Morgan Stanley's Ridham Desai On Modi 3.0 Outlook, Policy Making & The Impact On Stock Markets

Summary

Rhythm Desai, Managing Director and Chief Equity Strategist India at Morgan Stanley, discusses India's investment landscape post-election, emphasizing policy continuity and the potential for accelerated economic growth. He highlights the importance of lifting growth rates to alleviate poverty and the government's focus on investment rather than cash distribution. Desai also touches on the possibility of fiscal measures to boost growth, the private sector's role, and the impact of global factors on India's market. He concludes with hopes for farm law reform and increased FDI, setting a positive outlook for India's economic future.

Takeaways

• 📊 The speaker is optimistic about India's economic growth, attributing it to policy continuity and the potential for accelerated progress under the current administration.
• 🎉 The 26th investor conference is highlighted as a significant event, indicating a positive outlook for the market and the economy.
• 🤔 Concerns about the world markets being skittish ahead of the FOMC meeting are noted, suggesting a cautious approach to global economic indicators.
• 💡 The emphasis on lifting growth rates to create opportunities and reduce poverty is a key strategy, rather than relying on cash distribution which is deemed ineffective for wealth creation.
• 🌱 The BJP-led NDA government's focus on inflation control and growth acceleration is seen as beneficial for the economy and stock market.
• 🏦 The potential for a primary balance in India's budget within the next 3 years is discussed, which could lead to significant debt aging and economic benefits.
• 🛤️ The speaker is particularly bullish on the Railways sector due to its potential in reducing logistic costs and improving the efficiency of cargo transportation.
• 🏭 The expectation of a robust private capex cycle is tempered by the acknowledgment that the peak may not reach previous highs due to improved capital efficiency and a more moderate growth target.
• 📈 The composition of the market in terms of sectors and company sizes is expected to evolve, with a focus on the growth of industrials and financials over consumer staples.
• 🌐 The impact of global economic conditions, such as China's deflation and global growth, poses risks to India's market, necessitating a competitive response.
• 🚀 The hope for reforms in the farm sector, acceleration of FDI, and improvements in judiciary, bureaucracy, education, and health services are presented as areas for potential policy focus and improvement.

Q & A

What is the significance of the 26th investor conference mentioned in the script?

The 26th investor conference is a significant event where Rhythm Desai, the managing director and chief equity strategist India at Morgan Stanley, discusses the current investment landscape and shares insights on the future of the Indian economy and markets.

How does Rhythm Desai interpret the recent political continuity in India in terms of market implications?

Rhythm Desai views the political continuity as a positive sign for the market, indicating confidence in the administration to continue the work of the last 10 years and potentially accelerate economic policies, which he believes will be beneficial for the market.

What is Rhythm Desai's stance on the effectiveness of cash distribution as a means to alleviate poverty?

Rhythm Desai believes that distributing cash does not effectively make poor people rich. Instead, he suggests that lifting the growth rate and creating more opportunities are the keys to wealth creation for the impoverished.

How does Rhythm Desai perceive the role of the Indian government in managing inflation?

Desai describes the Indian Prime Minister as an 'inflation Hawk', implying that the government's policy-making is heavily influenced by a desire to control inflation, which is a key factor in their economic strategy.

What is the concept of a primary balance in the context of government finance, as discussed by Rhythm Desai?

A primary balance refers to a situation where the government's expenditures, excluding interest payments, are equal to its revenues. Desai suggests that India could achieve a primary balance in the next 3 years, which would be a significant fiscal milestone.

How does Rhythm Desai view the potential impact of corporate balance sheets on India's economic growth?

Desai is optimistic about the role of corporate balance sheets in driving economic growth. He notes that with pristine balance sheets, especially among corporations, and ample room to borrow, the private sector is well-positioned to crowd in as the government steps back, potentially leading to a surge in economic activity.

What is Rhythm Desai's outlook on the Indian government's approach to fiscal measures and reforms?

Desai does not expect any major fiscal stimulus from the government in the near term. Instead, he anticipates that the government will focus on stepping back, allowing the private sector to drive growth, and possibly selling government assets to fund further development.

How does Rhythm Desai analyze the potential for private capex to contribute to India's growth in the next five to ten years?

Desai believes that while private capex has bottomed out, it will not return to the highs of the past cycle. He suggests that the focus should be on efficiency and effective implementation, rather than sheer scale, to meet India's growth ambitions.

What are the sectors that Rhythm Desai is particularly bullish on, and why?

Desai is particularly bullish on Railways due to the potential for significant improvements in logistics costs and efficiency. He also sees Industrials and financials as leading sectors, while suggesting that Consumer Staples may lag behind.

What are Rhythm Desai's views on the potential for technology and innovation in India, especially in the context of 'Deep Tech'?

