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“People want fast, decisive action by politicians”

The Economic Times Wealth, Dec 12, 2016

Rory Tapner discusses some of the major global and domestic events and their implications with Narendra Nathan.

Everyone was predicting doomsday if Donald Trump got elected US President, but things have already stabilised. Will it continue to affect global markets?

We need to put things in perspective. First, it is not right to assume that everything Trump said during electioneering will be fully implemented now. It is natural for there to be a lot of noise at the time of campaigning. But the new President will be surrounded by not only his own advisers, but also by government employees who have been in the system for decades, and I am optimistic that the actions from the new government will be more moderate. In general, the ability of politicians to make dramatic changes is quite limited. Having said that, we have a non-politician as the President now, so expect perhaps slightly faster change this time.

Sudden strength in the US dollar can dictate global money flows. Are you worried about that happening?

I don’t think that the dollar will gain significantly from current levels. This is because continued strengthening of the dollar will make Trump’s domestic manufacturing and export oriented agenda more difficult to implement.

What about the interest rate actions from the US Federal Reserve?

The US Fed has been signalling a hike and then pulling back for quite some time. But from Janet Yellen’s demeanour, it seems like it is going to happen this time. What is more important though is the direction of travel, that is, how many more hikes in 2017, and that will be based on expected and observed inflation.

Is the US growing enough to warrant aggressive rate hikes?

As I said earlier, it is going to depend on inflation, not on growth rate. If inflation rises faster, they will have to increase interest rates quickly as well. This is because the US Fed usually wants to attack inflation first, even if it slows the economy down a bit in the process.

So where will the global growth come from?

Asia will continue to be the centre of global growth. It is witnessing structural changes like going from being manufacturing or service bases to booming domestic economies. The domestic middle class has started consuming, so there is a expanding new domestic market to service. When you land in Asia, you know it is buzzing, alive and growing, but you don’t feel like that when you arrive in Europe. Most of Europe is struggling with growth as well as uncertainty. Right now, there is no excitement about growth in Europe, as it is just going from one crisis to another and the focus is more on containing existing problems.

Within Asia, India is well placed, because it is a service based economy with a compelling consumption story. While global disruptions will impact India, it will be at a much smaller scale, because these disruptions impact big manufacturing more than services.

In the domestic context, we are in the middle of a demonetisation drive. How do you view this move?

Though many Indians may have complaints about its implementation, in terms of planning and execution, and the fact that it has been disruptive, demonetisation looks like quite a smart move from an outsider’s point of view. Its primary effect is fighting black money, but it will also help digitisation in a big way. Several companies have already started shifting their payroll from cash to bank. India is serving the rest of the world with digital and other technologies, but it has not spread within the country, which is going to change now.

How much of an impact will it have on the economy, both in the short term and the long term?

Demonetisation will have a small negative impact on this quarter and perhaps the next quarter, but the economy should start recovering after that. It promises to be positive in the long-term because the fear it has generated may force people to avoid black money, which would lead to less leakage of productive resources due to corruption. More importantly, it has given a very clear signal that the government is ready to take bold decisions, as well as pave a new path on which the economy needs to run in the future.

Could the long-term positives be achieved without effecting the short-term negatives if the move had been implemented slowly?

I think the way it is implemented has created the intended impact. The move would have been much less impactful if it had been carried out very slowly, say over a 12-15 month period. Admittedly, it would have caused less emotional upheaval against it, but its ability to effect real change and send a message would also have been diluted.

Going back to the global scheme, are you expecting strong actions like this from other politicians across the world?

I like it when politicians do brave things. Most global politicians are now taking the middle path. They are compromising and planning things over very long periods of time. Since this process is very slow, they are not able to achieve anything. People are fed up of the way traditional politicians do things now and want fast decisive action. This is why Donald Trump was elected and I won’t be surprised if similar trends are seen in the French elections.