This is possibly the cleanest bull market ever in India: Ruchir Sharma

Q: Let me start by asking you about why this essay and why the timing for this essay?

A: Because I was just thinking about India's trajectory and as you know, for the last 20 years, I have gone out on the election trail to try and figure out what is happening in elections. And while I think that is a great process of discovery because India comes alive at election times and it is great to see in terms of what is happening in India, it takes you to places which we would never go to ordinarily. The one thing which increasingly struck me is that the outcome of those elections has really no bearing on what and how the Indian economy is performing.

Q: So you are basically saying that there is no connection between politics and economics in India?

A: Yes, and I find that that is a really surprising conclusion.

Q: Yes, one would imagine because the discourse has been dominated by at least post 2014 by 'Modinomics', its implications on India, its impact on the Indian economy.

A: Yes, but this goes much further than that. So I think there are two ways in which this is really striking because in most emerging markets that we look at, I find there is a pretty close correlation between economics and politics. But in India, we just do not find that relationship. Now, for a while, in the last decade, in fact in my first book, in Breakout Nations, I wrote a lot about this and there seemed as if there was some link developing between economics and politics in India because of a lot of high profile Chief Ministers in India, whether it was Modi himself in Gujarat or Nitish Kumar or Naveen Patnaik in Odisha, you thought that there was a connection building between leaders who were delivering high economic growth and getting re-elected as well. And so, we saw that the pace of anti-incumbency in India last decade, the rate dropped quite sharply for a while.

Q: To about 50 percent versus 65 percent.

A: So that is the type of work that we have done that if you look at India's, ever since multi-party democracy took root in India, going back to the 1970s, what we find is that two out of three governments lose their re-election bid, both at the national and the state levels when you put them together. There have been hundreds of elections over this time period. We looked at all the election data and what we found was that most governments end up losing their re-election bid. That is the long-term picture.

Last decade for a while, in the second half of last decade, it felt as if this anti-incumbency, this natural tendency to throw the bums out no matter what happens, we thought that that tendency was beginning to change and we saw a big decline in anti-incumbency in the second half of last decade where the rate dropped to about 50 percent and I thought that something was changing.

But now, look at the latest data. This decade, there have been over 30 state elections and I am excluding some of the smaller states like the North-eastern states, etc. where it is very hard to figure out what is going on. But if you look at the 20 larger states of India and you look at these elections, what we find is that once again, the anti-incumbency rate has picked up this decade and currently, we are running at a rate which is back to the historical average of nearly two-thirds of all governments losing their re-election bid.

And the interesting here was that I tested this that does this have to do anything with economics that for example, if a state delivered very high economic growth which you can define as a rate of more than 8 percent, does it help the Chief Minister get re-elected? And the answer is no. If you looked at the data since the state3 gross domestic product (GDP) numbers were available going back to 1991, and the tens of elections which have been held across these states, there have been about 30 instances when state Chief Minister has delivered a growth rate of more than 8 percent. And even then, the anti-incumbency rate was more than 50 percent for those states.

So it drops marginally from 65 percent to 58 percent, but really it is a pretty tough ask that a state delivers 8 percent economic growth or more than that and yet the Chief Minister loses the re-election bid more than 50 percent of the time.

And if you looked at other variables too that if a state grows faster than the national average or if the states GDP growth accelerates compared to the preceding five years, does it help? And we found absolutely no statistical significance. And this is a bit different because last decade there was a body of research which was coming up to show that these variables were working. But, now if we include the data of this decade, we find that the long-term picture is absolutely identical.

So changes upon changes is one thing which has remained same about India, in its 70 years after independence.

Q: That politics has no bearing on economics or economics has no bearing on politics.

A: Yes, politics and economics are as disconnected as any other country I know and this is, as I said, this is just not true of many other nations that we see. Of course, in the United States, a lot of sophisticated models to explain why and how economics explains electoral results in terms of who is going to win and not, emerging markets too, we see that leaders typically have a pretty big impact on how a nation is going to do from an economic perspective. And in India's case, I am just not being able to find that relationship and I found that staggering and that is one of the main reasons for this essay as well.

