#990 Why India Needs “Safety of Business,” Not Just Ease of Business

The Core Report

Jahangir Aziz of J.P. Morgan discusses the global shift in manufacturing from prioritizing low costs to seeking supply chain security and re

Key takeaways

J.P. Morgan is directing $1.5 trillion in loans toward companies that promote security and supply-side resilience.
India remains vulnerable to supply chain disruptions because it relies heavily on China for pharmaceutical APIs and solar panel components.

Main topics

Supply chain resilience
India's economic policy

Notable quotes

The organizing principle of industry is no longer seeking out the cheapest place to produce things, but the safest place to produce things.

Conclusion

The episode serves as a strategic call to action for India to leverage

Transcript preview

Speaker 2 (0:00) Janki, thank you so much for joining me. So I'm going to pick on a few themes, also trying to tie it in with your visit here at this context, or rather in this context. But before that, how are you feeling? Speaker 1 (0:12) Look, there are millions of reasons to get worried about. There is Iran war, there is oil prices going up, there is Fed hiking cycle beginning, ECB has also done that, Bank of Japan has done that, Bank of England has done that. Will emerging markets be far behind? So if you want to get scared, there's sticky inflation. If you want to get scared, there are lots of things to be scared about. But at the end of the day, what also has to think about is that why are these central banks, at least the DM central banks, why are they hiking rates? It's because they feel much more comfortable today than they were six months earlier on the resilience of growth. And that's a significant positive for emerging markets because most of our external demand is a derivative of that growth. I'm more or less okay with emerging markets, right? That, you know, if you look at the last five years, you know, emerging markets have gone through one of the biggest health shocks in the world, which was COVID, right? Then it went through this massive spike in inflation when the reopening started. Then it went to a massive spike in energy prices after the Ukraine war. That coincided with 500 basis points of rate hike by the Fed. Speaker 1 (1:27) Remember, during most of this period of time, the largest single driver of emerging market growth, China, was shut down. Go back to 2013. where there was a whisper that Ben Bernanke someday might decide to stop QT and five of these emerging market countries, Brazil, India, South Africa, Mexico, Indonesia, all went through near or actual financial crisis. There's a, I mean, emerging markets have shown that, at least these 10, 20 emerging markets have shown that they can actually withstand these kinds of relentless global shocks. And so I'm feeling reasonably comfortable that emerging markets will continue to show this resilience. So that's the good news? That's the good news. Speaker 1 (2:21) Well, the bad news is that much of this growth resilience that we're looking at is being driven largely and not for the reasons that people talk about, which is AI-related investments. Much of the AI-related investments, those are very, very large numbers. We're talking about trillions of dollars of AI-related investment. But almost all of that is important. So the actual driver of growth over the last nine quarters in the US has been the consumer. And the consumer strength has come not from rising household income because wage growth have actually slowed. It's not that it's negative, but wage growth have steadily slowed, which speaks to the lack of bargaining power that labor has, but because household saving rate fell from 5 % to 2%. And much of that reflects, you know. very, very strong or unprecedented increases in wealth. And so some of the decline in saving rate is natural, but saving rate is at 2%. So the question is, if you do not get a reversal, i.e. a recovery in household income growth, can you continue with strong consumption because a space for saving rate to decline further from 2 %? I'm not saying it is not there. Speaker 1 (3:47) Households in the U.S. have gone through a negative saving rate, you know, but didn't work out well because that was just before the global financial crisis. So the space for savings rate to fall below 2 % and support consumption, that's getting very, very tight. So that's the concern. Speaker 2 (4:04) And how is this, including the fact that this leads to flows of capital out of markets like the United States, going to affect emerging markets and we can come to India as well? Speaker 1 (4:15) So there are many. So right now, you know, emerging market as an asset class, as we used to think about not too long ago, that doesn't exist anymore. There's no, I mean, we have GBI, EM index and other such things, MSCI, emerging market index, but no one really puts in money into the index anymore. You are now, emerging markets at least. big 20 emerging markets are being treated separately. And so each of them are now an idiosyncratic story. So one of the big stories from emerging market that has no longer a factor is how much attraction does Chinese equity markets have. Chinese equity markets haven't attracted foreign capital for a long time for a completely different set of reasons, right? So that leaves you behind with emerging markets outside of China. The largest equity in the equity space, fixed income space is a different space altogether. In the equity space, you know, the largest single, the largest and the most diversified market is India, followed by Korea. Korea is essentially being driven by two stocks. Taiwan has been driven by one stock.