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00:00Welcome to you live from the JP Morgan India Conference and we have with us right now
00:04Jahangi Raziz to talk about what the state of the economy not just for India but for the world
00:09is looking like. Jahangi, welcome to ET9. Good to meet you in person. Thank you. What's the
00:14worldview right now? And let's start off with the U.S. Where is this tariff war going to head?
00:20So I think there is a sense in the market that with all of these trade deals, let's leave India
00:26side for the time being. With all of the trade deals there is a sense that the tariff or the
00:31trade war is settled. I think it's far from settled. So if you look at the tariffs, almost
00:37all the tariffs were used using the AIIPA Act, International Economic Act. I forgot what AIIPA
00:45stands for. That's what the reciprocal tariffs were. That's what the fentanyl tariffs were. And we have
00:49been tracking this a while saying that there are major legal challenges to it. We had one
00:55challenge that was heard by the U.S. Court of International Trade that ruled that the AIIPA
01:01tariffs were illegal. That went to the U.S. District Federal Court that upheld the lower
01:07court ruling. And now it's up to the Supreme Court. The Supreme Court is going to hear it
01:12in the first week of November. It hasn't said when it'll hear. But if the Supreme Court also
01:17upholds the lower court rulings, then all of a sudden the basis of most of the tariffs, not
01:22at all, most of the tariffs on all of these countries essentially is invalid. And so are
01:32the trade deals. And then we go back to the drawing board saying that what are the alternative
01:39and the U.S. has alternative ways of reimposing the tariffs. But those ways, those avenues that
01:47they have, the nature of the tariffs will be different. The countries will be different.
01:52Quantum will be different. And the sectors will be different.
01:58But assuming that there would be tariffs in whatever form or quantum or whatever, are we
02:03looking at slower global growth in the times to come?
02:07Yes. And I think that what has happened over the last, I would say, three quarters since
02:14the tariff concern started, which was back in November last year, I think that is essentially
02:20camouflaging, is being camouflaged, that slowdown is being camouflaged by several things. One
02:26is the reaction by U.S. corporates to front load imports, which had a massive impact on the rest of
02:36the world, particularly in North Asia. So that was the first thing. The second thing is that the
02:42slowness with which the tariff increases are being passed on to inflation is because, again, U.S. corporates
02:49are absorbing most of the tariff increases on their balance sheet right now, on their profit margins.
02:56There are obviously clear limits to how much you can absorb on your profit margin. Sooner or later,
03:02that will get passed on to consumers. We expect that to happen in the fourth quarter. So there you are
03:08going to see a spike in inflation. And from there on to consumption in the U.S. on the labor market itself.
03:15The labor market itself is softening. And the third bit, which is where I think most of the
03:20camouflaging is, is that alongside all of the tariff wars, completely independent of the business cycle
03:27is the tech cycle. The tech cycle has nothing to do with the business cycle, right? And the tech cycle
03:33has been enormously powerful. U.S. capital equipment grew in the first half by 15.5 percent.
03:40Almost all of it was tech equipment. You can look at the S&P 500, how much of the tech companies
03:47driving it. And as a result, you, you, you have to sort of pass out all of these three factors.
03:55And the big call is that how long will this tech cycle last? We know that it's not a lot related to
04:01the cycle, but how long will it last? So I think there are there are these three things that are drive
04:06that wedge that, you know, growth has been very strong globally, at least stronger than expected.
04:12But just because it hasn't happened, doesn't mean it won't happen.
04:18It never will.
04:19You know, the entire premises has been the huge deficit that U.S. is running, which is the trade.
04:25And this tariff has been to get that deficit lower. What is the kind of impact that you see for the U.S.
04:32as a whole? There are some figures of 300 billion dollars of additional revenues coming for the U.S.
04:37Do you think that it's going to help in some way to bring down that huge deficit?
04:42No. So the deficit, what happens to the trade deficit and what happens to the tariff, this thing, etc.,
04:48are two separate things, right? So there are different ways of looking at it, right?