Q: So what bearings does your analysis now have A] on future elections and B] this discourse that we have had on how development and the development agenda is driving electoral results?

A: I think that in terms of there are two things here. One that I have always believed that the Indian economy moves much more in line with global trends than we here in India have ever given it credit for because here, in India, we are one of the most insular societies that I know of which is very inward looking and not that interested in what is happening in the rest of the world. But I find that this linkage is broken and yet look at the evidence.

The evidence really is that ever since the Indian economy began to gradually open up in the 1980s and in a much more accelerated way, obviously in the early 1990s, you find that India's growth rate has tracked the other emerging markets quite closely, which is on average, India has grown about 2 percentage points faster than other emerging nations over this very long period of time. And the reason that we have grown faster has mostly to do that our base is much lower. Our per capita income is just about USD 2,000 which is a much lower base and it is a very standard economic theory that from a lower base, you are able to grow much more quickly.

And, the average emerging market per capita income is closer to USD 10,000. But, ever since, we have opened up, our economy has grown very much in line with global trends and that is something which is again, being underappreciated. I know there is a lot of frustration in this country today as to why we cannot grow much faster, our growth rate seems stuck, investment levels seem very low.

But in some way, this is very much a global phenomenon. There is not a single region in the world today that is growing at a pace which is faster than the pace at which that region grew last decade, not a single region in the world. Now, there may be some isolated countries. So I think that we have to use a new math of economic success.

We have an anchoring bias here which is that whatever happened last decade, we tend to use that as the base in terms of what may happen in the future and this is a problem across many nations, not just here. Even in the US, there is a lot of frustration and Trump speaks about that – the need to get the US economy to grow at 3-4 percent again. But the reality is that given the three D's, as I put it in my book, demographics, debt and de-globalisation, in this environment, it is very difficult for any nation to grow at the pace that it was growing last decade.

Q: One is this interesting aspect that you are talking about that most nations need to temper their aspirations when it comes to growth and perhaps there needs to be a new math as far as the growth forecast itself is concerned. We just have the economic survey out which has now said that it is more likely that we are going to hit the lower end of the growth forecast which is about 6.75 percent versus the upper end which is about 7.5 percent. But you are saying that look, that is not necessarily reason for India to despair because that is the new normal across the world.

A: That is what it basically means. Of course, as you know, I have some problems about the exact GDP numbers ever since they changed the methodology, but let us just say that India is growing somewhere in the ballpark of 5-7 percent, depending on what you believe are the right numbers. That for me, is a fair outcome because if you look at the world today, at the peak of the boom, in the middle of the last decade, there were more than 70 countries in the world which were growing at a pace of more than 5 percent.

Q: And there is what, 28 left now?

A: Exactly, just 28 odd countries have been growing at a pace of more than 5 percent this decade. There has been a compression everywhere. There is not a single region in the world, as I said which is growing at the same pace because one of the main ways to grow richer is to export your way to prosperity. And look at export growth. This is especially in an environment of de-globalisation. Export growth has fallen everywhere across the world. Even India's export growth, last decade during the boom years was 20-30 percent a year between 2003 to 2007. That export growth basically has flattened out this decade and it has happened in most places. So this is the era of de-globalisation, after the era of hyper globalisation that we got over the last 2-3 decades. And in this environment, if your export engine is down, it is very difficult to grow rapidly.

Now of course, there are countries like China, Korea, Taiwan which have been able to grow at 10 percent plus. But my point has always been that to expect big bang reforms in India, to expect that some major big bang reforms will take place in India has always been a bad bet because that never happens. Our culture is one of incrementalism. We do things in incremental steps and I think that is what should be the operating assumption.

Q: Not necessarily desirable, but you are saying that that should be the operating assumption?

A: Yes, because that has been the evidence. That is how we have operated. Sure, when we have had our back to the wall, we have carried out some major reforms like we did in the early 1990s, but the path has been one of incrementalism for a very long period of time and that is the path that we should expect over the next few years and therefore, this brings me back to the original point of the argument in the essay which is that to pay attention to politics in India is, from an economic perspective, is really a waste of time.