Desai is very bullish on the potential for 'Deep Tech' in India, which he believes is an underappreciated space with the potential to be a major growth driver for the country in the coming years.

What are the key hopes and expectations Rhythm Desai has for the Indian government's policy direction in the coming years?

Desai hopes for a revisiting of farm laws to accelerate growth and increase per capita income. He expects a lower primary deficit and continued incentives for the manufacturing sector. Additionally, he hopes for accelerated FDI and the striking of deals with foreign companies to fill the global market vacancy left by China.

What are the main risks Rhythm Desai identifies for the Indian economy and market?

Desai identifies risks from global factors such as China's deflation and potential currency depreciation, which could intensify competition and affect India's export capabilities. He also mentions the need for capacity creation in judiciary, bureaucracy, education, and health as areas of domestic concern.

Outlines

00:00

💼 Investment Landscape Amid Policy Continuity

Rhythm Desai from Morgan Stanley discusses the current investment landscape, noting policy continuity with the BJP retaining major portfolios. He emphasizes the market's positive reaction and the global context of slight nervousness ahead of the FOMC meeting. Desai highlights the confidence in the administration's continued work and acceleration of growth, suggesting that populist measures won't prevail, but rather growth-oriented strategies will lift the remaining population out of poverty without causing inflation.

05:00

📈 Government Fiscal Strategy and Growth

Desai explains the government's approach to fiscal measures and growth, noting that the private sector balance sheets are strong, and the government is stepping back from heavy spending. He predicts India could achieve a primary balance in three years, reducing the need to borrow for interest payments. This shift is seen as beneficial for corporate balance sheets and overall growth without triggering inflation.

10:02

🌧️ Economic Outlook and Monsoon Impact

Desai anticipates a strong monsoon, beneficial for farm output and corporate sentiment. He acknowledges the challenges in private capex scaling up to meet future ambitions but sees a positive trend with private sector capex inching higher. Desai notes that while rural distress was underestimated, improvements are now evident, and the government's focus on investments will continue to drive growth.

15:03

🏗️ Infrastructure and Investment Cycles

Desai discusses the government's infrastructure initiatives, particularly in railways, to reduce logistics costs. He highlights the continuity in railway leadership and the expected impact on the economy. Desai also mentions the potential for government asset sales to fund further infrastructure projects and the focus on sectors like manufacturing to boost economic growth.

20:04

📉 Market Composition and Capex Trends

Desai comments on the evolving market composition, with small and mid-cap companies gaining prominence. He explains the implications of efficient capital use and lower incremental capital output ratios on the capex cycle. Desai foresees robust growth without returning to previous high capex levels, reflecting improved capital efficiency and sustainable growth rates.

25:05

🌐 Domestic and Foreign Investment Dynamics

Desai outlines the dynamics of domestic and foreign investments, noting the significant role of domestic investors due to policy changes and demographic factors. He predicts continued foreign investment in India despite market constraints. Desai also discusses the potential for a major primary market cycle and its impact on market behavior, expecting a more selective stock market environment.

30:07

🔮 Hopes and Expectations for India's Future

Desai shares his hopes and expectations for India's future, including the revival of farm laws and accelerated FDI to occupy the global economic vacuum. He expects the government to focus on manufacturing incentives and reducing the primary deficit. Desai also highlights the importance of addressing capacity creation in the judiciary, bureaucracy, education, and health to sustain long-term growth.

Keywords

💡Policy Continuity

Policy continuity refers to the ongoing implementation of existing government policies without significant changes. In the video, Rhythm Desai mentions that the BJP's retention of major portfolios suggests continuity in policy, which is seen positively by the markets.

💡FOMC

The Federal Open Market Committee (FOMC) is a branch of the Federal Reserve that oversees open market operations in the United States. The video mentions global market nervousness ahead of an FOMC meeting, highlighting its influence on economic policies and market conditions worldwide.

💡Inflation Hawk

An inflation hawk is someone who prioritizes controlling inflation over other economic policies. Desai describes the Prime Minister as an inflation hawk, indicating a focus on maintaining low inflation through conservative monetary policies.

💡Capex

Capital Expenditures (Capex) refer to the funds used by a company or government to acquire, upgrade, and maintain physical assets. Desai discusses the role of government and private sector capex in boosting India's economic growth, highlighting the shift from government-led to private sector-led investments.

💡Primary Balance

Primary balance refers to the fiscal balance of a government before accounting for interest payments on outstanding debt. Desai explains that achieving a primary balance means the government is not borrowing to pay interest, indicating sound fiscal health. India aims to reach a primary balance in the near future.

💡Iore

Incremental Capital Output Ratio (Iore) measures the efficiency of capital investments in generating economic output. Desai highlights that India's Iore has improved, meaning less capital is needed for growth, contributing to more efficient economic development.

