De-globalization or re-globalization - 2

Continuing from yesterday.

The case of India

India is a textbook example of this new world order:

It plays an active role in BRICS, a group of emerging economies focused on economic cooperation, development financing (e.g., the New Development Bank), and alternative institutions outside Western dominance.

At the same time, India engages deeply with the Quadrilateral Security Dialogue (Quad) — alongside the U.S., Japan, and Australia — to boost security, technology, and trade cooperation in the Indo-Pacific.

Rather than choosing one camp, India’s multi-alignment strategy shows how countries can navigate a complex world by partnering on specific issues with different sets of nations.

Global balancing acts

In much of the world, states are balancing: Economic cooperation that boosts trade and investment, Strategic cooperation for security, and national autonomy to protect key interests.

This creates overlapping spheres of influence — regional trade deals, bilateral agreements, and selective multilateralism — that together make up the new global order.

Investment implications of the reconfigured world

The new global structure has important implications for investors. As globalization evolves, so will markets, capital flows, and risk profiles.

Supply chain realignment creates new opportunities

With firms diversifying away from single-country production, regional supply chains will grow. Investors should look for opportunities in countries benefiting from this shift — especially in ASEAN, India, and parts of Africa and Latin America where production is expanding.

Higher costs and risk due to fragmentation

Protectionist policies and tariffs can lead to higher input costs, supply chain disruptions, and volatility in profit margins. Investors should factor in geopolitical risks and trade policy uncertainty when valuing companies with international exposure.

Growth of regional trade blocs

As countries form regional trade arrangements, investment opportunities linked to intra-regional commerce will rise. Funds flowing within a bloc (like ASEAN, EU, or BRICS) may see faster economic integration and growth.

Strategic sectors in focus

Governments will prioritize sectors seen as critical — such as technology, defense, energy, and critical minerals — for national and regional security. These sectors may enjoy higher investment priority and support.

 

Currency and capital flow dynamics

Fragmented globalization can influence currency markets and capital flows. Some nations may push for alternative financial systems or reserve currencies (e.g., BRICS de-dollarization talk), affecting global finance and investment returns.

Risk management and diversification

Investors must adapt portfolios to:

hedge geopolitical risks,

diversify across regions and asset classes,

and capture pockets of growth rising from new blocs and partnerships.

In sum: rather than betting on a return to isolation, smart investors will adapt to a multipolar, multi-trade-bloc world where localized integration coexists with still meaningful global interdependence.

Conclusion: Globalization evolving — not ending

The debate isn’t simply about whether globalization survives. Instead, we’re witnessing its transformation — from a world connected by broad, uniform rules to a more segmented, regionally focused, and politically nuanced global order. Trade and capital still flow, but through multiple lanes rather than a single global highway.

This world of overlapping alliances and trade networks — multilayered globalization — offers both risks and opportunities. For investors, the challenge and opportunity lie in anticipating shifts in supply chains, geopolitics, and regional ties.

Rather than fearing isolationism, savvy players will embrace the complexity of this evolving global landscape.

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View from the Mars

View from the Mars 2

De-globalization or re-globalization

For decades after World War II — and especially after the Cold War — globalization was the defining trend shaping the global economy. Markets, capital, people, technology, and ideas flowed across borders with increasing speed and volume. China’s entry into the WTO in 2001 was one of the most dramatic accelerators of global economic integration, lifting millions out of poverty and making global supply chains deeply interconnected. However, the 2008 global financial crisis marked a turning point, slowing trade growth and exposing vulnerabilities in the global system.

In the years since, the globalization story has become more contested. Events like Brexit and renewed trade tensions, especially large-scale tariffs by the United States, have fueled talk of deglobalization — a retreat from deep integration toward national self-interest. But the reality on the ground is more nuanced: rather than a simple return to isolationism, we may be entering a multilayered world of competing regional arrangements and overlapping alliances.

Challenges to globalization

Globalization today is under pressure from several important forces:

Trade fragmentation and protectionism

Rising tariff barriers and nationalist trade policies, particularly in major economies like the United States, are fragmenting trade networks. These policies aim to protect domestic industries but raise costs and disrupt long global supply chains, leading firms to regionalize production instead of relying on wide-spread global integration.

Slower trade and investment growth

Although global trade has rebounded in absolute terms, trade relative to GDP has declined since the global financial crisis, and foreign investment flows have become sluggish. Traditional globalization levels — measured by the volume of cross-border goods, capital, and labor — are no longer rising as fast as before.

Political backlash and inequality concerns

Growing inequality and political polarization have made many societies skeptical of globalization. People feel left behind by global markets, driving support for policies that emphasize national sovereignty and economic self-sufficiency, a trend captured in economic theory as a political trilemma facing policymakers.

Geopolitical tensions

The rise of geopolitical competition — especially between the U.S., China, and their respective allies — is reshaping trade and finance. Countries are increasingly cautious about over-dependence on rival powers, pushing diversification or substitution in critical sectors such as technology and energy.

Supply chain resilience concerns

Recent global shocks — including COVID-19 and geopolitical conflicts — revealed how too much reliance on single country supply routes can be risky. New agreements like the Supply Chain Resilience Initiative show how countries are trying to rebuild supply lines in more secure, multi-partner arrangements.