Q: Or is it too early, at least in the Modi years, do you believe that that assumption is too early, because look, it's three years. While you do not necessarily believe that the government has done the big band reforms like you would have liked to see, for instance in the banking sector and you know that the trajectory for what has happened with private banks versus public sector banks is very different and that has been one of your pet grouses that the government could have been a lot more aggressive when it comes to privatisation perhaps of banks. We are now talking about consolidation of banks, but there are other structural changes, the goods and services tax (GST) for instance, the dividends of which will probably play out over the next few years. So, are you perhaps being premature making that assumption about the Modi era?

A: No, in terms of the fact is that I go by what has happened so far which is that even as far as GST is concerned, yes, it is a commendable reform, but it is again incremental in nature. It is very different from the ideal GST that we would have liked which would have been much more big bang in terms of having a single slab or having two slabs rather than having five slabs and exemptions and stuff. So it is very different. But, that is just the Indian reality.

So, I am not frustrated by any of this. Just the long experience of dealing with India has been that this is a country as we have discussed that before that consistently disappoints both the optimist and the pessimist. And so, that realism is what we need. You can always be an optimist and always say that this is going to happen. But for me, that is a money losing strategy and that is one thing which is also, we have not appreciated that if you look at what has happened over the last three years, had you bet on the government to deliver, look at it from a pure stock market perspective, you would have been a loser.

Q: I will talk to you about the stock market in the next segment, but let us just continue with the reform agenda that this government has now spoken of. As I said, within the banking space is something that they are talking about. We will perhaps see some announcements being made shortly. On the disinvestment front, they suddenly seem to have the appetite even for privatisation of no other than Air India, at least that is what being spoken of. Demonetisation, the government believes that has been a disruptive reform. Do you see it as a reform at all?

A: No, in terms of, on demonetisation, I think that I have made my stand pretty clear that this was something which was the classic Indian trait of bad economics can be good politics because in fact, when we spoke about it last December, I was not a fan of what was done. I thought it was not the appropriate remedy for this economy. But I was surprised when I travelled to Uttar Pradesh to follow the elections in late February and early March. I was surprised by how politically popular demonetisation was on the ground with a lot of people there saying that this was the right thing that the Modi government has done because it sounds big and it is the right way to sock the rich. So, this was a classic case of something which was possibly bad economics but good politics.

Q: And it backed your argument that India today, is one of the few countries that actually wants an authoritarian leader who perhaps is not answerable to parliament?

A: This is the other research that I have stumbled on and I think that the results of this are hugely significant. There is this World Values Survey which is carried out and in the World Values Survey, the question they ask, and they have done this for many decades now, is that would you rather have a leader who favours more authoritarianism or someone who is more answerable to parliament and favours more democracy. They have this question that they ask. And over the last two or three decades, the country which has seen one of the largest increases in the people saying that they want more authoritarianism in their country is India. This is a staggering result that for the world's largest democracy, a lot many people in this country prefer a strong authoritarian leader.

And this is the point I try and make to a lot of my friends back in New York and outside. There is a lot of criticism about India losing its liberal way, there is a lot of that sort of stuff and what the government is doing. And I am reminded of this line there that culture really is an offshoot of the politics and sometimes it is the other way round as well that the politics is an offshoot of the culture that is there in a nation. And I think India basically, is seeing this reaction that they were so sick and tired of the previous ineffectual Prime Minister that now, the pendulum has really swung the other way where they would rather take someone with a strong hand, an authoritarian leader than the chaos of democracy or what they perceive as the chaos of democracy.

So this is coming very much bottom up in terms of that the people of this nation seem to want a strong authoritarian leader and that is what is going on here. And there are other countries which have also seen a similar increase.

Q: Ukraine.

A: Yes. But the sharpest increase has taken place of any major nation in the world has taken place in India.

Q: So, this then perhaps has more significance for the electoral result in 2019, if one goes by your hypothesis, than this business of 'Sabka Vikas' and development and economic performance.

A: Yes, possibly. As I said that the evidence suggests that there is really no connection between politics and economics in this country. On the other hand, it is this sentiment of nationalism and you see this, you see this across social media, you see it across television channels, it is this sentiment towards nationalism and stride at hyper-nationalism at times, it is this sentiment which is what is buoying Modi and the current administration.

