India Decoupling: Myth Or Reality?

Decoupling is a voyage and the Indian ship has definitely sailed but are we there yet? The answer is no. Will we get there? Obviously yes

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By Manu Rishi Guptha • Dec 1, 2022


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We all want it don't we?

And yet human biases are so positioned that we start thinking of things that we want and affirmations around it make us believe in the mental and verbal narratives.

Such is the story of India's decoupling with the global economy.

As I browse through (for amusement and not for information) the business channels each morning and almost throughout the day—as one gets used to the background noise, I can't stop wondering—if India has decoupled, why are all the anchors and visiting opinionators spend over 70 per cent of their time talking of just five things: US inflation data, US jobs report, US Fed interest rate decision, Fed commentary and US consumer confidence.

Dichotomy doesn't need any definition or explanation here.

So, while we all want it, it's still a decade or more away from reality, if we get all things right with respect to governance, infrastructure and collective character of the nation.

Any narrative can be peddled over a short period of time but, if we change our perspective from reverie to real, we are hardly decoupled.

Let's get some empirical data behind these arguments:

1. Nation's progress, when growth is inclusive and the entire cross-section of society uplifts itself to a better earning potential, better life, better security. The divide in our country has only widened. A driver and maids' salary has barely moved in the last 12 years whereas the employer's/manager's earning has gone four times if not more.

This creates a divide and hampers growth.

2. Even though Noah's Ark was a large ship to save the world from 'THE' biblical deluge, the ark itself had to have a balance even though it carried all forms of life. Or else it would have broken at its keel.

Society must move and progress in a balance. Too much of a divide and disparity can never create harmony and at some point, disparity will create an imbalance and lead to flashpoints (read: societal unrest) that might be hard to manage or control.

3. The very peddlers of 'the decoupling theory' might be ignoring an important data-point that around 45 per cent of Nifty50 companies depend on exports and if the US yield curve is anything to go by, US is heading into a recession that very few who are alive have seen before. If that happens, IT, pharma, sugar and refining suffers dramatically.

Direct and Indirect taxes in India are among the highest in the world. Countries that become economically formidable have done so by unleashing internal consumption. India has a long way to travel to become a consumption-based economy.

4. If exports suffer, and we continue to import (because we have become the largest consumer of fossil fuels), it will lead to trade deficits, that will lead to a weaker Indian rupee leading to higher inflation, leading to higher interest rates and thereby creating a deflationary spiral.

Indian manufacturing has just begun to come off age, and India must become an export powerhouse to be able to balance its trade deficit. The government should take a leaf from China's policy book and the way China unleashed a manufacturing boom in the 80's when the GDP of both countries was almost same.

5. So while one economic indicator might be leading or lagging another, the world and all its geographical constituents (I am refraining from calling it countries because it undermines the collectivism of the planet) are in harmony, dependent on each other, connected with each other that the decoupling theory is at best - specious.

6. What we have become; we aren't ready to revert to hunter gatherer mode of survival. And we need to trade globally, buy fuel (that we don't produce), buy cars (that require semiconductor chips from Korea), sell our intellectual capital to convert intellect into GDP (read: IT exports dependent on US of A), and the concept of decoupling becomes a figment of aspiration rather than a concept based on evidence.

7. The recent outperformance of a handful of shares that have pulled up the Indices to a lifetime high, is barely a reflection of the progress of the nation or the secularity of the markets. It's a great feel good to see paper wealth being created and the FOMO'ed first timers in the stock markets have taken Indian markets around 2 standard deviations above mean valuations.

The powers that be have well understood that a robust equity market is an absolute imperative for the reputation of a nation and for entrepreneurs to raise capital. But this can only be sustained when ease of doing business (we are still a far 37t , around 50 percentile) is sorted and corruption becomes a serious crime and contract enforcement becomes a reality.

It is absolutely charming and romantic to say that India will be a $50 trillion economy in 50 years by 2070 and throw out numbers so large and so far out that even if those don't make mathematical sense they sound absolutely stunning and bullish. And there is absolutely no doubt that as the western superpowers begins to wane in their spectrum of economic and military influences, India and China along-with new allies can easily be the fulcrum of emerging powerhouses.

Yet a lot of work needs to be done on the front of India becoming truly secular, democratic and business friendly with the agility of a tiger to change and adapt policy to become competitive. Government should govern and fuel capitalism while ceasing to be the owners of businesses.

Decoupling is a voyage and the Indian ship has definitely sailed but are we there yet? The answer is no. Will we get there? Obviously yes. But some serious work still needs to be done.

Bullishness and foolishness are two sides of the same coin: a few mis-steps and the erstwhile 'golden bird' would not know one side from the other.

Manu Rishi Guptha

Founder & CEO, MRG Capital

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