In short: globalization isn’t collapsing, but it’s being reshaped by political choices, economic nationalism, geopolitical rivalries, and supply chain reconfiguration.

Are we heading toward isolationism or multilayered globalization?

The debate often frames the question as either full deglobalization (a retreat into isolation) or continued globalization. But that binary is too simplistic.

Not isolationism — But fragmented integration

Complete isolation — where countries withdraw from global engagement — is unlikely because economic interdependence offers too many benefits. Global markets still trade, but they trade differently. Instead of one integrated world market, we are seeing:

Regional blocks — like the European Union and ASEAN — strengthening cooperation.

New groupings — like BRICS and the Quad — reflecting different priorities and partnerships.

Overlapping memberships, where countries cooperate in one group on certain issues and compete in others.

This is not traditional globalization, but multilayered globalization, where regional ties and economic blocs coexist with global markets.

…to continue tomorrow

Strategy review in light of the US tariffs - 3

 …continuing from yesterday.

In my view, assimilating the impact of a sustained Indo-US trade standoff in a personal investment strategy is an extremely complicated task, for three reasons – (i) Indo-US relations are very deep and wide; (ii) Indo-US trade relations go much beyond import and export of goods and service; (iii) Indo-US trade relations are intricately intertwined with strategic, geopolitical and social relations.

Hence, the impact of a prolonged standoff in the trade relations may not be confined merely to a couple of thousand Indian exporters, having a material exposure to US markets. In my view, a noticeable impact could be felt at economic, political, geopolitical, and financial levels.

As of this morning, we do not know about the progress in back-channel negotiations. But visibly both the sides appear to have hardened their stance. India has outrightly rejected the reasons cited by the US administration for imposing penal tariffs, viz., purchase of crude oil from Russia, as unreasonable and completely untenable. The US President has extended the tariff moratorium for China (the largest buyer of Russian oil) by another 90 days. He is attending a meeting with the Russian president tomorrow. In my view, this is indicative of a different design behind these tariffs, rather than the stated one (also read Tariff Tantrums).

I hope that a sense will prevail and the Indo-US relations get normalized soon. Would be even better if this normalization of relations is part of a larger global resolution, in which the US and other major trade partners like China, Russia, Japan, and EU also come to a sustainable agreement. This could usher a new phase of global economic growth, in which India could be a meaningful partner.

However, if parochialism, hyper nationalism and/or vested business interests override the spirit of cooperation and globalization, and a broad-based resolution is denied, India faces economic and geopolitical challenges that would require material policy changes, including foreign, trade, fiscal and monetary policies.

If I were to imagine a worst-case scenario in Indo-US relations, I would draw a picture using the following colors and shapes.

·         The US maintains penal tariffs, or even increases it further. The US businesses find it unviable to import from the Indian vendors. For generic goods and commodities, they shift to alternative sources (partially or fully) in the next 6-9 months. For specialized goods like specialty chemicals, auto components, pharmaceuticals, polished precious stone and jewelry, etc. the US importers may adopt a India+1 strategy. They may focus on developing alternative suppliers over the next 1-2 years and shift a part of their sourcing to such alternative vendors.

·         The US administration brings services and remittances also within the ambit of tariff/taxation. More non-tariff restrictions are (VISA, qualifications, numbers, minimum pay etc.) also imposed on Indian workers and students. This might force more Indian companies to establish onshore entities in the US and increase local hiring. Alternatively, some Indian companies may choose to establish entities in the foreign jurisdictions with favorable terms of trade with the US.

·         The US may restrict technology transfer to India by the US entities, hampering the growth of the manufacturing sector and R&D initiatives.

·         The US may increase strategic engagement with the neighbors of India, especially the hostile neighbors like Pakistan and Bangladesh, to put geopolitical pressures and keep the borders insecure.

·         The US may also incentivize/pressurize its close allies to review their relationships with India.

·         The US administration may sanction certain Indian entities on the pretext of criminal activities, supporting war, unethical business practices etc., particularly impacting their global business and financing deals.

·         The global economy also suffers, as the Political instability and unpredictable economic policies in the U.S., erodes confidence in the US economy and financial system. The foreign capital begins to move out of the US, causing sharp volatility and decline in the US asset prices, pressing the USD lower and bond yields higher, and a potential stagflationary condition.

·         Several Indian MSME's face severe financial stress as they lose their US business. Some of them fail to survive as they are unable to develop alternative markets in time. Many downsize their operations. Several medium and large businesses establish overseas entities with a local employee base. Unemployment rises. There is some incremental stress on the financial system. Consumption suffers. Realty demand falls. Government faces fiscal pressures as growth declines and the deflationary trend strengthens.

If I close my eyes and visualize this picture, it frightens me to the core. If I try to assimilate even a part of this to my investment strategy, I would end up holding almost zero risk asset (equity). I would therefore refrain from any such exercise.  

If you ask me “whether this worst-case scenario is possible?”, I would say “yes”. If you ask me what is the probability of this occurring, I would say “very low” but not “zero”.