💡Rural Distress

Rural distress refers to economic hardships faced by rural populations, including low income and lack of resources. Desai mentions that the impact of COVID-19 on rural economies was underestimated, but recent indicators show improvement in rural growth.

💡Fiscal Deficit

The fiscal deficit is the difference between the government's total expenditures and its total revenues, excluding borrowings. Desai talks about managing the fiscal deficit while promoting growth, indicating the government's strategy to balance spending without compromising fiscal health.

💡FDI

Foreign Direct Investment (FDI) refers to investments made by a firm or individual in one country into business interests located in another country. Desai hopes for accelerated FDI to boost India's economic growth, emphasizing its importance in the global economic context.

💡Investment Cycle

An investment cycle refers to the periods of economic activity characterized by increased investment in infrastructure and capital goods, leading to growth. Desai discusses the current and future phases of India's investment cycle, predicting robust growth driven by both private and public investments.

Highlights

Rhythm Desai, Managing Director and Chief Equity Strategist India at Morgan Stanley, discusses the policy continuity and market reactions following the BJP's retention of major portfolios.

Desai expresses confidence in the current administration's ability to continue and accelerate economic policies of the past decade.

He argues that distributing cash is not an effective method to alleviate poverty, suggesting instead that lifting the growth rate creates more opportunities.

Desai emphasizes the importance of maintaining a balance between lifting India's growth rate and controlling inflation pressures.

The government's focus on not borrowing for interest costs is highlighted as a key fiscal strategy for the next three to four years.

Desai predicts that India could achieve a primary balance, significantly impacting the government's balance sheet due to high nominal growth.

He discusses the potential for corporate balance sheets to leverage due to pristine conditions, with room for borrowing to boost growth.

Desai anticipates a shift in the government's role from spending to allowing private sector investment, particularly in infrastructure.

The importance of the Railways sector in reducing logistic costs and improving the efficiency of cargo transportation is underscored.

Desai suggests that the market composition may change significantly in the next five years, with small and mid-cap companies potentially growing large.

He forecasts that the Indian market will continue to see domestic investment growth due to favorable demographic trends and policy changes.

Desai highlights the potential for increased foreign investment in India, especially if domestic primary issuance picks up.

The discussion includes the expectation of continued support for the manufacturing sector through various incentives and policies.

Desai expresses hope for the return of farm laws to boost agricultural efficiency and India's growth trajectory.

He identifies the need for capacity creation in judiciary, bureaucracy, education, and health as areas of expected focus for the government.

Desai outlines potential risks to India's growth, including global economic conditions and competition with China.

The importance of innovation in the deep tech space as a growth driver for India is highlighted, with Desai expressing bullishness on this sector.

