Vijay Kumar Gaba

 The fourth letter of the English Alphabet “D” has held a prominent position in financial market jargon, at least since the Great Depression in the late 1920s. In the past two decades the terms like Dematerialization, Demographics, Depression, Decoupling, Demonetization, De-Dollarization, Digitalization, Deflation etc., have attracted immense interest from the market participants. Some of these “Ds” have had significant impact on the global economy; while the others have been mostly limited to being topics of interesting discussions and statistical analysis.

In the current Indian context specifically, I find three “Ds”, viz., Digitalization, Deflation and Demographics most relevant for the economy and therefore markets.

The current global situation – investment mix, geopolitics, global trade and gradual shift in strategic power – implies that supply shocks could be more frequent and much more intense in the next decade or so at least.

·         The unusual weather patterns are impacting farm output across the globe. Unseasonal rains, floods, extended periods of drought and heat waves etc. have negatively impacted the food production and livestock. As per a research study conducted in 2021 (see here), due to severity of drought and heatwave crop losses tripled over the last five decades in Europe alone. In India also similar trends have started to emerge in the past few years and are expected to strengthen in the next decade or so.

·         In the past few years, the geopolitical situations in the world have shown marked deterioration. The prolonged war in Ukraine has exposed the fault lines in the strategic power structure of the world that has been prevalent since the demise of the USSR. A drift between the US, China and Russia has never been more conspicuous in the past three decades. This drift has led to the rise in speculation over further intensification of the “deglobalization” trend that has shown some presence in the past one decade.

·         In the past two decades the investment mix in the global economy has shown a marked skew in favor of services, technology and climate change. Accordingly, the investment in augmenting the supply of conventional energy, metals and agriculture, while the demand for these has remained firm. Accordingly, the inflationary pressures have built up in the global economy.

It is widely accepted that digital technologies are bringing in enormous productivity gains; and therefore, is a powerful deflationary force in an otherwise inflationary environment. To quote, Satya Nadella, Microsoft CEO, “the next 10 years won't be like the last 10 years. Digital technology is a deflationary force in an inflationary economy. It is the only way to navigate the headwinds we are facing today”. He added, “This is the age of AI. Hybrid work is here to stay. 73% of workers want flexible remote options to stay. Every organization requires a digital fabric that includes People, Places and Processes.”

The aging demography in the developed world and China is another deflationary force that is countering the inflationary pressures. Even in India, it is likely that the population will peak and begin to age much earlier than previously estimated.

Thus, Digitalization, Deflation and Demographics could be listed as three major trends that will significantly influence the direction of the Indian economy and markets in the next many years.

Self-Reliance (Atamnirbharta) has been one of the key policy objective of Indian government, especially during the second term of the incumbent prime minister. It is clarified that self-reliance does not connotes self-centred systems; rather it encompasses a concern for the whole world’s happiness, cooperation and peace.

The stated aim is to make the country and its citizens independent and self-reliant in all senses. The five primary focus area identified to achieve the objective of self-reliance are —

Economy — Quantum jumps in various growth parameters, not just incremental changes.

Infrastructure — Building infrastructure that represents modern India.

Systems — Making systems technology driven.

Demography — Making the population vibrant.

Demand — Realizing full potential of the power of demand.

A number of programs, schemes and incentives have been announced in past one year under the umbrella of Self-Reliant India, encompassing support to a variety of sectors like agriculture, MSME, manufacturing, housing, infrastructure building, and exports, etc.

From various documents and public speeches by the prime minister and his cabinet colleagues, it appears that the idea of self-reliance is still at the stage of developing a conceptual framework; even though a slew of schemes and incentives have already been placed under this umbrella. Defining this idea in terms of a robust conceptual framework may actually take few more years, given the extraordinary circumstances presented by the Covid19 pandemic, which may result in result in reprioritization of fiscal and monetary policy objectives.

There is little debate on the point that digitalization has to be at the core of any economic development and modernization plan for future. In this context, I find it pertinent to highlight some of the data from ‘Digital Economy Compass 2020”, published by statista group. The report, inter alia, highlights some of the key global markets and consumption trends that may sustain in post Covid19 world. It also mentions the key players in each evolving market segment.

The services like healthcare, fitness, learning, entertainment, gaming, 3D printing, contact tracing (bio metrics, travel, GPS, demographics, talent hunt, etc.), communication, financial services (payment gateway, money transfer, transactions), collaborative software development, cloud hosting, cybersecurity, business and manufacturing process automation have acquired larger part of the markets (consumption, investment, and development etc.)

Manufacturing processes are being increasingly dominated by artificial intelligence, robotics, internet of things, etc. Development of 5G ecosystem is another major area of growth in global economy. Blockchain technology has made a prominent place in global commerce ecosystem.

Global trade is overwhelmingly dominated by ecommerce. Last year Chinese ecoomerce giant Alibaba alone logged a total merchandise trade that exceeded GDP of all but 14 top nations in the world.

Work from home trend is likely to sustain for longer than presently expected. This is leading to higher demand for products and services like home automation, food delivery, gaming, streaming of music and video, home management services, fitness, e-dating, shared mobility etc.

All these trends are essentially leading to materially higher demand for electronic devices (phones, tablets, laptops, servers etc.) and semiconductor chips to be embedded in various appliances (washing machines, cars, alarm systems, automatic machines, smart TV, refrigerators etc.)

Software is essentially the fulcrum that supports this entire global digital ecosystem. There is a variety of software development services like enterprise software, system infrastructure software, application development, and productivity enhancement software, etc.

The point to note is that presently Indian capabilities in these spheres are limited. Only 4-5 Indian companies appear on global podium, but their participation is mostly limited to software services. In most other areas our capabilities and size are limited in global context. The government programs and schemes (e.g., production linked incentive for mobile manufacturing) are presently focusing on low end value addition (mostly component assembly and contract manufacturing). If India has to become self-reliant in the modern world, the focus has to be on joining the top league in global digital ecosystem. Manufacturing mobile phones and chemicals may help in little more than managing the current account.