I would like to believe that a broader global trade agreement may happen in the next 3-5 months, and Indo-US trade relations normalized to pre 2025 level, at least. In the meantime, I would, however, rationalize my portfolio to reduce the weightage of smallcap companies having over 20% revenue exposure to the US. In the mid and large cap space, I would only review the companies with over 20% revenue exposure to the US, provided they have significant debt on their books and are trading at a premium valuation (more than 20% premium to their long-term average valuation).

 

Also read

Strategy review in light of the US tariffs

Strategy review in light of the US tariffs - 2

Tariff Tantrums

New chapter in Indo-US relations

Speculating Trump’s second term

Ambivalent

Strategy review in light of the US tariffs

The US administration has announced imposition of 50% additional tariffs (25% reciprocal and 25% penal), over and above the regular/MFN tariffs that were already in place, on merchandise imports from India. Certain items, like pharmaceuticals, that are part of separate trade negotiations, and services are presently not part of the new tariff rates and continue to be charged at the extant rates.

This level of tariff is indubitably concerning, as it makes numerous Indian MSME businesses, especially those exporting textile, leather goods, small components, jewelry, carpets etc., incompetitive; and in many cases poses an existential threat to the exporting entities. For several MSME the US market contributes a substantial part of their revenue; and these entities were enjoying some advantage over competitors due to lower MFN tariffs. They not only lose this advantage, but become materially incompetitive due to these tariffs.

These reciprocal and penal tariffs, in my view, tantamount to covert economic sanctions on India by the US. The reason cited for the penal tariffs is continued import of crude oil by Indian oil companies from Russia. The Indian government has clearly communicated to the US administration that this reason is not valid, as several other countries, including the EU, which also import crude from Russia are not subject to penal tariffs.

The situation is still evolving as the trade negotiations with the US are still under way, and these high tariffs are not permanent as of now. Nonetheless, the probability of these tariffs staying for a longer term is not zero. It is therefore important for everyone, including businesses, policymakers, and investors, to script a worse-case scenario for themselves and test their preparedness for such a scenario.

Notably, the present tariff action of the US administration is neither a surprise nor an isolated act of aggression against India. In the past 7-8 years there has been a pattern in the evolution of Indo-US relationships. Particularly since 2018, the US administration has been actively looking to base the mutual relationship on equality. President Trump seeking to rebase the relationship seeking full reciprocity from India on key economic, trade and technology issues is just a continuation of the evolving pattern. (Read more on this New chapter in Indo-US relations).

It is also pertinent to note that since 2018, the US has withdrawn the benefits under Generalized System of Preferences (GSP); materially tightened scrutiny on Indian IT and pharma compliance; persistently stalled progress on a bilateral trade deal; virtually downgraded the diplomatic status through exceptional delay in appointing an Ambassador to India (Indian mission of the US headed by an interim Chargé d'affaires during January 2021-March 2023 and January 2025 till present day; see details) and causing inordinate delays in grant of VISA appointments to Indians; disgracefully deported illegal Indian immigrants. These are some of the pointers towards the evolving pattern of Indo-US relations since 2018. The tariff spike is simply an extension of this pattern.

Some entrepreneurs, politicians, investors and thought leaders have called for a 1991 (balance of payment crisis) and 1998 like (economic sanctions post nuclear test) response to the situation. They have suggested that the government should use this opportunity to initiate some major reforms, like 1991 and 1998, to further strengthen the resilience of the Indian economy. Many of them see the current situation equivalent to economic sanction (through trade route) and suggest an appropriate response accordingly.

In my view, the Indian economy urgently needs several major reforms, regardless of the outcome of the present trade conflict with the US. The current situation does provide a catalyst and a valid excuse to implement these reforms that may cause some short-term pain to various stakeholders.

In the next few posts, I shall discuss my thoughts on the areas that need urgent reforms and changes, if any, required in the investment strategy in light of the latest US tariffs. Before that it is important to take note of the 1998 crisis, and how the situation in 2025 may be different.

Operation Shakti triggered global sanctions on India

India had maintained a policy of nuclear ambiguity since its first nuclear test in 1974 (Smiling Buddha). Over the years, global non-proliferation efforts intensified, particularly after the Cold War. On May 11 and 13, 1998, India conducted five underground nuclear tests in Pokhran, Rajasthan, codenamed Operation Shakti.

Operation Shakti, triggered a wave of economic sanctions from the US, Japan, Canada, the EU, and international financial institutions like World Bank, IMF and ADB. Notably, Russia, France, and Israel did not participate in sanctions. China issued strong condemnation but refrained from economic penalties.

Under the sanction, most of the non-humanitarian financial aid was suspended. Export of military and dual use technology to India was banned. All defense cooperation and technology transfer treaties were suspended. A freeze was put on loan guarantees and financial assistance. Lending to India by the World Bank, IMF, and ADB temporarily halted/slowed.

The extant government decided to take the global pressure head-on. It steadfastly refused to sign the Comprehensive Test Ban Treaty (CTBT) under pressure. The government also launched an aggressive diplomatic campaign to explain its position, emphasizing strategic necessity and national security concerns. Most importantly, the government unleashed several structural reforms to strengthen the domestic economy. Notably, the government divested its monopoly over core sectors like coal, power, telecom, oil & gas, civil aviation, etc. An ambitious national highway development plan (NHDP) was launched. Several fiscal incentives were provided to promote exports. A special economic zone (SEZ) policy was implemented. Several tax and other concessions were offered to the ITeS sector.