Transcripts

we have the man who a lot of people want

to hear uh views about on all things

possible in investing Rhythm Desai

managing director and chief Equity

strategist India at Morgan Stanley joins

us right now well on the Eve or rather

on the eve of your investor conference

and this is what the 26th investor

conference yeah and we'll talk about

that as well Rhythm but can't not start

off by talking about how do you gauge

the landscape currently after what

arguably seems to be policy continuity

with all the major portfolios retained

by uh the

BJP uh and um and and and the markets

celebrating it thus far but the world

markets uh maybe slightly skittish ahead

of the fomc so perfect timing to have

you good morning yeah good morning great

to be here it's a lovely Studio I'm

really impressed and I'm so happy I made

it here instead of instead of

interviewing in the in the Taj um yeah

no I think U there was a bit of

nervousness on tues Tuesday afternoon uh

because it seemed like we were going to

have a little bit of a problem but I

think things uh shaped up well I'm not

surprised I wrote a note overnight on

Tuesday uh that this is continuity and

just treated like a majority government

I have great confidence that this

Administration will basically continue

the work of the last 10 years and

actually accelerate things so I think

that's the message from the electorate

if there is a there are multiple

messages here there political messages

which we will not discuss because not

relevant to the market and then the

economic messages that I think there are

a few people that are still behind the

poverty line obviously there are uh that

number has gone down by 10 points over

the last 10 years but there is still you

know maybe 15% of India that is below

poverty line and to lift them and this

is where I am

counterintuitively suggesting to

investors who concluded on Tuesday that

we are now going to be back to populism

I think we're going to be exactly the

opposite to in order to bring those

people up you know Distributing cash

doesn't work distribution cash has never

made poor people Rich okay it may wi you

votes but it doesn't make poor people

Rich what makes poor people rich is you

lift the growth rate and therefore

create more opportunities and and the

BJP uh LED NDA in the last 10 years and

I keep saying is that the prime minister

is an inflation Hawk so that is what

informs all policymaking so you know the

classic example of this is co when the

world was Distributing cash this

government chose to distribute food

because cash would leave an inflation

imprint that will hurt later and you

know the fomc context is precisely there

right they're still struggling to get

inflation back to where they want it to

be um so that does not happen and what

happens instead is an endeavor to lift

India's growth rate because at 7% X

number of people get jobs at 8% that

number goes up materially so you lift

India's growth rate and at the same time

you don't let inflation pressures build

it's a very tight Balancing Act but this

is what I think the government is going

to attempt to do and then you just

imagine how bullish that is for stocks

yeah okay that's Goldilocks multiplied

by five but just sorry just wondering

though uh one followup to that M growth

impulse from the government can come in

via some fiscal measures not necessarily

reforms because reforms in the near term

in the very short term might actually

not really lead to growth stimulus in

the near term right so if indeed you do

you forecast or do you believe that

there could be fiscal impulses given in

order to boost growth because the

consensus 6 and half to no that's not

the template that template is not

government spent during covid because

the private sector retracted that is is

over now the inim budget already told us

that the government is stepping back I

don't expect any reversal in that

thinking okay that's exactly the point

the the template is for the government

to step back and let the private sector

crowd in see the private balance sheets

are pristine right now especially

corporate balance sheets 50% debt to

equity there's a lot of room to borrow

right the government has been crowding

out that because it had obviously judged

that the private sector will be

reluctant coming out of covid now that

heavy lifting is done so the government

is stepping back India is the likely

only large economy in the world the top

15 20 economies that could be in a

primary balance in 3 years from now and

you have to understand the implications

of a primary balance so just for the

audience a primary balance is when you

are not borrowing money to pay interest

cost the fiscal deficit is the total

expenditure minus the total revenues the

primary balance or the primary deficit

is what you have before you pay your

interest cost now at a corporate level

if you are borrowing to pay interest

cost you're bankrupt governments don't

go bankrupt because they print money

correct right when you get into a

primary balance and given that nominal

growth is 10 11% you get a major deal

aaging on government's balance sheet and

that has not happen in India's history

we've had 2 years in the last 75 OD

years when India had a primary balance

but it was not by design it was by uh

just uh you know luck of a very strong

economy which two which two years 2007

2008 okay huh so I mean 2007 fiscal F7

and f8 you know what the markets did in

those two years yeah yeah the mid of the

G so that is exactly what we are set up

for in the next 3 4 years so I think we

go into a primary balance it triggers a

major Rel leveraging of corporate

balance sheets and and that's how growth

gets lifted this is benign for inflation

because it's investment light see look

at the government's response

yesterday it was basically let's build

more

homes investing uh your uh revenues does

not trigger inflation it's when you when

you uh you know redistribute it that's

when you leave inflation impulses in the

system which then go out of control at

Beyond a certain time so I think the

impulse will be to trigger an investment

cycle and very uh 101 on economics is

when the investment rate is rising

corporate profit share and GDP is rising

and there's a virtuous cycle as profit

share and GDP Rises corporate saving

goes up and they invest more and all

this continues until you reach a level

where the incremental Investments become

unproductive that'll happen at one point

in time in the cycle but we're still not

there we're about halfway through the

cycle yeah so we have a long way to go

before we get there that's what happened

in

20091 Investments became unproductive

