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What kind of structural changes are you witnessing in the Indian economy right now?
Ritesh Jain: I believe the structure of the Indian economy is changing. India is moving from services incrementally to manufacturing-based economy. India had leapfrogged manufacturing and directly went into services because of digital infra and English-speaking population. Now, there is some data out over there which says that services only create 20% of the jobs created by manufacturing. Hence, most countries which have a greater share of GDP from services are rich countries. They are not poor countries. India is an exception. That is why we have a jobless recovery and wealth concentrated in metros.
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Now, India is going back to the drawing board and I believe manufacturing will start pulling its weight because of government focus, PLI schemes, China plus one, etc, etc. This will not only lead to broad-based prosperity due to job creation, but real estate prices in tier II, tier III cities will outpace those of metros. I believe, over the next few years, we will find a much more balanced economy.
So, you are making a point that the government actually is a big factor in leading a lot of capex, a lot of push coming in. If that is the focus area, the vehicle of that capex push, etc, will be the PSUs and PSUs have done a whole lot in terms of returns in India. What are your thoughts on PSUs and the government’s push on reforms via PSUs?
Ritesh Jain: We need to understand that post Covid, governments across the world, not only in India, have become more powerful and reallocating resources. During pandemic, a lot of power got vested in government hands and everybody loves power. Once you get power, you do not want to leave that thing. India, like any other western country, has become a command economy. You might not like this word, but it has become a command economy and in command economy you need to take into account what your government is thinking.
Do you know that since late 2019, the US itself blocked the appointment of new judges to the WTO appellate body? There was a time we used to be very worried about those WTO judgments. Now they do not even have new judges because the US has blocked it. Now, the US has started their own reindustrialisation programme. They are doing it differently. The most capitalistic country in the world is becoming protectionist for a reason, but that has allowed other countries like India to launch their own industrialisation programmes.
All this industrialisation is happening through sectors which government like, through subsidies, favourable policies, and favourable companies. So, India is not an outlier. India got an opportunity to reindustrialise without compromising its fiscal position like western world, so that is a good question. Hence, post Covid, the government, government bodies, government overreach, and favourite sectors of the government are winners and will continue to be winners in this brave new world which an investor needs to take into account while investing.What are the macro themes which you are focusing on right now?
Ritesh Jain: Entire electrification ecosystem is my macro theme of the decade and we are in the second day of a five-day test match. The other is a high-end defence engineering tech. I believe that drones have changed warfare completely at a tine when West has lost its defence tech talent to budget cuts and prioritising profits over quality. The unfolding Boeing fiasco is a great example of the rot in the system, which was developing for some time in the US. I believe Indian companies are rightly positioned to take this responsibility and I am not only talking about specialised defence part manufacturers alone, but also engineering design companies.
How long do you see the rally in Indian markets continue from these levels?
Ritesh Jain: It all depends upon the policies which we will be taking in after the election. So, let me tell you that yes, markets are getting long on over here. Based on my reading of the current government policies, I find that the government is not too happy with this raging speculation happening in financial markets and is getting concerned.
When you listen to regulators and policymakers, one thing is clear to me, they will find a way to disincentivise financial market speculation, like what President Xi did in China to calm property markets. He did it to create a more equal society and the recent speeches by our prime minister also hints at the same thinking process. So, China reallocated the resources in such a way that when the Chinese property bubble was deflating, the regulation was incentivising car production and since then China is now the largest producer of cars in the world. I think we are seeing early signs of something like that in India and the focus will be on incentivising production over consumption.
This is a welcome development because this will shift liquidity from financial markets to the real economy, which will help in creating jobs and will allow fundamentals to catch up to elevated financial markets valuation. It is possible that broad indexes do not go anywhere for the next couple of years after the elections and I think it will coincide with a wave of new policy announcements post the general election in India. You will have to allow fundamentals to catch up. You will have to allow liquidity to move from financial markets to the real economy, creating jobs and regulation. These days regulation, regulators, policymakers can do it by just a click.
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