Consequently, the impact of the sanction remained contained. Reforms attracted material private capital flows from global investors. Turbulence in the market was short lived, and within a year the market scaled new highs. Sensex rose from ~3,300 in Jan 1999 to ~5,100 by March 2000, a jump of 50% in 15months.

Overall, the impact of sanctions was marginal.

The sanctions were lifted within two years as India materially helped the world in managing the Y2K crisis; unilaterally announced a “no first use” nuclear doctrine.

Situation in 2025 is different from 1998

The present situation is however materially different from the 1998 situation. First, the present trade action is limited to the US, unlike 1998 when a number of trade partners had imposed restrictions. Second, the Indian economy is now much stronger and materially more integrated into the global economy as compared to 1998. The impact of trade restrictions on the local economy, therefore, could be materially higher. Third, the political situation in India is much more stable now as compared to 1998, when the coalition was more fragile. Fourth, India has strengthened its global strategic position significantly in the past 27years. With several multilateral alliances (G-20, BRICS, QUAD etc.) and bilateral treaties, India has much stronger support from its global partners as compared to 1998.

 

Also read

New chapter in Indo-US relations

Speculating Trump’s second term

Ambivalent

…to continue tomorrow

Leave it for politicians

The two-decade period between 1988-2008 saw the most remarkable progress in the sphere of international relations and collaborations. The technological developments made global trade faster and cheaper, aiding global businesses to collaborate with distant partners to optimally exploit their core competencies to materially enhance productivity. End of the Cold War and fall of the Berlin Wall led to nearly full integration of global economies and unprecedented growth in global trade.

The global financial crisis (2008-09) however paused the trend. The global trade and technological partners forces began to grow increasingly uncomfortable with technological, trade and political collaborations. Emerging global forces like China & India erstwhile global political powers like Russia, the UK, and Japan etc. found the terms of engagement unfavorable and started to focus on developing regional alliances. Breaking of global supply chains due to outbreak of Covid-19 pandemic provided further impetus to the trend of shift in global linkages.

The present global situation is that the two largest economies, viz., the US and China are looking to redefine their global linkages. The US is looking to revert to its pre-WW1 policy of isolationism while China is expanding its global linkages, particularly in the global south and Eurasia.

In the pursuit of gaining global leadership, China is leaving everyone behind. The stories of gigantic infrastructure projects, like the 3000 square kilometer solar wall in the inner Mongolia region and the US$62bn South-North river linking project undertaken by China are part of economic folklore now. The efforts made to secure deeper and wider global linkages are also worth noting. For example, consider the following examples—

·         China’s Belt and Road Initiative has 155 countries signed up, representing 75 per cent of the globe’s populations and more than 50 per cent of its GDP, stretching from East Asia to the EU.

·         China is the top trading partner for 120 countries. Overcoming the post WWII idea that global relations cannot be neatly divided between democratic and authoritarian states, China has emerged as the largest trading partner for the US and for the EU. China also trades more with the Global South than the US, Japan and the EU combined. China’s annualized exports to the Global South have more than doubled from US$662bn or 29% of total exports in 2017 to a record US$1.3trn or 37% of total exports in the 12 months to October 2024.

·         Reportedly, China's diplomatic training institutions - particularly China Foreign Affairs University and Beijing Foreign Studies University - rank among the nation's most elite schools. These institutions have extraordinarily stringent language requirements, with BFSU teaching all "the official languages of the 183 countries that have established diplomatic relations with China" (including such niche languages as Sango, Tok Pisin, Niuean or Tetum.

·         In 2015, the Chinese government announced the ‘Made in China 2025’ (MIC 25) initiative, with the goal of upgrading its manufacturing industry, reducing its reliance on foreign technology, and raising the domestic content of core components and materials to 70% by 2025. Despite a backlash from the US, Europe and other countries in 2018, China persisted with the plan.

As part of MIC-25, China provided substantial policy support. Meaningful tax concessions were allowed to the High-tech companies. Mergers and acquisitions of foreign technology companies were incentivized. Direct state funding of billions of dollars was provided for the R & D function of large manufacturing enterprises. A clear roadmap stating specific targets for factors such as R&D spending share, productivity, digitization and environmental protection, was set.

Reportedly, "Made in China 2025" initiative has largely succeeded, with China achieving a leadership position in five out of 13 key technologies, which includes high speeds rail, graphene, unmanned aerial vehicles, solar panels, and electric vehicles and lithium batteries, as well as rapid progress in seven others.

·         To gain stronger global linkages, China has been using its USD reserves (gained over the years through large trade surplus with the US) to buy USD debt of many underdeveloped and developing countries; thus, gaining access to their markets and natural resources. China has started to give all the least developed countries (LDCs) with which it has diplomatic relations (including 53 African countries) zero-tariff treatment for all products within the tariff quota from 1 December. Over 26% of China’s external trade is now renminbi settled.

For a better understanding of the progress made by China in securing global linkages and developing technical, economic and strategic strength, it might be pertinent to take note of the progress of India in this context.