Q: One of your arguments pertains to the Indian stock market. You say, India's stock market continues to move in line with other stock markets around the world and anyone who made investment decisions based on Narendra Modi's political agenda currently looks like a looser whether they bet on him or against him. So, now let us talk about the Indian stock markets and the connection with Modinomics or the lack thereof.

A: If you look at what has happened in the stock market ever since this government came to power, the real pessimist would have said that the stock market is going to tank just because they had all sorts of concerns about what was going to happen with the social fabric of this nation. Instead the stock markets are up more than 20 percent since Narendra Modi came to power.

On the other hand if you look at what has worked in the stock market over the last three years, you will find that there is nothing to do with the government or politics. The best performing sector since May 2014 has been the consumer staples sector. This reflects the fact that what is really driving the Indian economy over the last three years has been consumption.

As we know from instances across the world, that the government really doesn't have much of an impact on consumption as much it has on investment. Investment is what the government can really drive by creating the investment environment for investment to pick up or pushing that.

Instead if you look at investment related stocks in India, those have done quite poorly on a relative basis especially over the last three years.

Q: So, what investors were calling the Modi basket, you believe that those have underperformed?

A: Absolutely, the evidence is very clear for that. If you look at infrastructure stocks or investment manufacturing kind of stocks, these have done quite poorly over the last three years on a relative basis.

Q: Even though the assumption was that these would have actually been the outperformers given the fact that there was a lot of expectation around what would happen on the investment side?

A: Yes, and also look at public sector companies in terms of how poorly they have done on a relative basis. So, this bull market has really been led by consumer staples kind of stocks, stocks which are benefitting from consumption and other very high quality private sector companies which have done well. Whereas the public sector companies continue to languish in general with some exceptions like the oil marketing companies - because of the collapse in the price of oil have done decently but in general if you look at the sector breakdown, you will find it has very little to do with the government.

This also goes back to the other piece of research which I had done earlier which is that typically we found that when a new leader comes to power, the stock market of that country does well for the first two or three years on a relative basis.

If you look at India's performance compared to other emerging markets, India has outperformed but a lot less than implied by the research which shows that typically when a new leader comes to power, in the first two or three years, the stock market of a country tends to outperform by 20-30 percent. In India's case it has been closer to about 10-15 percent - the extent of outperformance vis-à-vis other emerging markets.

So, my simple point being here that the connection between politics and economics in this country is rather limited and the stock market's behaviour over the last three years since this government came to power has only reinforced that notion. If you look at both the internals of the market, in terms of what has done well and also the overall market, neither the pessimists nor the optimists on the Modi government would have made any money based on a political view. So, in this country if you want to do well you have tune out the politics and be an internal exile as far as politics is concerned because that only interferes with sort of making money in this nation.

Q: Let me ask you about what your view is on the Indian stock market currently given where we find ourselves, given where the economy is, give the flows that are coming in, specifically the domestic flows. What is the view on India today?

A: Yes, the nature of flows has changed a bit because of the very strong domestic flows that we got in the stock market. But if you look at the Indian stock market's behaviour on an overall basis, on a daily basis, it pretty much tracks other emerging markets. Even if you look at this year, the average emerging market this year, is up about 25 percent in dollar terms. Guess how much India is up, 25 percent or so in dollar terms. So I say the Indian stock markets remains highly correlated to the rest of the world on a daily basis. So the future of this bull market is very much dependent therefore, on the global bull market rather than to do with the Indian bull market.

Having said that, what you do find over time is that whereas on a daily basis the correlations are very tight, over time, the Indian stock market does steadily outperform other emerging markets. It has done this for now, 20-30 years. And, just like the Indian economy, as I said earlier, tends to grow about 2 percentage points faster than the average emerging market, the Indian stock market also steadily outperforms over time and that relationship is very much on line currently. If you look at the Indian stock market, steady outperformance over time and that slope is exactly what the Indian market is following currently.

So I would say that the Indian stock market, I still expect both the Indian economy and the Indian stock market to steadily outperform other emerging markets and the macroeconomic volatility that we see in this country is amongst the lowest that we have of any nation. But that view at a macro level and then see how to implement it and it gets much more interesting and somewhat complex as well.