and that's why the economy and of course

there were other things that happened

because we LED inflation out of control

the fiscal and monetary stimulus was

excessive and I have this view that

manrega proved to be quite lethal

because it fueled Labor uh cost and did

not have a corresponding investment

around it and that brought double digit

inflation and was the

real foundational reason why the UPA

lost elections in 2014 because poor

people were impoverished and even though

we don't get uh annual data on poverty I

am sure that in 20140 poverty was at a

multi-e high right despite manrega see

this is what redistribu you're in fact

you're saying in in because of manrega

yeah I'm saying because of but it's not

the single reason because a lot of other

things happen around that time so I

don't expect such policy responses I

think I think especially foreign

investors as a cohort not individuals uh

you know misread India's politics quite

a lot and they don't understand and look

at yesterday's cabinet formation okay

continuity yes at an extreme level which

is essentially it's almost like the

prime minister is telling his cabinet

listen your two-month break is over

let's get back to work yeah exactly yeah

so that's you know we we we're basically

you know it's business as usual so

nobody has to learn anything new uh I

mean there are a few moves but you know

nothing dramatic so everything is as it

was and you know life goes on and

therefore they can press the pedal and

move forward now uh I know I'm not

allowing you to ask any questions but

anticipating your question there is a 50

basis points um uh room that the

government has earned in these two three

two months since or rather four months

since the interim was announced right

the base number is down 20 so instead of

5.8 it came at 5.6 and then the RBI has

given a three 30 basis points dividend

check so it'll be interesting to see

what the government does with this 50

okay I I don't think they will take the

deficit down to 4.6 because I think

that's too much of a contraction in a

single year uh the likelihood is that

the deficit will be 5 5.1 and the

remaining amount will be available for

the government to spend and I don't

think that's priced into the market

that's a lot of money actually waiting

to be SP spent in and that's good for

liquidity it's it's uh it's good for

growth uh it does set us up and if uh

the rain gods are uh you know and I

think my again my my science tells me

and I disagree with climatologist that

this was uh this was climate change this

was a ferocious El Nino which created

this heat wave in India and it is being

followed by a equally strong lanina so

come August we're not going to be liking

to come to office yeah because it's

going to be raining a lot so I'm

expecting a very strong Monsoon

hopefully it's not it doesn't cause

damage but it'll be a very strong

rainfall probably the best that we've

had in a few years so that sets us up

for good Farm output the government has

a little extra cash in its back pocket

without compromising on the Fisk and I

think you know corporate sentiment

should be good right yeah can I come

back to the private uh kex cycle uh I

think everything now seems to be still d

driven by the government capex uh Kitty

uh the private sector is not coming in a

way that we need to scale up see for the

next 5 years if we have to scale up now

it's a question of scaling up you know

we can't just say that we'll do a bit

here and a bit there do you think that

private kex is coming in a way that can

meet the Ambitions that have been set

for the next five or even 10 years let

me share the numbers with you so the

last time we had a cap pick cycle in the

private sector was the period between

2004 and 2010 right now the starting

point in 2004 was 4% of GDP which is

Corporate capex was 4% of GDP GDP was a

lot smaller then it was almost 1/8 the

current size by 2010 that number went to

17 we had never witnessed such a CAPIC

cycle in our life okay uh and Nifty

earnings in the period between 04 and 08

compounded at about 30% okay that's not

our base case right now okay for a few

reasons I'll explain those

the private corporate CAPIC cycle

troughed at 4 in this cycle again so

from 17 it went all the way back down to

4 by 20120 second quarter which was the

uh end of the or during the first wave

of covid and is now sitting at about 5

okay so it has inched higher it is now

off the lowest I think this five goes to

10 I don't think it's going back to 17

and there are reasons for this one very

important reason is India's iore has has

gone down so let me explain that iore

stands for incremental Capital output

ratio okay that is the efficiency of

capital uh that is available in the

country so our Capital was a lot more

inefficient 15 or 20 years ago so for

every dollar of growth we needed $4 of

capital okay and therefore you needed to

invest that much more in order to

generate a certain amount of growth rate

the second thing that has Chang change

is the actual headline growth rate that

the government is tonging now I have

heard this a multiple times from

government and I agree with them that

India is just not ready for 9% growth if

you try to push 9% growth then you will

trigger inflation and the growth cycle

will end like it did in that period yeah

okay now at 9% growth with iore at 4 you

need an investment rate of

36% but at 7% growth an ior which

arguably is lower than four because

India's capital efficiency has improved

for many reasons we can go into those

details but infrastructure

GST uh Financial system

digitalization internet Broadband

everything everything has changed the

incremental Capital output ratio the

amount of capital I need is a lot lower

and hence I get more bang for the same

dollar buck that I'm investing today

than I got then so if you are looking at

that cycle and saying oh we're we're not

yet there we're not yet there we're not

going to get there and yet we will have

robust growth rate now if you decide

that you want to push growth from 7 to 8

yeah and your iore is say 3.8 you will

need about 30% of gdps capital still a

good 600 basis points lower than that

time and that is reflected in my

forecast which is we're not going back

to 17 we're probably going to peek at 10

rythm uh just on follow up on that capex

question and some of the points that

you've made you're saying that no course

correction will be required in policy

but I want to link a couple of things uh

rural incomes not growing at the same

Pace the question of unemployment all of

these came up politically and maybe got

Amplified for political reasons but I'll