04:55One way of looking at it is to say that whatever the trade deficit or current account deficit is,
05:01that's just what U.S. needs to borrow from the outside world to meet its fiscal deficit,
05:09given what is happening to domestic savings, right?
05:13So if you have fiscal deficit going up, it is not going to go up to 7 percent
05:19if you believe that all of the 400, 500 billion dollars of tariff revenue is going to come,
05:24but it's going to go up from around 6 percent to about 6.5 percent.
05:28So you have a half a percent increase in fiscal deficit in the U.S.
05:31Who's going to fund that?
05:34In the last eight years, no one really ever was concerned about it because it was a reserve currency.
05:42If fiscal deficit goes up, it's going to be funded by foreign borrowing,
05:46which means that the current account deficit is going to widen.
05:49But now you have an administration that is targeting that, too, as you rightly pointed out, with the tariffs.
05:54So whether or not the trade deficit widens or narrows depends entirely on who is going to fund
06:02that half a percentage point of higher fiscal deficit.
06:06If the domestics are willing to fund that through higher savings,
06:10then current account deficit can actually fall.
06:14But if the domestics are funding that with higher savings,
06:17then either consumption or investment or both need to slow.
06:21That's the only way you do get higher savings, which means growth rate in the U.S.
06:25is going to slow down.
06:28So there is no such thing as a free lunch.
06:31What happens in India's case?
06:33Because kind of the same story playing out.
06:36While consumption is getting that fillip, you've got the RBI backing it,
06:40government, et cetera, as well, trying to propel growth into the economy.
06:44But then what happens to CapEx?
06:45So, look, we've been crying about CapEx and, you know, hangering about CapEx since 2012.
06:53Corporate investment as a share of GDP has been flatlining since 2012 at 12 percent.
07:03At some point in time, we have to give up this thing that, oh, this is cyclical reasons.
07:08You know, it's because of, you know, GST was imposed.
07:11It was because the banking sector was weak.
07:13Now, the banking sector is back.
07:15Oh, it's because of this, that, and the other.
07:18You can't have corporate investment flatlining at 12 percent at 13 years and then say this is not structural.
07:26It's a structural story.
07:27It has very little to do with cycles.
07:30I know we want to believe in green shoots and cycles and every pop-up glass half-full thing.
07:3713 years we've been talking about it, right?
07:39At some point in time, we need to step back and say, look, there is something structural about India's corporate sector.
07:45And that's where I think the debate has not been there.
07:50It's always been focused in India on what are the cyclical factors, what is the proximate cause.
07:55And we've always blamed, you know, now we're going to blame tariffs and external headwinds.
08:03Previously, we blamed the banking sector.
08:05Before that, we blamed the introduction of GST.
08:08I think we're running out of excuses.
08:11We need to really actually find alternative engines of growth.
08:16And the corporate sector is, you know, flatlining at 12 percent is because there are no alternative.
08:21We haven't identified alternative sources of growth.
08:23So what is the solution?
08:26The solution is that we basically go back and figure out what has been the reason as to why we had this massive increase in corporate investment back in the period 2002-ish to about 2008-09.
08:39We had the global financial crisis.
08:41Why did it actually fall in the global financial crisis?
08:44And why has it never really picked up?
08:46It has to do with the corporate India not fully buying into the domestic-driven or the export-sector-driven story.
08:58They have to buy into that idea.
09:00They haven't.
09:01I mean, that's the only obvious explanation I can come up with.
09:04But what about the domestic story?
09:05Because you have consumption in domestic, and that's, if you look at India as a whole, we are not so much dependent on export, but we have a good domestic story which is going on.
09:16So you take investment either in growth rate, overall investment, or as a share of GDP, then take export's growth rate or export as share of GDP, draw the two lines.
09:30There is no daylight between the two of them.
09:33We are an exceedingly open economy.
09:38We just do not want to actually acknowledge that.
09:42And I think that is one of the, in answer to your question, that is one of the first acknowledgements we have to do.
09:48Literally, take investment as a share of GDP, take export as a share of GDP.
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