But, the most remarkable feature I find of this bull market is that this has possibly been the cleanest bull market in India's history. We have seen many bull markets. I have been tracking this now for over 25 years and typically, when you get a bull market in India, a lot of low quality companies do very well. A lot of so called shady businesses end up having their time in the sun and yet, what we find in this bull market is that quality has worked like never before and that is a major break from the past.

Q: So wouldn't that then be connected to politics or at least governance largely?

A: I mean you can argue, but if you look at as to when that started, as you say the low point for India and the low point was when crony capitalism was at its peak, like at the early part of last decade. But really, since about 2012-2013, what we have seen is a steady trend where crony capitalism, at least as reflected in stock market values has been declining quite sharply and quality has been doing very well. So I would say that this is a trend which predates even the government coming to power.

Now sure, to this government's credit, I think it is a very important, symbolic thing that at the central level at least, there has been no corruption or no high level case of corruption and that is quite commendable because in any emerging nation, we expect those headlines to come. So it is commendable. But the stock market is almost independent of what is going on that if you look at it, even before the government came to power, at least in the stock market terms, you found that crony capitalism was declining and quality was doing really well.

And how do I define quality? I define quality as companies that are steadily able to deliver earnings growth of let us say, 15 percent or more every year, show a return on equity of 15 percent or so every year on a steady basis. And I cannot remember any bull phase in India where quality has done so well and this is where again, so many people have been wrong about it because when the government came to power, the usual drum beating on how you need to buy low quality, buy Capex companies, buy infrastructure companies, a lot of drum beating took place and that has just been wrong.

So even if you were bullish on the market based on that political thesis, you would have underperformed dramatically by buying those companies and our game is about outperforming and doing better than the market. Instead, had you stuck to quality, you would have done really well and in that regard, I have to say, India is very unique and therefore, it is very hard to get pessimistic about India, even when the macroeconomic variables are looking very bad just because the quality of companies we find in India, the number is almost unparalleled in any emerging market.

So that is a little exercise that I did along with the team that we had a look at which emerging nations have the highest number of quality companies in them defined, as I said, with companies which for five years have steadily grown their earnings at 15 percent a year and have also delivered a return on equity of more than 15 percent a year. Which country has the highest number of those quality companies and we find that with the exception of the domestic Chinese market, India basically stands out and stands out by a long shot.

Q: So that is the big bet that you are making on the Indian private sector?

A: Yes, the Indian private sector but even narrowing it down further that the good thing in India is that given the number of quality companies you have, you do not have to go down and buy all these companies which will be politically connected and think that that is the way to make money in this country. It just does not work in this country to buy politically connected companies as well. That is another finding that we had.

One of my big complaints with India last decade, which again I wrote about in my first book, was the number of bad billionaires who seem to have risen in this nation. I define bad billionaires as those billionaires coming from sectors which are linked to politics. That billionaire wealth has been decimated this decade. On the other hand, the good billionaires coming in from sectors such as manufacturing or pharmaceuticals, healthcare, those kind of where the government's role is extremely limited, explaining their success, those billionaires have done really well this decade.

This bifurcation that we have seen in the Indian stock market is very remarkable. And also the fact that for stock pickers in particular, India remains such a haven because of the number of companies. There is no other stock market from Brazil to Russia to even South Africa and Mexico, all these emerging nations where you get so many high quality companies as you get in India.

Q: So, given the hypothesis that this is the cleanest bull market that India has ever seen, the fact that we have got domestic liquidity like never before, unless and until something goes drastically, horribly wrong with global factors, rising geopolitical tensions between North Korea and the US, for instance, dries up global liquidity, you believe that this bull run has legs to continue?

A: Yes, I think that over a period of time, I do feel that the Indian stock market is going to continue its path of steadily outperforming and of these 30-40 companies are companies that will keep delivering for you over a long period of time. It is also because these businesses in India really know how to negotiate the local environment, like how you negotiate a very tough bureaucratic environment that you have at home. So basic point that the risks to the Indian bull market come more from external than domestic factors is absolutely valid.