leave that aside the fact is that

private capex is also waiting for

consumption levels at bottom of the P

pyramid to grow to that extent every

theme we talk about is premiumization

what push do you see to make that happen

as well where you have a more sort of

secular growth rate you mean broad-based

broad-based um so uh so let me uh let me

admit one thing I think coming out of

covid we underestimated rural distress

okay so I was of the view that rural

growth should have turned last year but

it didn't and it has taken a little

longer for the impulses from Urban India

to slip into rural India so uh I think

it is happening now actually so you can

see that in corporate commentary we have

leading indicators which actually tell

us that rural growth is improving you

can see it in the two wheeler data you

can see it what consumer stable

companies reported last quarter it's

finally turned okay so that filtering of

growth down has uh has happened the

second thing which you must

understand is that the government in the

last 3 years during covid has focused

essentially on investments and therefore

the share of Investments has risen in

GDP okay now GDP con contains investment

consumption and your external deficit

okay if the share of Investments is

going up and the external deficit has

gone up down slightly consumption cannot

be at the same level it has to lose

share so on a ninal growth basis

consumption growth has trailed

investment growth and that is how an

investment cycle behaves and that will

continue to be the way it will happen

over the next uh you know four or five

years as the investment rate gains share

unless you go into a current account

Surplus which I don't think will happen

so we'll probably have a much narrower

current account deficit consumption will

lose a little bit of share investments

will gain then as the investment cycle

matures and as things Peak out there

that's when consumption comes back so

this is not the time when on a relative

BAS bases again and you know rural India

reflects most um in in the stock market

Palin it reflects into consumer staple

stocks they underperform in the 0307

cycle and their outperformance started

in febo 8 so from a stock market

perspective it's certainly not the place

to be you don't want to buy consumer

staple stocks I mean there may be pops

and trading pops and there was one last

Tuesday because everybody thought

populism is back and it was a great

moment to sell the stocks again come

back into uh Industrials which you know

took a little bit of a backseat but I

think Industrials and financials will

lead the pack Consumer Staples will be

trailing so that's from a market

perspective but I think the rural

economy is already improving at the

margin no so since we're talking about

the market perspective let me take that

opportunity Industrials you like

financials you like you talked about uh

government kex not paying at the same

levels but what about um you know your

core sort of infra spends Railways um

defense make in India all of that you

think continues at the same Pace were

you have a bullish on it no make in

India is not government spending uh

the yeah okay yeah so I'll come to that

PL continues uh probably expands gets

even more refined but the key

infrastructure sector that I would be

constructive on is Railways yeah because

that's where all the heavy lifting is

not going to happen the the Endeavor is

to lower India's logistic six cost uh

maybe by 30 40% over the next 5 years

and and therefore you know the happy

news here is that we have continuity in

the railways because the the outgoing

Minister and the incoming Minister has

already done a lot of work in the last

three years we wrote extensively about

this about 6 weeks ago about all the

changes and it's dramatic I remember we

had written a report in

2015 the average speed of a cargo train

in India then was 20 km an hour you

could cycle faster okay yeah we've

already come a long way from there okay

now that speed has doubled it will

double again so if the cargo now think

about the macro and the micro

implications if cargo on the trains is

moving faster it becomes cheaper to

transport Goods point to A to point B

importantly the inventory in the system

goes down okay so balance sheets become

better this is about iore you need less

Capital to grow your business so the

implications in the next four five years

will unfold and surprise us on to the

upside right so I if if there was one

infrastructure sector where I think the

government is going to lend greater

attention to I think it's Railways now

in the other sectors I think the

template has been set up which is the

gross spending will remain okay but the

net spending may actually decline

because the government may actually

start selling some of these assets more

aggressively to fund incremental stuff

so so you know everybody in the market

when they think privatization they only

think about government companies yeah

but you should be thinking government

assets they don't need to be

corporatized in order to be sold when

you sell a road you're still selling a

government asset you're still

privatizing something right that

activity I think will be very strong and

it will allow the government to fund the

next Road it will allow the government

to fund a host of rural roads that need

to be built where you don't get the same

economics or in fact zero economics

compared to a uh Highway and uh the

railways will get money out of the bu

so I think that's how I am thinking in a

very big picture way right yeah I I have

one question to take this back to the

market when I'm saying Market I'm not

talking about Nifty Target or sensex

Target today the market that we are

seeing is different from the market that

we saw 5 years back 5 years hence you

know a large number of small cap

companies engineering companies some of

the older ones they are all coming to

the four so what I see today the

Thousand basket thousand stocks that I

see could be different 5 years from now

so the market texture could change

completely the way we are moving ahead

Oh you mean to say in in terms of share

of market cap of various comp no not

just market cap in in terms of mix of

companies you know today a small cap

company is getting so many orders midcap

companies are getting so much orders now

some of them will would have grown so

big if they are on this efficient path

that we we are looking at implementation

and efficiency right right now so they

would look completely different so

forget the Nifty Target or the sensex

target that's PA of course you know that

math you always has been uh telling us