Ever since independence from colonial rule, India has been a prominent player in international relations. Before the global financial crisis (GFC), India had been a founder/initial member of important international collaboration frameworks like Non-Alignment Movement (NAM-1961), South Asian Association for Regional Cooperation (SAARC-1985), World Trade Organization (WTO-1995) Group of Twenty (G20-1999), Quadrilateral Dialogue on Security (QUAD-2007), BRICS (2009). After 2009 India has just joined Shanghai Cooperation Organization (SCO-2001) in 2017. Many of India’s traditional allies, including Russia, are now seen more closer to China.

Like MIC-25 in China, the government of India also launched a mission titled Make in India (MII) in 2015. The objectives of the mission were (1) to increase the manufacturing sector's growth rate to 12-14% per annum; (2) to create 100 million additional manufacturing jobs in the economy by 2022; and (3) to ensure that the manufacturing sector's contribution to GDP is increased to 25% by 2022 (later revised to 2025).

The achievements of the mission have fallen well short of the goals. The manufacturing output growth during 2015-2023 has been less than 5% CAGR; only 8 million jobs have been added in the manufacturing sector; merchandise export has risen just at a 3.8% CAGR; and share of manufacturing in GDP is stagnant at 16-17%. Most of the new ~US$13bn investment under the Production Linked Incentive (PLI) Scheme, which has been the main stay of MII mission, so far has been in low value add electronic assembly units, IT Hardware and bulk drugs etc.

I am definitely not trying to undermine the economic and strategic progress made by India in the past couple of decades. I believe that in absolute terms we have performed quite decently; especially given our socio-political structure and legacy problems. The idea is just to highlight the impertinence of the India vs China debate for investors. I would leave this mostly rhetorical debate to politicians.

Laying BRICS for the future

Early this year BRICS, a bloc of leading emerging economies, announced the induction of five new members, viz., Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates, to its fold. The ten-member bloc has a significant presence in global trade. More specifically, it exercises significant control over the global energy markets, controlling 42% of global oil production and 35% of total oil consumption.

In July 2023, the then President of BRICS, South Africa claimed that over 50 emerging nations have expressed their desire to join the group. Recently, Russia’s Federation Council Committee on International Affairs, stated that BRICS would be expanded further as more than 40 countries are desirous of joining the group.

The cooperation between BRICS members is free, and flexible and extends to a variety of subjects of common interest amongst members. The members and other countries desirous of joining the group, view BRICS as an alternative to global bodies viewed as dominated by the traditional Western powers and hope membership will unlock benefits including development finance, and increased trade and investment.

Defining the vision of BRICS, President Putin said, “BRICS is attracting an ever increasing number of supporters and like-minded countries that share its underlying principles such as sovereign equality, openness, consensus, aspiration to form a multi-polar international order and a fair global financial and trading system.

The expansion and strengthening of BRICS could, therefore, be interpreted from different perspectives. From the geopolitical perspective, it could be seen as a vote of no-confidence in the extant global order, dominated by Western developed countries (especially the US), by the emerging economies. A larger BRICS could undermine the dominance of NATO, the UN, and even the IMF.

From India’s perspective, it could act as a strong resistance to any material escalation between India and China. We have already seen the traditional rivals Iran and Saudi Arabia bridging the differences and coming together on the Palestine issue. We have also witnessed ineffectiveness of the NATO sanctions against Russia over the Ukraine invasion issue. BRICS and other developing countries have increased their trade with Russia materially in the past couple of years, as reflected in a larger current account surplus for Russia.

From an economic perspective, a larger and stronger BRICS could play a significant role in determining the terms of global trade. Its present and prospective members would control a significant proportion of the global human, mineral, and manufacturing resources. Besides, helping in securing better terms of trade, ensuring energy security is seen as another key advantage of a stronger and larger BRICS.

From a financial perspective, post global financial crisis, a large number of developing countries have reported a slowdown in financial aid from developing countries. The conditions appear to have deteriorated further post the Covid-19 pandemic. A deeper and wider cooperation between the enlarged BRICS grouping, the humanitarian aid to the developing nations could be restored.

From a monetary perspective, there is an intense debate about limiting the role of USD in global trade. A BRICS agreement on adopting a common independent currency or increasing the bilateral trade in local currencies could help in achieving this objective. There is strong evidence of a material rise in yen trade between Saudi Arabia-China and Russia and China. India has also made some advances in promoting INR trade with traditional trade partners like UAE and Russia. We might see more developments on this front in the next couple of decades.

These may be the early days to term BRICS as a foundation for change in the post-USSR unipolar global order to a multipolar world order that shall facilitate much-delayed reforms in the global institutions like the UN and IMF etc. Nonetheless, the developments are encouraging and offer hope.

Not bothering about prophecies, for now

I vividly remember it was the winter of 2007. The global markets were in a state of total disarray. The subprime crisis was unfolding in the developed world.

In the US, the financial system was on the verge of collapse. Several banks, insurers, and other financial institutions were reporting massive write-downs on their subprime Collateralized Borrowing and Lending Obligations (CBLO). The cost of protecting debt (Credit Default Swaps) was rising sharply. The US administration and Federal Reserve were mostly in denial, at least in their public posturing; even though the Fed had started to cut the benchmark fund rates from September 2007.