On that, as you know, I am a bit more cautious because on the global bull market, remember, we are now in the ninth year of this global bull market. This is the second longest bull market in history after the 1990s that the US being the leading country has seen. So, I will remain a bit concerned and valuations have become very expensive because you are in the ninth year of a bull market and we have not had a serious correction even in this bull market for a long period of time. And a lot of this has been driven by the fact that central banks across the world, led by the Federal Reserve have maintained a very easy monetary policy stance. And if they begin to change that, that will begin to have a big impact on the global bull market than what people think.

So I would say the global cues are not that positive if I were to look out over the next couple of years because I feel that the global bull market is quite extended, particularly like in the US. But within that, I do think that many emerging nations including India should steadily outperform over the next few years.

Q: Let me ask you about what is happening in the US currently and global markets very volatile. Every time President Trump tweets and of course, the last one said he is locked and loaded, so how does one make sense of how the market is likely to react to these daily developments on the geopolitical front?

A: The markets were looking for an excuse to sell off here. You talk about volatility, but if you look at the measures here, this has been one of the least volatile bull markets in US history. So we have forgotten what volatility looks like. We get a 1 percent move in a day which is the 1 percent fall that we saw last week on one day was possibly the second largest fall that we saw the whole year or something. So, I think we tend to exaggerate in terms of where volatility. I think it has been very low volatility and we should expect more volatility going ahead and these events like North Korea is just an excuse for some sort of two-way risk to come back into the market. This is a very extended bull market in the US and I think the impact of Trump is way exaggerated. I think that even markets have been ignoring a lot of this ever since he came to power. In fact the volatility of the stock market has been shockingly low ever since he came to power. So I think North Korea is just an excuse.

Q: For the markets to correct?

A: Exactly. Now something can always spin out of control, there is always that risk and you can do that, but I would say that that is not what is really seriously priced into the markets just now.

Q: One of the arguments that Ruchir makes has to do with encouraging investments. In fact he says in India and in as many other countries investment growth has been week since the global financial crisis of 2008. The main reason India is still growing at a decent clip is because of strong consumption. In fact the share of private consumption in the Indian economy has grown 55 percent in 2008 to 60 percent now. We talked about the consumption boom that India is witnessing but on the flip side the investment decline which continues from 2008, that is a big cause for concern?

A: Yes it is because if you look at the economic research, it basically shows that booms which are led by consumption tend to me much more short-lived than booms which are led by investments.

The Bank of International Settlements has done a lot of work on this and so that has to be one of the risks. My overall scenario for the Indian economy is steady as she goes, the economy will continue to outperform other emerging nations with very little macroeconomic volatility and the stock market too is likely to follow the same path. However if we look at the risks to that view, I think the biggest risk has to be that private investment is in fact much weaker than even what the overall numbers show. The overall numbers sort of take both - private and public investment which is by the government.

Q: That is what we have seen, government is trying to spur investment.

A: Yes and the private investment numbers are in fact negative. The latest growth rate numbers are quite worrying. That is also one of the reasons why the job growth has been another concern.

The data on jobs growth in India is not very reliable. We don't know what exactly to take but overall jobs growth in India has been quite weak and one of the reasons for that is that if you look at the miracle economies - from China to Korea, Taiwan, Japan, they all created massive jobs growth on the back of manufacturing. Manufacturing is where the jobs typically are. Because their manufacturing sector and investment is not doing that well, jobs growth is a concern. So, far as I said the economy has been driven by consumption. In fact the share of private consumption in the Indian economy, I don't think has been as high as it is now -about 60 percent is the share of private consumption in the Indian economic today, that is about the highest number I can remember for India in a very long time.

Q: What will it take to break this deceleration and decline that we have seen on the investment side? For instance the twin balance sheet problem continues to persists, we haven't seen any significant deleveraging at this point in time. How do we kick-start the investment cycle?

A: This is one of those things where over time this will be healed. Time is a great healer, I think we have to find the same thing out here. There is going to be no quick fix to this and this is just going to gradually come up and you got to hope that there is some global revival in the investment cycle because even the global investment cycle has been very weak and you hope that India will catch those tailwinds and do well.

Do I expect anything to happen on a domestic basis in a very urgent way to kick-start this? As I said my expectation of anything being kick-started by the government are very low just because I don't think that is the way the Indian economy or the Indian polity functions.

