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.

 The summer has been truly scorching in many parts of the country this year. Reportedly, land surface temperatures neared 55 degrees Celsius over many parts of northwest India; even crossing 60 degrees Celsius over several pockets (see here). The visuals of floods and inundated streets & homes from many states are also disturbing. Obviously, the weather patterns are changing rather quickly and our infrastructure is not designed to handle these changes. Power shortages, urban flooding, uncontrolled wildfires, frequent landslides, roads caving in, flight delays, traffic jams, etc. have become rather common issues.

The rating agency CRISIL highlighted in one of its latest reports (Sustainability Yearbook 2022) highlighted that over 52% of India’s GDP could be exposed to physical risks like wildfire, flood, sea-level rise, or storms by 2050. This cannot be a good augury for a large proportion of our population which is poor and largely dependent on agriculture for its sustenance.

Fortunately, the government is fully conscious about the devastating impact climate change could have on the social-economic milieu of the country. It has forcefully committed itself to ambitious climate goals. Nonetheless, the conditions may not improve much for the current generation. All those in the 15-59yr age bracket may continue to suffer every winter, summer and monsoon season. The duration of spring and autumn has been diminishing for the past many years, anyways.

One less talked about impact of climate change is the declining rate of population growth. Climate change has impacted fertility, affordability and inclination to have children.

The government data has already highlighted the sharp decline in Total Fertility Rate (TFR) of Indian women. The TFR of India is now very close to the replacement rate, indicating that our population is likely to peak much earlier than previously estimated.

Recently, a superstar of Telugu Cinema, Ramcharan Teja and his wife Upasana, were in news for their decision to not have kids in the interest of climate control. Temjen Imna, the Nagaland Minister who was trending all over social media for his comic twist to racism slur faced by the people of North East India, also tweeted, “On the occasion of #WorldPopulationDay, let us be sensible towards the issues of population growth and inculcate informed choices on child bearing. Or #StaySingle like me and together we can contribute towards a sustainable future”.

From my interactions with numerous people across the country, I know for sure that these feelings are not limited to a few celebrities or people from the higher socio-economic strata. Young couples even from smaller towns and villages are deciding not to have children. Affordability and desire to live a “free” life without the responsibility of raising children are two primary reasons offered for their decisions. In recent months, the worsening social harmony and high crime rate have also been added by some couples to the list of reasons for not having children.

I believe that this trend is a global trend, not specific to India. In my view, therefore, demographic change (ageing and population decline) is a much bigger investment theme as compared to climate control (or ESG). From a long term perspective (2-3 decades) deflation, technology, insurance, healthcare, home appliances, casual clothing, home delivery etc. should be the popular themes. Inflation, personal mobility, fashion, travel, food and water etc. should become increasingly less popular trades.