Signs of a sovereign debt crisis had started emerging in peripheral Europe. In countries like Portugal, Iceland, Greece, and Spain (popularly called PIGS) treasury default swaps had spiked to indicate imminent default.

The financial markets in the developed world had started correcting sharply. Both equity and bond prices had fallen. The emerging markets were however doing relatively better. The investment strategists at the large global banks were coining terms like BRIC (Brazil, Russia, India, China) and Frontier Markets (including Pakistan, Bangladesh, Bahrain, etc.) to distract investors from the crisis in the developed markets and peripheral Europe. Many of these markets like India and Pakistan had become the best-performing global markets in the October 2007-January 2008 period. Bangladesh and Sri Lanka had also done extremely well.

Despite the financial system in the developed markets collapsing and talks of bail-out gaining currency, a section of the market started forecasting hyperinflation, matched only by the inflation preceding the great depression in the 1930s. The resource-rich Latin America was becoming the hot investment theme. Numerous Latin America and Natural Resource funds were launched to collect billions of dollars in fresh investment worldwide.

This was the time when a renowned commodity guru, Jim Roger forecasted an unprecedented commodity super-cycle. I had an opportunity to meet him in person in the spring of 2008 when he was speaking at the prelaunch event of the Natural Resource Fund by an Indian fund house in Mumbai. In a brief 15-minute interaction, I found his knowledge of economics, global finance, and strategic affairs quite ordinary. He appeared to be a smart trader who would sense opportunity in commodities markets and rotate his positions swiftly.

Nevertheless, all the assumptions of global experts and gurus were demolished in the next 12 months. BRIC and Frontier markets performed the worst. Commodity markets went into a long (almost a decade) bearish phase. Investors who relied on these experts lost money, despite the financial stability returning to most troubled countries. Smarter investors who ignored these experts and invested in Greek and Italian bonds at 60c to a dollar raked in the mullah.

I find that the global markets are in the same position as they were in 2007-2008. Experts in their wisdom are making a variety of forecasts.

For example, numerous experts are forecasting the trajectory of Fed rates in 2024 and 2025; even though there is no empirical evidence of any correlation between Fed decisions and experts’ forecasts.

One renowned global strategist has reportedly forecasted a 25% correction in Indian equities if the incumbent regime loses power in the 2024 general elections. Disregarding the fact that there is no empirical evidence of any correlation between political regime and stock market performance in India.

Similarly, there are forecasts of Bitcoin topping US$1,00,000/per coin; gold outperforming financial assets; and Japanese equities doing better than Europe and the US.

There is an intense debate over the US economy skirting (no recession), slithering (soft landing) or collapsing (hard landing) into a recession. The debate on the end game for mountains of debt developed markets have accumulated over the past 15 years, more particularly in the past three years is also intense.

For a tiny investor like me, the situation is very tough. After reading zillions of pages of research, I discovered almost no one (analysts, economists, strategists, government officials, central bankers, et. al.) has any clue about how the situation is evolving. Everyone seems to be arguing from their biases and experiences; and praying to god that their prophesies come true so that they can tell the world “I told ya so”.

The Fed chairman is no exception to this. As you would hear from him tonight, he has literally no control over prices, growth, geopolitical situation, and markets. Regardless, there is an entire industry that will try to establish a correlation between what the Fed says and what happens in the market thereafter.

I have therefore decided to read research reports only for some useful data points and indications towards future trends. I shall avoid the forecasts, conclusions and recommendations, till I find strong evidence of clarity emerging.

Struggle to find a balance - 2

Continuing from yesterday (Struggle to find a balance).

From the developments, events, and engagements in the past two decades, it is evident that India has been making credible efforts to sustain an affirmative engagement with the global community. These efforts include opening the Indian economy to the global business community; actively participating in global alliances and forums; developing social and physical infrastructure; committing to global agreements in the areas like economic cooperation, climate change, transparency in fund flows & investments, crime prevention, terrorism, etc.

These efforts have been made at three broad levels –

(i)    At the state level through suitable changes in policy framework. This includes, inter alia, deeper strategic alliances with Western countries (civil nuclear deal, QUAD, etc.); bilateral (free) trade agreements, liberalized FDI regime; BRICS and G-20 cooperation; etc. The vaccine diplomacy during Covid was a significant effort in wider global outreach by the Indian state. The Indian state’s resolute refusal to align with any side in the ongoing Russia-Ukraine conflict is widely cited as a good example of its strategic efforts to stay non-aligned while protecting its interests.

(ii)   At the private enterprise level through deeper and wider engagement with global businesses. This includes deeper and wider engagement with global technology leaders and innovators; making large-scale investments in foreign countries (Corus, JLR, Novelis, to name a few); providing competitive manufacturing platforms (mobile and white goods manufacturing) to global brands; partnering with global leaders to produce/Service in India for India and world; etc.

(iii)  At the individual level through the deeper and wider engagement of Indian citizens (or persons of Indian origin) with the global community – business, governments, civil society, academia, scientific research, art, and culture. The number of students admitted to various courses in foreign universities has risen exponentially; so has the role of Indian professionals in the senior-level management of top global enterprises.

These efforts have indubitably earned wider acceptability for India’s official narrative across the global socio-political spectrum.

