AI >> No, no, no. What what he says is for example like understand >> his own book. He put it online with a with a you know, you can put a queries and >> Yeah, yeah, yeah. So you know, he's he's teaching he's he's writing about his own history so that chatbots can pick it up online and then and if someone asks future in future what Tyler what he's doing is >> He's like a different level. He's two years ahead of us.
47:04 >> So >> We need to figure out how to get him to come to come to Mumbai and come on to this podcast. >> No, but he does. He does. He does come to Bangalore. So I think the >> Yeah, he has a he has a interesting going on. He sponsors a lot of yeah. >> Shruti, no, that is Shruti Rajagopalan so they they hold a conference in Bangalore. >> Ideas 101 kind of thing. >> Yeah, so and and so he comes for that.
47:27 anyway, so so yeah, so I and what I found fascinating is that like you know, even his unrestricted warfare. So if I or or I just finished this book on Genghis Khan Genghis Khan as they say and if you if you come across a word, come across a phrase, come across a period of history which you don't understand well, you ask that and there's a nice summary. So you can these things can hallucinate on say hard economic data. So, if I'm trying to see how Gini coefficients are reflected in wage to GDP ratio, they'll give you cooked up data.
48:08 So, there was >> But, language-oriented are much better. >> And history, for example, I can't I can't screw that up. So, So, so yeah, so it's it's actually remarkable, how how efficient your learning becomes, and how much structured your learning becomes. So, I think that that didactic thing, they start linking it. So, to give you an example, so, in this, site principle, and so I'd I'd asked, Gemini about, Jask, because he I had heard that there's a place called Bandar-e Jask. Bandar mean Bandar-gah, that, you know, harbor.
48:43 So, and Bandar-e Jask, if you see it on the map, it is it just overlooks the Strait of Hormuz. So, so I knew that attacking Jask was Jask was, also, one of the priorities for for America. they will not keep talking about it, because they don't want to say that we are we are hitting China. But, the strategic battle is between US and China. It is, Israel and Iran are just proxies. Now, so, and then I was reading, Unrestricted Warfare. I heard about the site principle. I said, "Okay, give me some examples of the site principles."
49:14 It was saying that, and then it prompts me, that, "Do you want to see how the site principle was applied by what how the the operation Epic Fury showed a master class in the use of the site principle by China?" I said, "Yes, sure." And so, so the fact that it had the context that I was talking about Jask, and I was reading this, and it linked the two and said, "Did you amazing. So, so it you know, so these engagements, again, it comes down to, as they say, you need need to learn how to prompt.
49:52 but the but the wider you read, more curious you are, more hours that you're willing to invest in it, it's gold mine. Very very >> If I were to ask you, and many of our viewers and listeners on this would be young professionals getting in early stages early across the stages, but let's assume there are quite a few early stage professionals. What would you advise them to do now? So, obviously one part is learn how to use AI, but what else would you say would you say that that's like an important thing to do? What else would you want to do?
50:28 >> Look, in in in this fear of AI is I think completely misplaced. You know, the narrative in the US is shockingly negative. That that AI raises power tariffs, it's it's it's controlled by a bunch of tech nerds, and then it'll create a lot of job losses. I think AI is incredibly powerful. it is going to completely change many ways that we we have thought about life.
51:08 you know So, there's this developer not a it's not a developer, and he's the the big best developers on AI, Andrej Karpathy. So, he he said in one of the podcast, I think Dwarkesh's podcast, that you know, we have stopped lifting weights. We don't have to lift heavy weights because robots do it for us, machines do it for us, but we still go to the gym. It feels good. reading books and intelligence gathering will also become like that.
51:37 >> You'll do it you'll do it >> You'll do it because you want to >> You enjoy doing it. You enjoy doing it. What what I also think is that you know, in economies like ours, AI will unlock so much value. and and that creates new opportunities. So, for for youngsters, instead of getting intimidated, I mean, to to see where the unlocks are happening. So, to give you an example, the first thing, AI can mostly work on things that are documented.
52:06 >> Right. >> Things that are not written down, AI does not know about. so, like, you know, in the software industry, so, if you think about the workflow, so, requirements, architecture design, split into modules, development, testing, integration testing, and then deployment. Now, suddenly, coding and testing become effec- effectively free. We can pass costs down 95%.
