The Impact of Politics on Markets and the Indian Economy is Way Overstated:Ruchir Sharma, Morgan Stanley Investment Management's Chief Global Strategist

 Ruchir Sharma, the Head of Emerging Markets and Chief Global Strategist at Morgan Stanley Investment Management, is someone whose opinions and observations on world economies and financial markets count heavily. From Prime Minister Modi to Russian President, Vladimir Putin, when Sharma speaks, heads of powerful economies take note. 

In an exclusive conversation with VirSanghvi on CNN-News18, Ruchir Sharma spoke about variety of topics – from the current situation of Indian economy to the cases of Nirav Modi and Vijay Mallya. He also talked about the political scenario in the country and the plight of agriculture sector and farmers. 

When asked about his views on the Indian economy, Sharma said, “There are like other economies in the world which tend to be very volatile. Whether its Turkey or even Indonesia, with its massive volatility in terms of how these economies are doing. India, for me, is one of the steadiest stories in the world, which is that the sentiment moves around a lot, the conversation moves around a lot but the underlying trajectory of this economy is quite stable and I think that's again the case.”

Recently, much was made of the fact that India is growing faster than China apparently. Speaking about the same, Sharma said, “. I think this is a very basic economic theory that India's per capita level which is what an average person earns is about 2000 dollars. China's is close to about 9000 dollars, right, so nearly five times as far as India is concerned. So, from a higher base, by definition, you will grow more slowly. Particularly if you are a large economy. China's per capita income was similar to India's. China was growing at 10%. I think that is the important point.”

“We may be the fastest emerging economy in world but that's nothing to be short change of. I don't want to say that but these comparisons with China. The only people who do these comparisons are Indians themselves”, he added. 

Talking about the politicians, government and the impact on economy Sharma said, “I don't think any politician can rightfully claim that we are in a boom. The true boom that we saw in India was between 2003 and 2007 which was last decade. That was the time when the global economy was booming and our exports were growing at 30% a year. whether it's the consumption of your goods or cement or construction or real estate, every single thing today is lower, the magnitude is the only thing by which it differs, by how much lower, like construction, real estate are really in the dumps.What we have now basically is a sort of steady incremental story. What the growth rate is, I don't know. Ever since they changed the GDP methodology, I don't have the idea of what the underlying growth rate is.”

“I feel that the impact of politics on markets and the Indian economy is way overstated. There is absolutely no relationship that I can find between stable governance in India vs stock market performance or economic performance. So, this a very common perception, but it's wrong.”, he stated.

Speaking about the recent cases of Vijay Mallya, Nirav Modi, MehulChoksi etc. Sharma said, “I think these are symptoms of two things. One is obviously this is of crony capitalism. I think that's the existing case. The second thing is that there is a nexus which the public sector banks, as to how easy it is to form a nexus with them that you can end up doing something like this. So I think that is the real issue as far as these problems are concerned. At this point, I am concerned about the witch hunt that is going on.”

“It is politically incorrect to say this today almost. Today the mentality is that these people cheated - who have cheated the nation and looted it. Fair enough. In terms of the evidence in these cases, it does suggest that it is overwhelming. To me, the real concern is as the cliché goes. Throwing the baby out with the bathwater, which is that there are many good businessmen leaving the country because they fear that if by any chance they get entangled or targeted for some reason which may be wrong, then that could be completely debilitating for the businesses.” 

In this regard, there is one data I keep mentioning of these days, that 23,000 millionaires have left this country since 2014. To put that number in perspective, that the only country which I think has seen a higher exodus has been China but that's because they have many times more millionaires than we do. As a share of the total millionaires in the country, India has seen the largest exodus of any major nation over the last few years. Last year alone there were 7000 millionaires who left India. I think that tells us a lot of domestic people are leaving the country.”

“I find it really scary that in this country and again this is a lot of popular support, you know but if you're caught in some media case which is in the highlights then you can be thrown behind bars without getting bail. I think that's for a long period of time at least. That is something that you don't accept of most democracies.”, he told Vir.