However, it cannot be denied that India’s internal struggle to redefine its socio-economic identity as an “ultra-nationalist free market economy with a socialist overtone” has allowed various interest groups and lobbies to challenge the credibility of India as a democratic secular system with equal opportunity and progressive outlook. These interest groups have been building a strong narrative to dissuade the global communities from further deepening their engagement with the Indian state. This narrative could have influenced global opinion to some extent, as reflected in a much slower pace of progress in trade, FDI, VISA regulations, technology transfer, nuclear cooperation, etc. I also see the recent spurt in separatist movements, like the Khalistan movement, adverse press coverage during the prime minister’s foreign visits, etc. as an extension of this trend only.

These interest groups appear to have the tacit support of the local politicians, intelligentsia, civil society members, etc. who are either opposed to the policies, methods, and style of functioning of the incumbent government; or are struggling to find a space for themselves in the scheme of things.

In this context; I find the India narrative in the recent issue of The Economist (July 15the-21st, 2023). The 78-page issue has the following 7 mentions of India. The economic mentions are all bracketed with China which has over 100 mentions in the magazine.

1.    At least ten people were killed in election day violence in West Bengal. The Indian state went to the polls to choose rural councils. Dozens of people have died in violence in the state since the election date was called a month ago.

2.    In a setback to India’s ambition to become a global hub of chipmaking, Foxconn, best known for assembling the iPhone, pulled out of a $19.5bn joint venture to develop semiconductors at a factory in Gujarat. The deal had been announced with much fanfare last year. Press reports suggested the project had been held up by the government’s dithering on state support.

3.    India’s central government is subsidizing a Micron factory in Gujarat to “assemble and test” chips, spending an amount equal to a quarter of its annual budget for higher education.

4.    India’s attempt to boost its mobile phone industry appears to have brought mainly low-value assembly work. The lesson from South Korea is that national champions must be exposed to global competition and allowed to fail. The temptation today will be to protect them, come what may.

5.    While he is gradually being welcomed back into the Arab world, Mr. Assad hopes his multifaith policy will help him end his isolation elsewhere. Yoga has helped him strengthen ties with India.

6.    Vietnam, which is hardly friendly towards China, has adopted some of its methods for controlling data. Authoritarian regimes are not the only ones to slide toward digital protectionism. India insists data must be stored locally: to give its law enforcement agencies easy access, to protect against foreign snooping, and as a way to boost investment in the tech sector.

7.    India’s “Make in India” strategy hopes to boost the industrial share of the economy to 25% of value added by 2025. In China and India industry’s share of economic output appears to be roughly where it was three decades ago, but even in these countries, it has slipped in recent years.

Despite the efforts of local officials and strong geopolitical incentives for Apple to move away from China, India has struggled to become anything other than a destination for the device’s final assembly

The oft-lauded superior productivity growth of manufacturing—versus services as well as agriculture—comes with caveats. Economists have found that financial, it, and legal services can boost productivity elsewhere, including in industry. According to the IMF, the gap between manufacturing and services productivity growth has shrunk in many countries since the turn of the millennium. In China and India, its direction has flipped, with service productivity rising faster.

The following podcast of The Strait Times, featuring Mr. Sanjay Baru, a geo-economist and commentator who was Media Adviser to Prime Minister Manmohan Singh also makes an interesting listening in this context.

‘Closet Nehru’ Modi has played Indian foreign policy well

Hold your horses tight

 The investors and other market participants in their 50s and 60s would recall that there have been at least three occasions in the past three decades when India was considered the next best thing after sliced bread.

Starting with the opening up of the economy in early 1990s, the narrative acquired a much louder echo after Roopa Purushothaman, a non-descript research analyst coined the term BRICS for a report to be published in the name of legendary Jim O’Neill (Chairman Goldman Sachs AMC) in 2001. During the global financial crisis (2008-2010) that weakened many developed economies, India and China emerged as two strongest pillars of support for the global economy, growing in high single digits despite the global crisis. Post Covid, since India has again emerged as one of the fastest growing economies, leaving even China behind, the narrative is again in vogue.

There is absolutely no doubt that the Indian economy has never been intrinsically so strong in the past four decades. The growth is not high but looks sustainable for many years. The efforts to fill infrastructure gaps that started 25yrs ago have begun to show tangible results. In the next five years, India shall have decent physical infrastructure to attract the best of the global manufacturers to produce in India.

However, in my view, the investment theses that rely on this need to be realistic and moderate. Extrapolating the Chinese experience of the 1990s and American experience post WWII, to Indian conditions may lead to disappointment.

For example, the businessmen who travelled to China in early 1990s would recall seeing industrial estates in Zhuhai, China running several kilometers in length; high speed rails etc. We are still far away from that status. Today, China has about 45,000 km of high-speed rail running at a speed of 280-310 km/hour; where we are expecting the first 200km of such trains not before 2026.

There could be little argument over the fact that India has poor productivity in terms of investment/GDP ratio. Every incremental investment of INR yields much lower GDP growth. The largest sector in terms of employment, viz., agriculture is saddled with extremely low productivity.