52:36 And, so, somewhat like what happened in the first phase of the industrial revolution, where household used to, do apparel manufacturing. So, someone would convert cotton into yarn, then yarn coloring, and then fabric, and then, stitching, and all that. So, when this genie was discovered, where yarn converted to fabric very fast, because it was automated, there was a shortage of yarn. There was a shortage of tailors. So, so, so, what happened? So, instead of thinking that, "Oh my god, all these software jobs are going," we should think about an rapid explosion in in, or a very fast growth in requirements, for architects, software architects, complexity of deployment, and all the business solutions that can be solved. So, like, you know, if you see some of these ads that came out during the World Cup, that, cricket coach in Jharkhand, a woman, a cricket coach is teaching girls, and she wants to raise funding, she doesn't know how to do do it, and frankly, she would not have known how to who to ask.
53:39 But, now she does. a small exporter in Kanpur who's who's who has good walls and he wants to export and doesn't know where the where the market is. Frankly, these are incredible information gaps which are going to be filled by by AI. And so so as you think about the world going forward, I think the the agility, curiosity and and and and taking advantage of what I think is the is the best environment for entrepreneurs India has ever seen.
54:15 maybe ever in a long time. 250 years. Is is is a huge opportunity for youngsters to to to create jobs, to create businesses take advantage of the low cost of capital, easily available capital, easing regulations. Other than this energy crisis that he has created or this has emerged out of this war in Iran. He's not created this. I mean, it's unfair to blame him. It's for us to blame but beyond that, rest of it is just noise.
54:45 I think the the under there deep positive changes happening in India. And it is up to the youngsters to take the bull by the horns. >> Excellent. Just a couple of personal questions if I I have to end this. One any something that no one knows about you. What would you like to share with us? Or very few people know about you. Maybe your wife does. >> actually I my my basic my first principle is that I I I keep things simple. I is you know, I've understood that the the least stress I avoid stress at all costs. So the least stress is when everything is in open.
55:35 So if I'm having a discussion so that I can't think of anything very serious. >> No, no, it doesn't have to be serious. >> No, no, even even if you >> You like have a hobby or do you do I mean you you mentioned reading and listening, so that's kind of keeps you busy, I'm sure. >> Yeah, so I >> Travel maybe? >> Yeah, so I that's I used to travel a lot till we had kids.
56:01 So, I've been to Antarctica. >> Oh, wow, that's interesting. >> So, that was and I want to go there again. It's an incredible experience. So, yeah, so I I but again, this is something I've talked about like you know, I'm fascinated by science. I I I I you know, this thinking of human brains as natural intelligence or natural intelligence versus artificial intelligence. So, my wife thinks it's very funny that I feel threatened by AI.
56:34 Not threatened meaning that you know, that I need to be more efficient, use AI so far so that my brain and I I don't know if you read Hitchhiker's Guide to the Galaxy, I'm sure you have, right? So, Zaphod Beeblebrox two brains and the second brain is trying to control the second brain. It's actually very very real. I mean, so I I treat my brain as a someone other and that's okay if I do this, my brain is going to behave like this. Maybe that's a secret.
57:01 That I treat it like a machine. >> Maybe your AI tool is now going to be a >> Yeah, exactly. It is possible. It is possible that that I'd say that okay, if this is the stress I give my brain, this is what it's going to learn. And then I read the signal and say I I I think I'm getting too stressed, so now I need to back back off. How much information can it process? So, yeah, so maybe that's the secret my wife knows but no one else.
57:25 >> Excellent. Thank you very much. I think there was there were many many insights here. There are many things. I think for for of people to know you, to see your career path. I mean for someone who's I mean I got out of college and the only thing I've done is asset management. I've done nothing else in my life. So, it's always fascinating to hear those different journeys. >> and I think you are also very clear in expressing, you know, your thoughts on global and Indian economic outlook, which I think is the need of the hour.
57:52 So, thank you very much, Nithya. >> No, thank you. Thank you for having me. >> Mutual fund investments are subject to market risks. Read all scheme related documents carefully.