Talking about the current agrarian distress and about farmers' marches, Sharma said, “I think, there is a reason why our agriculture growth rate should not be higher, because when China was moving its people in a massive way, away from agriculture into the urban areas, they were still able to have an agriculture growth rate of four percent or so. There are two points here, one, that the share of agriculture in the economy is bound to decline. The issue is, how well you manage the transition and what is the basic growth in agriculture you should get. I do feel that the growth rates are quiet disappointing on the agricultural front. 

Even though they have been okay with a last couple of years' decent monsoon and this is where the entire issue comes up about these farm loan waivers and stuff like that. Then you really speak to people about that and then they almost feel that the farmers do need some relief. The argument gets lost in so much of populous we currently are in. When you see that all these banks have sort of been robbed of tens of thousands of crores then why not just give them farm loan waiver?” 

Ruchir : There are like other economies in the world which tend to be very volatile.

Vir: Yeah

Ruchir : You know whether its Turkey or even Indonesia with its massive volatility in terms of how these economies are doing. India, for me, is one of the steadiest stories in the world, which is that the sentiment moves around a lot, the conversation moves around a lot but the underlying trajectory of this economy is quite stable and I think that's again the case.

Vir: So, which period are we talking about?

Ruchir : I would only say that this is one of the stable economies going all the way back to the 1990s

Vir: So, post-liberalization?

Ruchir : Exactly. Post-liberalization I would say that from the 1980s. Even before that you had stabilization but that was stagnation

Vir: Where in you have the Hindu rate of growth and all that?

Ruchir: Exactly. But in terms of the underlying stability of this economy relative to other emerging economies, India has always been that. I find that hasn't changed. Yes, sure, at the beginning of each decade we tend to get some sense of a crisis

Vir: Yeah

Ruchir : Right at the beginning of 1980s, 1990s. Even at the beginning of this decade we had a sense of crisis. But if you look at the underlying growth trajectory, it hasn't changed that much and we had this massive growth boom last decade because the global economy was doing well, the global economy receded and we went sort of down with it. So I think that's the important thing, to disentangle sentiment versus the underlying trajectory

 Vir : Is the trajectory upwards?

 Ruchir: Yes, I think the trajectory is steadily up

 Vir : Is it a steep slope or gentle slope?

 Ruchir: It's always gentle, that's the thing about India which is the fact that this is not an economy which has a massive upside either, in terms of where we start growing at 10 or 11 percent to become the next China and stuff. That doesn't happen here because we are never able to do enough to try and sort of get to that trajectory. On the other hand, there is such underlying resilience in the economy because we're starting from such a low base. The penetration levels are so low, people still want to buy their two-wheelers. People are still buying their first car, people are still taking their first flight. You know the consumption levels are so low, that sort of keeps a natural buoyancy going for this economy and also the fact that the politicians are doing just about enough, tinkering just about enough to make sure we have this sort of ample productivity and reform to keep this going.

Vir: Much is made of the fact that we are growing faster than China apparently. So it's slightly confusing if you don't realize what a small base we are talking about compared to China. Can you explain that?

 Ruchir: Yes. I think this is a very basic economic theory that India's per capita level which is what an average person earns is about 2000 dollars. China's is close to about 9000 dollars, right, so nearly five times as far as India is concerned. So, from a higher base, by definition, you will grow more slowly. Particularly if you are a large economy. China's per capita income was similar to India's. China was growing at 10%. I think that is the important point. We may be the fastest emerging economy in world but that's nothing to be short change of. I don't want to say that but these comparisons with China. The only people who do these comparisons are Indians themselves.

Vir: Indian politicians on the whole.

Ruchir: Yeah. The Chinese don't see themselves that way. Everyone likes to look up. So the Chinese are concerned they are very focused on the US. The entire obsession in China is very different. Their obsession is when they are going to take over from the US as the world's largest economy. That's the game that they are playing. Whereas for us I guess, the fact is that our base is much lower and we are quite happy that we are the world's fastest growing economy.That's because China is naturally slowing down as it reaches a much higher per capita income level.

Vir: Which is part of the normal process of growth. So you said that the Indian economy is stable, trajectory is nearly always upward. What we wanted to know is where are we exactly now? Are we really in the middle of a boom as we're told by some people or are we, as politicians tell us, in some kind of slump or neither?

