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00:00we have with us right now Jahangir Aziz to talk about what the state of the
00:12economy not just for India but for the world is looking like Jahangir welcome
00:16to ET now good to meet you in person what's the worldview right now and let's
00:21start off with the US where is this tariff war going to head so I think there
00:27is a sense in the market that with all of these trade deals let's leave India
00:31side for the time being with all of the trade deals there is a sense that the
00:35tariff or the trade war is settled I think it's far from settled so if you
00:40look at the tariffs almost all the tariffs were used using the AIP Act
00:47International Economic I forgot what AIP stands for that's what the reciprocal
00:52tariffs were that's what fentanyl tariffs were and we have been tracking this a
00:56while saying that there are major legal challenges to it we had one challenge
01:01that was heard by the US Court of International Trade that ruled that the
01:05AIP Act tariffs were illegal that went to the US District Federal Court that
01:11upheld the lower court ruling and now it's up to the Supreme Court the Supreme
01:16Court is going to hear it in the first week of November it hasn't said when it
01:20will hear but if the Supreme Court also opposed the lower court rulings then all
01:24of a sudden the basis of most of the tariffs not all most of the tariffs or all
01:29of these countries essentially is invalid and then I saw the trade deals and then we go
01:40back to the drawing board saying that what are the alternative and the US has
01:45alternative ways of reimposing the tariffs but those ways those those avenues that
01:52they have the nature of the tariffs will be different the countries will be different
01:57quantum will be different and the sectors will be different but assuming that there
02:04would be tariffs in whatever form or quantum or whatever are we looking at slower global
02:10growth in the times to come yes and I think that what has happened over the last I would
02:16say three quarters since the tariff concerns started which was back in November of last
02:22year I think that is essentially camouflaging is being camouflaged that slow down is being
02:28camouflaged by several things one is the reaction by US corporates to front load imports which had a massive
02:38impact on the rest of the world include particularly in North Asia so that was the first thing the second thing is
02:46is that the slowness with which the tariff increases are being passed on to inflation is because again US corporates are absorbing most of the tariff increases on their balance sheet right now on their profit margins
03:01there are obviously clear limits to how much you can observe on your profit margin sooner or later that will get passed on to consumers we expect that to happen in the fourth quarter so there you are going to see a spike in inflation and from there on to consumption in the US on the labor market itself the labor market itself is softening and the third bit which is where I think most of the
03:25camouflaging is what camouflaging is is that alongside all of the tariff wars completely independent of the business cycle is the tech cycle the tech cycle is being has nothing to do with the business cycle right and the tech cycle has been enormously powerful US capital equipment grew in the first half by 15.5 percent almost all of it was tech equipment you can look at the S&P 500 how much of the tech companies driving it and
03:53and as a result you you you you have to sort of pass out all of these three factors and the big call is that how long will this tech cycle last we know that is not related to the cycle but how long will it last so I think there are these three things that are drive that wedge that you know growth has been very strong globally at least stronger than expected but just because it hasn't happened doesn't mean it won't happen
04:21doesn't mean it won't happen you know the entire premises has been the huge deficit that US is running which is the trade and this tariff has been to get the deficit lower what is the kind of impact that you see for the US as a whole there's some figures of 300 billion dollars of additional revenues coming for the US do you think that it's going to help in some way to bring down that huge deficit?
04:46No so the deficit what happens to the trade deficit and what happens to the tariff this thing etc are two separate things right so the different ways of looking at it right one way of looking at it is to say that whatever the trade deficit or current account deficit is that's just what US needs to borrow from the outside world to meet its fiscal deficit given what is happening to domestic savings
05:15right so if you have fiscal deficit right so if you have fiscal deficit going up it is not going to go up to 7% if you believe that all of the $400-$500 billion of tariff revenue is going to come but it's going to go up from around 6% to about 6.5% so you have a 0.5% increase in fiscal deficit in the US who's going to fund that?
05:37In the last eight years no one really ever was concerned about it because it was a reserve currency if fiscal deficit goes up it's going to be funded by foreign borrowing which means that the current account deficit is going to widen but now you have an administration that is targeting that too as you rightly pointed out with the tariffs.
05:59So whether or not the trade deficit widens or narrows depends entirely on who is going to fund that half a percentage point of higher fiscal deficit if the domestics are willing to fund that through higher savings then current account deficit can actually fall.
06:17But if the domestics are funding that with higher savings then either consumption or investment or both need to slow that's the only way you do get higher savings which means growth rate in the US is going to slow down so there is no such thing as a free lunch.
06:35What happens in India's case because kind of the same story playing out while consumption is getting that fillip you've got the RBI backing it government etc. as well trying to propel growth into the economy but then what happens to CapEx?
06:49So look we've been crying about CapEx and you know hangering about CapEx since 2012.
06:56Corporate investment as a share of GDP has been flatlining since 2012 at 12%.
07:05At some point in time we have to give up this thing that oh this is cyclical reasons you know it's because of you know GST was imposed it was because the banking sector was weak now the banking sector is back.
07:18Oh it's because of this that and the other.
07:21You can't have corporate investment flatlining at 12% at 13 years and then say this is not structural.
07:29It's a structural story.
07:31It has very little to do with cycles.
07:33I know we want to believe in green shoots and cycles and every pop up glass half full thing.
07:4013 years we've been talking about it right.
07:42At some point in time we need to step back and say look there is something structural about India's corporate sector and that's where I think the debate has been not been there.
07:53It's always been focused in India on what are the cyclical factors?
07:57What is the proximate cause?
07:59And we've always blamed you know now we're going to blame tariffs and external headwinds.
08:06Previously we blamed the banking sector.
08:08Before that we blamed the introduction of GST.
08:12I think we're running out of excuses.
08:14We need to really actually find alternative engines of growth.
08:19And the corporate sector is you know flatlining at 12% is because there are no alternative.
08:24We haven't identified alternative sources of growth.
08:27So what is the solution?
08:29The 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.
08:42We have the global financial crisis.
08:44Why did it actually fall in the global financial crisis and why has it has never really picked up?
08:49It has to do with the corporate India not fully buying into the domestic driven or the export sector driven story.
09:00They have to buy into that idea.
09:03They haven't.
09:04I mean that's the only obvious explanation I can come up with.
09:07What about the domestic story because 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.
09:19Right.
09:20So you take investment either in growth rate overall investment or as a share of GDP then take exports growth rate or exports as share of GDP draw the two lines there is no daylight between the two of them.
09:36We are a exceedingly open economy.
09:41We just do not we do not want to actually acknowledge that.
09:45And I think that is one of the answer to your question.
09:48That is one of the first acknowledgements we have to do literally take investment as a share of GDP take exports as a share of GDP basically there is no daylight.
09:58Jahangi we could go on chatting about the world but thank you so much for your time.
10:02I believe you have to get going.
10:04I have to get going and thanks so much for coming to our conference.
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