but the uh choice of stocks could be

completely different if you look five

years from now it's possible but as such

the composition of the market in terms

of sectors always changes from cycle to

cycle so it does not remain constant so

you know at the peak of this cycle

Consumer Staples will lose share

financials and Industrials will gain

discretionary consumption will gain a

few other sectors will lose share and

then

technology as an technology is I think

very interesting yeah so I tend to be

quite bullish on some Pockets uh on a

5year basis uh cyclically I'm more

constructive but uh technology may not

gain share May quite lose share a bit at

the Peak at the peak okay but it all

depends then of course there are going

to be a plethora of new listings and I

cannot really anti ipate uh the sector

diversity of the new listings but we are

going to get a very big primary cycle

very big one in fact it's just about to

unfold in like the next 15 days and a

lot of companies will file to raise

money and uh and uh therefore I think

the markets will be less exuberant than

they seem now because the supply will

come and therefore it will become a more

stock selective Market if if I were to

make a prediction by December uh the

Nifty will have even before before that

may have just exhausted for a while mhm

okay so um a a large primary Market

sucking out Capital but domestic staying

true to the four and that Capital likely

continuing is that the base case you

made it a few years ago it's panned out

very well does it continue part two of

my question what about the what about

the

goras see uh the domestic investors are

going to continue investing okay uh

because uh because of many changes that

have been put into place uh we created

an acronym called dream uh which stands

for demographics real rates uh and um uh

you know policy changes and education so

a lot of things have changed um the

seven you know the household balance

sheet Acres about $700 billion of saving

at the current GDP rate and if you look

at last month's number you still

annualizing at about 50 60 billion so

you've not even reached 10% of that

number right the lowest amongst the

developed World in terms of household

saving equities is Japan at 12 and Japan

by the way is now back to equities okay

so they are coming back in a big way

Europe European balance sheets have more

than 50% in stocks us balance sheets

household balance sheets have more than

40% in stocks so so we are nowhere close

so this has got many miles to travel in

fact I'm speculating that uh the

government may even allow retirement

funds to invest more today they are kept

at 15% of incremental the experience has

been awesome in the last 9 years this

was allowed by the prime minister in

2015 MH so it's now been almost a decade

and uh and I think the retirees are

going to be quite happy because they're

getting better and better returns even

though interest rates are lower the

Providence fund is able to deliver

because of equity markets and it makes

sense for a long-term fund manager like

The Provident fund to be invested in

equities that's what happened in the US

when President Reagan allowed 401K plans

to invest in stocks yeah there it ended

with the NASDAQ bubble in about 20 years

here I think it will run a little longer

our people don't age like they did in

America for a long time so I dare say

another 20 30 years to go so that's on

domestic flows now see in the market and

I say this and I get tired of saying

this there are only two cohorts right

there are domestics and there are

foreigners if you look at last month's

clip they were putting about $200

million a day into the market so imagine

if domestic funds decide that they don't

want to buy for 5 days it's a billion

dollars now to invest you don't do for

two weeks and you have $2 billion right

it's a lot of money and therefore they

have to come every day to buy stocks

somebody has to sell so foreigners are

selling now this will change when the

corporate issuer is in the in the game

so once the once primary issuance is

pick up and therefore you now have the

third cohort in the market and a fresh

seller you will find ironically The

Foreigner will come to buy so if you ask

me for a prediction next 6 months

foreigners are going to buy India okay

and I'm just tying this because they

have 5 minutes left with the investor

conference one more thing yeah please

Okay so yesterday 3 days ago somebody

asked me this question uh a client of

ours that you know currently if you look

at the Emerging Market funds foreign

investors are about 50 basis points

underweight India so India has a 177%

index weight and foreign investments

maybe around 16 16 and half so the

question was how much money does it take

for foreigners to go another 100 Point

basis points higher so slightly

overweight from their underweight and

the answer is $50 billion US oh God okay

and the problem is that the maximum that

they've ever put to work in a single

year is

35 okay so now you are stuck because

this is amongst the best performing

markets in the world you're underweight

and you're struggling to deliver

performance and uh and to go overweight

the amount of money that you need to put

is just not Fe the market cannot take

that much so what will your clients ask

you at the investor conference which

starts tomorrow because capital gains

might be in Focus you mentioned that

your Capital Market shouldn't be

tinkered with and this is what the 26th

edition of your investor confidence it

is okay so tell us a bit about the

conference yeah so we have over 300

investors coming in um and uh I think uh

we have about uh 75 or 80 companies

presenting at the summit um we have a

few macro sessions as well I have a

special session on deep Tech I very

bullish on deep Tech and I think it's an

underappreciated space and it could be a

major growth driver for India into the

next uh few years uh India actually has

never been renowned for Innovation but

what's happening in the Deep Tech space

I think will surprise a lot of uh

investors uh so uh so yeah so that's you

know what's happening it's a mix of

companies from Industrials financials

consumers uh energy uh I think we have a

bit of focus on energy transition

because that's a big theme for the next

few years I think

Aerospace uh plis um the U you know the

buildout in

infrastructure the the overall

manufacturing space I think remains a

big theme our view is manufacturing

gains share in GDP over the next 10

years and therefore services will lose a

bit of share agriculture I think retains

um so uh so the Summit is around this

the the main question that is haunting