 Ruchir: Exactly. I don't think any politician can rightfully claim that we are in a boom. The true boom that we saw in India was between 2003 and 2007 which was last decade. That was the time when the global economy was booming and our exports were growing at 30% a year, now that is a boom like condition. If you compare the metrics today in terms of what the growth rates are, compared to what we saw last decade, the growth rates are lower across the world. Just the basic stuff, whether it's the consumption of your goods or cement or construction or real estate, every single thing today is lower, the magnitude is the only thing by which it differs, by how much lower, like construction, real estate are really in the dumps. Consumption is still doing okay but nowhere near the gangbuster rate at which we grew last decade. That was the true boom. What we have now basically is a sort of steady incremental story. What the growth rate is, I don't know. Ever since they changed the GDP methodology, I don't have the idea of what the underlying growth rate is. But, you look at the companies you look at what they're reporting, the top line of companies, it seems to me that a 6 or 7% economy growth rate is possibly close to what we have and that is steady pace I expect this economy to maintain regardless of what happens in politics or reforms because those things never really impact economic growth in a very decisive way particularly in a short period of time.

 Vir : There is a suggestion that while what you say is true that business doesn't appear to have the confidence required to make huge investments. So there isn't that much re-investment, there isn't that much capital formation. Is that fair?

Ruchir : I think that's fair, but a lot of this also comes from the fact that global economy isn't sort of booming the way it was. Yes, it improved a lot and also because we are still sort of trying to clean up the mess of the last few years where we had a big bad debt problem. An issue where the banks sort of acquired a lot of bad debt. I think a lot of small and medium size enterprises aren't able to access funding, the way they were able to do. One, they don't have the money or the low rates of interest at which they can make these investments and that does hurt confidence. I think that's true and something that no business man will tell you publicly. They keep saying that things are really good but in private conversations they'll tell you that yet they will still remain engaged with India in some way or the other.

Vir :If you look at the Vijay Mallya case, the Nirav Modi case, the MehulChoksi case all of which has been in the headline all these months. What do you think are these symptoms of?

Ruchir : I think these are symptoms of two things. One is obviously this is of crony capitalism. I think that's the existing case. The second thing is that there is a nexus which the public sector banks, as to how easy it is to form a nexus with them that you can end up doing something like this. So I think that is the real issue as far as these problems are concerned. At this point, I am concerned about the witch hunt that is going on.

Vir : Explain that?

Ruchir : It is politically incorrect to say this today almost. Today the mentality is that these people cheated - who have cheated the nation and looted it. Fair enough. In terms of the evidence in these cases, it does suggest that it is overwhelming. To me, the real concern is as the cliché goes. Throwing the baby out with the bathwater, which is that there are many good businessmen leaving the country because they fear that if by any chance they get entangled or targeted for some reason which may be wrong, then that could be completely debilitating for the businesses. In this regard, there is one data I keep mentioning of these days, that 23,000 millionaires have left this country since 2014. To put that number in perspective, that the only country which I think has seen a higher exodus has been China but that's because they have many times more millionaires than we do. As a share of the total millionaires in the country, India has seen the largest exodus of any major nation over the last few years. Last year alone there were 7000 millionaires who left India. I think that tells us a lot of domestic people are leaving the country. Of course, when I say this to people, their response is yeah it's good. Some of these people were looting the nation and many of them were corrupt. The corruption had gone too long. This is the price you have to pay for cleaning the system up. It could be, but as we know, whether is it demonetization etc., that you may try to clean up the system after the collateral damage which you cause by doing these things. It's something that you must be aware of, we must be conscious today of the regulatory overkill and this overzealousness now, that once the horse has bolted we have to prove that this is never going to happen again. But as we know that with most crises and this is true of most countries not even India, you should think of what will happen next rather than trying to solve problems.

Vir : Problems that occurred five years ago..

 Ruchir : Exactly.

Vir : I am going to stop you there because one of the things business people will tell you off the record when there are no cameras on is that while there may not be big-ticket political corruption of the kind we saw in the past, what you now see is a kind of inspector Raj, where officers, feeling that they have a public opinion on their side come and shake you down, squeeze you. They say they have never been so terrified of enquiries, threats of investigation, when they are just doing legitimate business.