India’s present market cap is already above its FY23 nominal GDP. To make Indian markets an attractive investment destination on this parameter, GDP needs to grow much faster than the stock market. Assuming a 90% Market cap to GDP is attractive, a US$5trn economy by 2027 (present US$3.5trn) could result in a US$4.5trn market cap in 3yrs. This is 14% CAGR for the next 3yrs with plenty of “ifs” and “buts” thrown in between.

Some market participants love to talk about INR emerging as one of the key currencies in global trade. Given that India’s share in the merchandise global trade is less than 2% and global services it is less than 5%, this proposition does not merit any comment, not even ridicule, at this point in time. I would just like to remind these enthusiastic market participants that we are struggling to get Indian bonds included in global indices for over two decades and there is no visibility of that happening anytime soon.

It certainly feels good when the global CEOs visit India and speak highly about the potential of the Indian economy and people. However, I would not take these comments at their par value in my investment decision making. Many of these comments are made in zest or to promote vested interests, e.g., to get government subsidies under the PLI scheme etc. For example, I feel that Apple is manufacturing locally to save on hefty duties on imports of SKD and fully assembled phones, which makes Apple phones uncompetitive to those who manufacture or fully assemble in India. Both Apple and Samsung do only the assembly work in India, without adding much to the local skill set or technology. The value addition in India is less than 10% in case of iPhones. So, when we read the staggering amount of iPhone exports from India, we need to adjust it for the 90% import content and low revenue to employment ratio of factories assembling iphones.

As I said, I am extremely positive on "India story" for the next decade. In fact, I have never been so positive about the "India story" in my life. But I am not running my excel sheets wild by extrapolating the current numbers by Chinese and American experience in their high growth years. I shall be extremely delighted to get a small premium on the nominal GDP growth over the next decade or so.

Pain of an investor

 Before I say anything, I would like to make it clear that I use the terms “investor”, “trader” and “punter” in the context of equity investments, very judiciously.

To me an investor is a person who thoughtfully invests his money in a business to participate in the future growth of that business. A trader is person who is trying to optimize his return on capital by choosing from the best instruments available at any given point in time. It may be bond, fixed deposit, equity stock, gold, crypto currency, foreign exchange, other commodities etc. or a mix of these. Traders do not invest with the objective of “wealth creation”. Their focus is usually earning more than the risk free return while maintaining liquidity of his money. Punters buy financial assets or commodities just like lottery tickets. They get kicked by the prospects of hitting a jackpot someday and do not mind losing their entire capital in the process.

Here we are talking about investors only.

In summer of 2007, the global equity markets were doing great. Most global indices were close to their all-time levels. The global fund managers were exploring the world like Cristopher Columbus. Emerging Markets, BRICS, MENA, Frontier Markets etc were the hot themes. Everyone was deep in the money. Indian markets were no different. Then appeared first signs of sub-prime crisis and a sharp correction occurred in July 2007. However, the losses in correction were entirely recouped in no time and markets surged to their new highs by January 2008. The 14months after that were nothing less than a nightmare. The global equity indices saw cuts ranging from 35% to 75%.

The investors who had conviction in the strengths of the businesses they were invested in stayed the course and emerged winners. The punters lost their entire capital and much more. The traders also lost money.

In July 2007, at peak of the market, one investor invested in the stock of Mahindra and Mahindra Limited; the other investor invested in the stock of Reliance Industries; and a retired person invested in the Gilt Fund that invests in long duration government securities.

If they stayed invested in these instruments till today, the two investors in M&M and RIL stocks would be making about 9.25% CAGR (excluding dividends) on their investment; while the retired person would be making 9.5%.

A plain reading of previous two paragraphs may prompt the readers to jump to many conclusions. When I sent these two paragraphs to some of the readers for their comments, I got many responses. I find the following five responses as representative of the entire sample:

·         “Are you suggesting over a longer time frame, investment in gilt and stocks yield similar returns, but risk adjusted return are far superior in gilt.”

·         “If equities of front line companies have matched the return of Gilt, even after weathering two unprecedented crises (GFC, 2008-09 and Covid, 2020), then next decade perhaps equities will give phenomenal returns.”

·         “RIL gives you excitement’ but M&M is a steady performer.”

·         “If you are a long term investor, do not try to time the market. Over a longer period, returns would automatically get normalized.”

·         “Investment in reliance is like making a fixed deposit in SBI. You can never lose money.”

However, the responses could be very different, if I show the following chart to the respondents. This chart shows the relative performance of the stocks of M&M and RIL from July 2007 till date. The stock of M&M gave the entire return during first seven years (2007-2014) period. The current price of stock is almost same as it was in August 2014. The stock of RIL did not give any return for 9years (2007-2016). The price of the stock in December 2016 was almost the same as it was in July 2007.

A trader would immediately think, “December 2016 was the best time to sell M&M and buy RIL. This way one could have made the 2x the return of an investor.”

But an investor who is convinced about the business prospects of either M&M or RIL or both, the long intervening periods of no return are quite painful. The one who learns to manage this pain ultimately comes winner. The ones who succumb to this pain of non-performance, would sell RIL in 2016 and buy M&M, and end up as total losers.

If you want to fully assimilate the point I am trying to make here, then please talk to someone who had sold ITC and bought RIL in September this year, after getting no return in ITC for 5yrs.