As socioeconomic experts around to understand what the world will look in a post-coronavirus age, India Today TV spoke to Morgan Stanley’s Chief Global Strategist Ruchir Sharma to understand just how much the world will change.
Speaking exclusively at the India Today e-Conclave session Jumpstart India, Ruchir Sharma said that contrary to popular perception, the world will fundamentally remain the same after the Covid-19 pandemic, barring the acceleration of few changes.
“If you look at past pandemics, those incredibly destructive episodes told us very little about what comes next… It is understandable that when we are going through such a stressful period, we will think that this is what the future will be about. However, this episode doesn’t change the world, it may simply accelerate some things,” Sharma said.
Ruchir Sharma has identified seven trends to emerge from the Covid-19 pandemic. Here is what he had to say:
It means that the flow of goods, services, capital and migrant are slowing down. The share of global trade will fall to 53 per cent of the global GDP from a peak of 60 per cent this year because of a global recession. We will never go back to 60 per cent.
There is also a rise in nationalism around the world, especially food nationalism. Many countries want to ban food exports or rely less on imported food.
This will have a very significant impact on developing countries like India. Countries like China exported their way to prosperity. That model has been hit badly. India cannot do the same now. There needs to be much more reliance on domestic markets now.
Another trend happening before the crisis and now heightened is the rise of authoritarian leaders. The world is going through a democratic recession. Following the collapse of the Berlin Wall, there was a massive expansion of democracy. However, after the financial crisis of 2008-09, the world saw an incremental return to authoritarianism. Countries like Russia, Turkey reflect that change.
Leaders around the world are seeing a massive increase in popularity during this crisis. People are rallying behind the flag. In India, too, that is visible as many people who have previously had issues with PM Modi’s governance are now solidly backing him on the lockdown.
In the long term, once we have ceded power to these politicians leading to much more intervention in business and normal life, it will be very hard to get them back.
One thing the government is going to have much more of is the surveillance state. People will have to accept that we will have to share much more information with the state than we are comfortable with in return for better healthcare norms.
BLURRING OF FISCAL AND MONETARY POLICY
We thought central banks need to be independent of fiscal authorities. So many central banks are being forced to bail out people. What really happens here is that central bank balance sheets get bigger and their interference along with fiscal authorities gets more extensive as far as people are concerned. The days of truly independent central banks are over. They will now be forced to buy back government debt.
As far as the fiscal space of the Indian government is concerned, the global fiscal stimulus at the moment is about 4 per cent of GDP. In emerging markets, it has been much less (about half). In India, it has been just over 1 per cent of GDP. India does not have the kind of fiscal room for more. We came into this situation with a large fiscal deficit.
We cannot get out this by printing money to stimulate the economy. India’s public debt as a share of its economy is over 70 per cent and could get as high as 80 per cent by next year. Research shows when debt is of that level, borrowing costs rise very sharply. Across the world interest rates have fallen. In India’s case that has not happened. If we print more money we could have a serious loss of confidence.
There are four constituents of debt — household, financial, corporate and government. With the 2008 financial crisis, consumers and financial debt-taking went down. After the coronavirus crisis, the corporate sector has realised it has too much debt. Debtophobia will extend to all three sectors, only the government has the capacity and willingness to take on debt. The other three will be much more risk-averse.
In India, it will be very difficult for anyone without the highest credit rating to take any more debt. For this RBI intervention is necessary. To prevent further bankruptcy MSMEs need support.
Governments are realising that no amount of stimulus can substitute for reopening business. For every one month an economy remains in lockdown, it loses 1.5-2 per cent of GDP annually. So hypothetically, if India remains in lockdown for 3 months, it knocks off 6 percentage points of any growth that was being projected.
Many habits like videoconferencing were changing before the pandemic and will only accelerate now. Digital leisure such as gaming has become a new favourite pastime. This means some businesses may not be coming back such as cinemas or theatres when people have streaming services.
With this pandemic, trends that were expected to play out over 5-10 years have happened over 5-6 weeks. It will plateau but the acceleration has been incredible.
On the negative side, a lot of inefficient companies (zombie companies) are being kept alive by easy money and government bailouts. You need bad companies to go bust. Their existence is not good for long-term growth.
The good news is that we are thinking about increasing efficiency, many people are realising that work from home is convenient. Increased automation during this time may increase productivity.
CRISIS TO OPPORTUNITY
The most important thing is to fight fear. After living in this environment of fear, we need the leadership to take us out of fear. It needs to tell people how to cope with this rather than fighting it.
Let’s use this opportunity to carry out economic reforms. We need more capital, more privatisation and more labour reform.
We need India to be less of an interventionist/statist society. Don’t want to go back to an era where politicians and bureaucrats told businesses what to do.