Recession, Cheap Oil: The World In 2016 Is Both Opportunity And Threat For India
It is not very simple to predict the direction of the world economy or the stock markets or geopolitical events. So it would be a huge feat if someone gets almost all his predictions right.
Predicting the direction of the world economy or the stock markets or geopolitical events is always a mugs’ game. So it would be a huge feat if someone gets almost all his predictions right. Well, it is time to give Ruchir Sharma, head of Emerging Markets Equity and Global Macro at Morgan Stanley Investment Management, a big hand. His predictions about the top 10 trends of 2015, given to NDTV about a year ago, have mostly come true. More important, none of his observations went wrong.
The most important takeouts from Sharma’s crystal-ball for 2016 are that the global economy may be entering a period of recession, and that oil will not rise above $70-80 for the next 10 years. For India, this means 2016 is the year for accelerating reform, through the executive route if not the legislative one. (We shall look at Sharma’s 10 predictions in detail a bit later, but first we need to understand why he was so right in 2015.)
Looking at global data over several decades helps Sharma discern patterns that iron out the kinks in year-to-year forecasting. Last year, Sharma said that stock markets rise 20 percent in the first year after a new government is sworn in; they rise another 20 percent if reforms materialise; if they don’t. stocks fall 12 percent. Bang on for India. The Indian stock market declined in 2015 after the high reform hopes of 2013-14 vanished in 2014-15.
His other nine predictions (or observations) for 2015 were:
(a) The 2015 budget will be transformational if more power is given to states (it was given, with 62 percent of nation’s revenue resources going to states); and that interest rates could fall (they did, but a bit sporadically).
(b) China will be big risk for the global economy (it was, and still is).
(c) India is likely to grow faster than emerging markets (as has been the case always).
(d) The India-China divide is too huge to be bridged (no major prediction this, but an important observation for those who still try to bracket the two together; China’s per capita income is five times India’s).
(e) India will find it tough to obtain foreign capital flows (true, total inflows into equity and debt were a measly $10-11 billion in 2015).
(f) Oil prices were heading for their 100-year average and commodity prices will remain low for a long period (true so far).
(g) The dramatic fall in global inflation will help India (it did).
(h) Tech billionaires will overshadow energy billionaires (who can dispute this, ask Mark Zuckerberg, Jack Ma, Jeff Bezos and our own Sachin Bansals and Kunal Bahls).
The last thing he said: India should be wary of positive magazine covers on the economy or companies. If a general interest magazine starts reflecting a trend, it is probably already dying out. The 2014 magazine covers that talked about a quick revival of the Indian economy all turned out to be wrong.
At the start of 2016, even accepting that some of Sharma’s trends are not predictions but mere observations, one can be sure that data-based crystal ball is a fairly trustworthy source for predicting broad trends and directions.
So what is Sharma saying this year? His 10 trends and insights for this year, broadcast last night (11 January) on NDTV, suggest the following (with my comments in italics):
#1: Global recessions happen roughly once in eight years. This means, after 2008, 2016 is in line for one. So fasten your seatbelts for a bumpy ride downwards.
#2: China is the “weakest” link, having swallowed too much debt to keep growth up artificially. Sharma’s point: a 40 percent increase in debt over just five years is a danger signal. Something has to give. We can only hope it doesn’t give in 2016, but who can predict that? Best to focus on what we can do to fix our domestic reform and growth issues. The world cannot help us, except by keeping commodity prices low.
#3: Growth can’t revive this year when emerging market exports are falling globally. Corporate profits will be weak, given zero sales growth last year. Even this has depended on India turning protectionist. And what about the 7.2-7.5 percent GDP growth predicted for this year and similar things next year? The dichotomy between GDP and corporate growth data indicates suspect data, says Sharma. Takeout: We shouldn’t assume that 7 percent is the real growth. On the old GDP calculation, perhaps 6-6.5 would be what we should assume, never mind what the numbers say.
#4: Commodity prices will continue to remain weak. Sharma predicts oil to remain well below $70-80 a barrel for next 10 years, though $50-60 is India’s sweet spot. This means 2016 is when Narendra Modi must pick courage in its hands and deregulate the entire oil sector.
#5: India is still to conquer inflation; recent price moderation may be entirely due to low commodity prices. This means more reforms are needed to create a truly national market for farm produce, and less protection for domestic players. Focus should be on ending inter-state barriers to trade, and improving the ease of doing business.
#6: US is unlikely to raise interest rates too much. Sharma’s reasoning is counter-intuitive here. He is not saying this because of the possibility of a US slowdown, but because the US Fed has now effectively become the world’s central bank, and this means global growth has begun to matter in its calculations more than just the US domestic economy. For India, this means less pressure from US Fed to keep rates high. Raghuram Rajan has more headroom to cut rates.
#7: Rupee cheap, other currency cheaper. This means India will have another tough year on exports, but imported inflation will also be under control. Time to pack your bags and visit any country other than the US for cheap tourism.
#8: Tech remains in favour. Sharma’s phrase is, ‘FANG in, BRICS out’. FANG is short for Facebook, Amazon, Netflix and Google (the ‘A’ could have been used for Apple and Alibaba too, but Sharma chose Amazon). BRICS out means that the old assumptions about BRICS (Brazil, Russia, India, China and South Africa) driving future world growth have gone out of the window. BRICS without the Chinese engine are a motley crowd without adequate heft of their own. India may be an exception to BRICS gloom, but we can do little to help world growth with our smallish $2 trillion economy.
Sharma sees an explosion of “Unicorns” around the world – Unicorn being a term used to describe billion-dollar startups. Funding may get scarce, but tech’s attractions make it the only game in town.
#9: Banks are dragging India down. Thanks to a trainload of bad loans on their books, public sector banks are unable to lend, and credit growth has stalled. The Modi government knows this, and is likely to give priority to recapitalising banks and pushing growth through higher fiscal spends so that more money lands in the pockets of private borrowers, which will ultimately allow banks to reduce their bad loans. But this is only a short-term palliative; the long-term solution is privatisation of banks and operational autonomy for banks that will always remain with the government.
#10: Voters are blowing a fuse. Sharma says that with growth stalling, voters are more than willing to vote governments out, as it happened here in 2014. His data show that in the decade before 2007, 65 percent of incumbent governments were returned to power; now the ratio is more like 50:50. Modi has his work cut out for him if he wants to be among the 50 percent of incumbents that survive 2019. He has to get growth up – and fast. Getting growth and jobs up in 2018 may be too little, too late. He could then end up with a Vajpayee-like defeat.