investors abroad it doesn't bother

investors here because because uh you

know we can't put money to work in size

elsewhere right so until that changes if

we want to buy an equity asset class and

it's it's only India for foreigners the

problem is this 21 times Nifty multiple

and they're not able to digest it yeah

so there are only two markets in the

world that trade at such fancy multiples

the US and India India trades at this

multiple in my view for legitimate

reasons you have a strong earnings

growth cycle we're only halfway through

we have we have strong terminal growth

because of our demographics and our beta

to em is down to3 it used to be 1.3 so

the expected rate of return has fallen

so all this means that you're going to

trade at higher multiples in in very um

in very layman terms essentially

equities are trading closer to bonds

than emerging market equities okay

because Bond cash flows are assured you

know every year you're going to get it

right so that's how the Indian Equity

markets are behaving um at some point in

time it will become a bubble we're not

there we'll get there at some point in

time and that will be the moment to exit

the stock market the economy may still

doing be doing very well but that may

not matter because the markets could

have priced in everything but I don't

think it has happened so far so I think

that's one debate and the second is I

think investors want to get a pulse of

how Corporate spending will pan out the

question that he asked so you know what

are companies saying about their balance

sheets are they about to start

leveraging are they about to build big

capacities and and uh I think the third

thing will be around macro policy so

some insights into how macro policy will

go though I think uh we probably going

to get more momentum behind all the core

policies of the outgoing government in

this new government and that message

seems to be fairly clear over the last

few days but uh let me let me ask you as

we let you go Rhythm uh you're very very

bullish on India's future uh what are

the three things and we've seen

continuity Etc but if I were to ask you

three things that you hope to see new

and improved but from the same

government and the same team in term

three hope yeah hope to

see I'm hoping not expecting so there's

a difference between hope and

expectation okay I'm hoping that farm

laws are brought back to the table I

think for the 200 million farmers in

this country that's going to be the you

know the uh 1991 moment as it was for

the industrial sector and it will ensure

that India accelerates on its growth

path and becomes a much uh bigger per

capita income than it is

today uh the farm sector requires urgent

reform uh so that I think is one I'm

hoping uh not expecting though uh the

the other thing I think uh would be uh

and you you have specifically asked for

Hope right not expectations you can add

an expect two hope and one expect

expectations are very clear expectation

I think we're heading for much uh lower

primary deficit and probably a primary

balance in the next 3 4 years I think

we'll continue to see uh pointed in

incentives for the manufacturing sector

it'll come in a in many ways it'll come

through rationalization of GST it will

come through infrastructure build it'll

come through social infrastructure build

it'll come through plis it'll come

through various uh methods it will come

through greater

FDI um so I think those expectations are

fairly

another hope I have which is not

necessarily an expectation is that we

should strike a few deals with foreign

companies and get them home as quickly

as we

can uh I think uh we have been a little

bit uh slow on FDI relative to my

expectations so I hope that it can be

accelerated uh I think the last year or

so maybe uh you know there were other

things to attend to but now I think is

the moment for us to there is a there is

a vacancy in the world

from the multi-polar world and China

plus one and I think we can occupy that

spot quickly enough so yeah maybe these

two things two hopes one expectation no

no expectations are many I think I will

be right on most of them and they're all

detailed in my report uh in fact there

are so many of them that I lose track of

those expectations those will all come

through okay but the couple of hopes

that I have I think the FDI thing will

still come through Farm law I am not

very sure I think it's a toss Mr musk is

excited now that all is done in dusted

is already waiting but uh what an

absolute pleasure rhym thank you so much

yeah we didn't touch upon one thing

sorry do we have a minute risk factors

ah everybody should be aware this is not

a equities are not a straight line asset

class you don't get up every morning and

get a interest you know coupon in your

bank account so people should be very

conscious of that I think um most of the

risk for India are from the world I

think China's deflation is a risk

because Indian companies will have to

compete with Chinese pricing which is

going to get very competitive and even

more competitive there's a possibility

that a ren andb depreciates which will

make it harder for India to compete with

China I think we have to worry about

global growth unfortunately for India it

does not have the same Global growth

Tailwind that China had when it was

doing its jig right so India will have

to have uh counter a much slower Global

growth because the world has since then

aged and it is also far more indebted

than it used to be years ago so it's not

a very pretty world out there so I think

that's the uh second thing I would worry

about and back home I think we have and

I expect this so there's not hope but I

expect it capacity Creation in four

areas Judiciary bureaucracy education

and health now education and health are

complex because they are you know also

State subjects so it has to be the

delivery has to be at the state level

but Judiciary and bureaucracy I think

think will occupy a lot of attention in

the prime minister's office to India has

a great contract law but to enforce it

is not easy because the Judiciary is you

know is bursting at the seams and really

if you want to accelerate from 7% to say

9% growth that could become an

impediment okay well but as the note

said U this remains India's decade and

in some sense it's good to identify

risks in in in in a period which is

going to be very good for um India

Indian markets and more so R thanks for

laying it out for us and all of us here

wish you all the best for your investor

conference thank you so much n thank you

pleasure having you

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