Q: If you had a wish list in terms of what you would like to see both the private sector as well as the government do today, what would it be as we celebrate 70 years of our independence?

A: This is one of those main reasons why I wrote this essay and why we are having this conversation. It is to drill it into our heads that every time you bank on the government to do something, you are likely to be disappointed. This has got nothing to do with this government, it is the history of the way India has governed. We just don't govern that way. As I said when the government first came to power the biggest problem, the fault which I wrote about had to do with the entire banking sector problem.

There is no other country in the world possibly with the exception of North Korea where the public sector share in the banking system is as high as in India.

I have had in the early days, private conversations with some of the policy makers about this needs to be changed. In India's case 70 percent of the banking assets three years ago, were held by the public sector. In the average emerging market that number is close to about 33 percent. So, we are that out of whack compared to other countries.

The answer that policy makers would give me is that in India if you were to do this it is the sure way of losing elections, there would be too many protests and we need the public sector to finance all sorts of social objectives.

My point was, yes you can do that but your share doesn't have to be as high as 70 percent. Here we are three years later with a slight decline in that share, which had nothing to do with the government. It is because over the last three years two thirds of all the incremental lending has been done by the private sector.

You spoke about Air India's privatisation - finally, right? So, after the assets have been virtually beaten down to pulp by being mismanaged for the last 20-30 years they are going to finally privatise it at some rump value just to make sure that they don't bleed the exchequer any more. However will there be any pre-emptive privatisation, which is that you basically privatise something, anticipating that this sector might sort of loose favour or the company may not do well? Never, that just doesn't happen. There is no pre-emptive. This is like when you are completely forced to do it, you will do one privatisation and then make a big deal about it. That is just the nature of how we function. There is nothing pre-emptive. So, I think that the defining reform characteristic of this economy is almost which is privatisation by malign neglect, that over time sectors get privatised. Telecom got privatised in a similar way, airlines or the sector got privatised in a similar way. The banking sector something similar is going on. There will never be a quick fix. The public sector banks will keep losing value over time.

Again from a stock market perspective over the last three years the shares of the private sector banks have done staggeringly well. Whereas the public sector banks have seen virtually no appreciation, even the market has gone up and this is after they have fallen a lot already in the preceding 3-5 years. So, that is India's reform trajectory for you which is that privatisation happens but by malign neglect.

Q: So, your advice to people who are watching this program is don't follow the politicians, track the 30 or 40 top Indian companies for cues on where the Indian economy and the Indian markets are headed?

A: Yes and of course follow global cues because that remains a very powerful determinant of how the Indian economy and how the Indian stock market behaves. When you bring it down to the next level of implementing that view then sort of stick with these 30-40 quality companies that you have in India. Of course the list can change over time and it does. However if you just follow this basic metrics, you will find there is a huge cohort of companies available in India which other emerging markets don't have and do not let your ideology come in the way of your investment and your economic decisions because if you do that, that is a sure way of losing money in India.

Q: The new investment math?

A: I speak about this in the book, which is the new math of economic success and that is the fact that everywhere across the world growth today is much lower than it used to be. So, you have to bring your ambitions down accordingly, like the United States or the developed world. A decade ago we would have said 3 percent was a pretty good growth number there. Now it is virtually impossible to find any developed countries growing at a pace of more than 3 percent. Some handful of small economies in Northern Europe you will find. So, that baseline is down to 1.5 percent.

The other end of the income spectrum in emerging markets, the number of economies now growing above 5 percent is quite limited. So, if you grow by 5 percent that is a pretty decent outcome. We haven't touch upon inflation. There has been a big decline in inflation in India over the last few years and that is commendable. However if you look at it this again is very much a global trend. Therefore while we deviated from this global trend in the first few years of this decade because of the kind of policies the previous government was following, which were quite inflationary - they increased the minimum support prices and other policies but now we are once again re-converged to the global averages. So, yes we have seen a big decline in India's inflation rate but for me it is almost a re-convergence with the global growth rate. So, if you look at India's rankings on the inflation front across the world you will find that we have basically gone back to the average inflation rates of the other countries and that has been India's trajectory for a long period of time.