Ruchir : Yeah they say the same things, I mean at times when what's happening is a part of the judiciary etc. There is a lot of judicial activism and they sort of say that. I find it really scary that in this country and again this is a lot of popular support, you know but if you're caught in some media case which is in the highlights then you can be thrown behind bars without getting bail. I think that's for a long period of time at least. That is something that you don't accept of most democracies.

Ruchir: And this is the reason partly explains why so many people who have the means to do it are leaving the country. I would personally like more of those people to stay in the country, and invest more in the country rather than running into them in like Auckland or Dubai.

Vir: You said that earlier, perhaps socialism runs in our DNA, we have seen election of the current government and it was elected, we thought, with a reformist zeal that things would change. Yet many of these policies this government is following now would not have been out of place at Indira Gandhi's time. Is it a positive proof that socialism cuts across everything?

Ruchir: Yeah, I would say there are parts of it they will tell you there are opposite about what they have done which is very different in terms of getting foreign investment in all fairness that has been more successful in terms of the FDI's number compared to what we see there. So, the whole line that history never repeats itself rhymes, it's a unique brand of state capitalism that we are seeing right here. It is capitalism but it is very much but the belief that the state is very powerful and the state must be very powerful. I think, it's that combination which is currently at work in India.

Vir: We heard a lot about agrarian distress, you have been hearing a lot about farmers' marches in India. There is a sense in which people believe that the fruits of economic growth have been unevenly distributed and that the farmers have got a bad deal. Do you accept that?

Ruchir: I think, there is a reason why our agriculture growth rate should not be higher, because when China was moving its people in a massive way, away from agriculture into the urban areas, they were still able to have an agriculture growth rate of four percent or so. There are two points here, one, that the share of agriculture in the economy is bound to decline. The issue is, how well you manage the transition and what is the basic growth in agriculture you should get. I do feel that the growth rates are quiet disappointing on the agricultural front. Even though they have been okay with a last couple of years' decent monsoon and this is where the entire issue comes up about these farm loan waivers and stuff like that. Then you really speak to people about that and then they almost feel that the farmers do need some relief. The argument gets lost in so much of populous we currently are in. When you see that all these banks have sort of been robbed of tens of thousands of crores then why not just give them farm loan waiver?

 Vir: It's a powerful argument.

 Ruchir: It's a powerful argument but it's a loose-loose for economy because it's not as if the other, you're comparing it to an alternative which is not great for the economy, but I think that there is a general feeling in the rural areas. Having said that, my latest sort of research does suggest that we are seeing some easing of the hardship on the farms. There are much more spending going on in the rural front and also because the monsoons have been good. That sort of help things.

 Vir: Many people who are watching this programme aren't farmers, they are middle class people. The questions that I want answers from you are, is real estate going to survive?

 Ruchir: Real estate cycles take a long time to play themselves out. I think that is the entire point. I think that real estate cycle is turning in this country. The mistake a developers make in this country especially in the big cities is that, they make a lot of vanity and marquee projects. They want to build these palatial 3,000-4,000 feet homes and just focus on that and put hundreds of crores behind that. But you know if you look at what is happening is likely in places like Bombay, I was there recently and there you see areas like Dombey Ville, and there is sort of the prices are really cheap and the demand for those homes is incredible. So, there is a latent demand for house ownership in this country. The mistake that the developers made apart from taking too much debt and getting the cycle wrong is that they focused on all these marquee projects. Where a real demand in India is whether it is FMCG, whether it is got to do with this is at the smaller ticket level. I think, that's the reorientation that we are seeing now.

 Vir: but it will take time to happen.

 Ruchir: Yeah, but it's happening. So, for the smaller ticket size, so like in terms of you know, buying in these outside areas and buying them sort of cheap. I think, that's the kind of development we need in India. And the private sector developers are.

 VIr: ...are finally getting it?

 Ruchir: yeah. They are shifting their focus so badly, playing this vanity game of building these palatial homes and there are so few Indians to fill them.

Vir: What about the stock market? If a middle class person watching this programme want to put his savings in the market. Is that a good idea or a bad idea?

