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.