Ruchir: The big trend that we are seeing in India sounds a bit technical is the "financialisation".

Vir: It is technical.

Ruchir: Yeah. So, a lot of people in India were, historically, used to only investing in property and gold. What we are seeing off late is that now they are much more interested in investing in financial assets like stocks and bonds. That's really what's happening in India. I think, that trend is here to stay. I do feel that compared to property and gold, much more exposure in stocks and bonds is in trend and is a way to go as far as India is concerned. Now, you have to be very careful about it, and I do feel, that for this we need a very long term horizon and you're better off putting it into mutual funds instead of doing a lot of direct trading in these kinds of things. But these are long term trends. In the next twelve to eighteen months, I am worried about the global stock markets in general. And India is very much integrated with the global stock market. And the reason for my worry of global stock market is that, we have had this extraordinary period of zero interest rates, very low interest rates, and that's coming to an end. Whenever that happens, the price of money gets more expensive. The stock market always react negatively to it overtime. It's not instantaneous but it reacts. So, I think the short answer to your question is that, I think that stocks and bonds is a way to go. As long as you have a five-year view, but over the next twelve months you better be cautious because the global markets are looking a bit more edgy now. Given the fact this extraordinary period of easy money is coming to an end.

Vir: And in terms of the long term future, as I understand your view is that politician will come and go but the Indian economy will grow despite them?

Ruchir: Yeah. I think, in terms of 8% of economic growth or get into that kind of economic reform I don't think that's on the cards or the agenda. I don't expect especially given how the global economy is also doing. But yeah, I feel that the impact of politics on markets and the Indian economy is way overstated. There is absolutely no relationship that I can find between stable governance in India vs stock market performance or economic performance. So, this a very common perception, but it's wrong. As you know it, that we have had periods like the late 1990s when you had the ultimate coalition government and yet most of the people think that one of the best budgets India ever produced in 1997. Similarly, we had the periods like the 1999, we had the big tech boom and so much political volatility and the government falling by one vote etc. and had no impact. As I said, the same sort of people who root for political stability were saying the same thing when UPA 2 came in power. The moment they back to power in 2009, the stock market nearly shut for a day because the people were so excited. The stock market went up and look what happened in subsequent five years. It was sort of disappointing in terms of the second term. So, that's my entire point. The impact of these things is overstated because the reforms that any government carries out tends to be incremental, they tend to be front loaded that can be done, is done by the first government in the first couple of years. And also the other trend in India, which is that, it may have stopped a bit in a couple of few years but there is increased federalism. That the power the states have to do stuff is increasing and what the Centre can do is getting more and more limited and it seems to be that if you move back in the era of coalition politics, that trend is only going to get stronger.

Vir: and that's a good thing.

Ruchir: I think, that's a good thing, if it ends up bringing more competitive federalism.

Vir: so you have turned, which is the conventional wisdom, on its head. The conventional wisdom is you need a very strong Centre, coalition are terrible things and unless you have a strong central government the economy will not grow. You are saying there is a very little correlation between the Centre and the economy in any way. And coalition may in fact increase the new trend towards federalism, which is not a bad thing.

Ruchir: Exactly, that's the upsides which may happen. Of course, there will be downsides which will happen, people will talk about increased corruption and about guarding their own xxx (19:30:00) term. But I think, India's natural social fabric. The story about India is - there are many things, the states are so distinct, the habits are so distinct and this also where I think that the political party finds it quiet limiting. The BJPs appeal in the Hindi heart line is a negative in the South, with a lot of anti-Hindi sentiments, and I think it changes state by state. Which I find very fascinating which goes back to the point about politics is that in India, not one single regional leader has been able to have an impact outside his/her state boundary unless it's a national party.That’s different, but they have all tried from Sharad Pawar to Mayawat, they have zero impact the moment their state border comes to an end. This is the real story of India is, that this is a very heterogeneous country, It's a country of many Indians and that's the natural social fabric of this place - to me that the real optimism as far as India is concerned. It's about the fact that the state is where the action is those states need to get more embolden whether the labour laws of their own have their own special economic zones, and the more freedom the Centre gives them to do that, the better I think it will be for India.