In its second year, the pandemic has transformed the world—it hasn't changed everything, but it has accelerated many things, from population decline to rising debt to the digital revolution. So these trends could determine the fate of the world and India in 2022.
1. Decline in birth rates is accelerating:Couples had ample opportunity, but apparently lacked the desire to bring children into a closed world. Falling birth rates have slowed global economic growth and have declined more rapidly during the pandemic. As the virus spread, birth rates fell nearly 4 percent worldwide, including a dramatic 15 percent drop in China. China's working-age population began shrinking around 2015, and now the overall population is on track to shrink this year or next - many years earlier than most forecasters expected.
In India, the birth rate had already fallen below the global average for the first time before the outbreak of the pandemic. Although national birth rate data is not yet available for India during the pandemic, initial figures from Mumbai suggest a decline on the order of China, with births per 1,000 population falling from 120 in 2020 to 101 in 2021. Once regarded as the epicenter of the global population explosion, India too is now experiencing a baby bankruptcy. The critical point for India's economy: countries with weak population growth cannot sustain GDP growth in the super-fast 8 to 9 percent range. Historically, that just didn't happen.
2. Peak of China's economic power:Slowed by baby busts, mounting debt and government meddling, China accounted for a quarter of global GDP growth in 2021, up from a third before the pandemic. China's increasingly sharp turn from trade to "self-reliance" is loosening its ties with other economies.
Nearly perfect five years ago, the correlation between GDP growth in China and other emerging markets, including India, is now hard to see. Along with South Korea, India is also one of only two emerging economies where trade with China as a share of GDP has declined in recent years. To be clear, China is still important for growth in India and the world, but not as much as it used to be.
3. Global Debt Trap Deepens:Global debt, which has been increasing for four decades, grew even faster during the pandemic, fueled by sovereign debt. 25 countries, including the US, China and Japan, have aggregate debt above 300 percent of GDP, down from zero in the mid-1990s.
In India, history mirrors the global trend, with a rise in public debt over the past year that pushed the country's total debt from about 160 percent to a peak of 185 percent of GDP before falling back to 175 percent. While this burden may seem relatively small compared to, say, China, it is actually worryingly high for a comparatively low-income country like India, and this type of borrowing frenzy often creates problems. The only bright spot: most of the debt is in rupees, meaning India owes the money to itself and not to foreigners, which is an even riskier form of borrowing.
The money printed by central banks continues to inflate global stock and bond markets, which were the same size as the world economy in 1980 but are now more than four times the size. This deepens the debt trap and makes it harder for governments to raise interest rates and curb the flow of easy money for fear of triggering bankruptcies and market contagion.
4. Inflation will rise, but may not hit double digits:Declining population means fewer workers and higher wages. The deglobalization of trade, money and people flows implies less competition. Slow productivity growth raises costs, and the spread of populism dampens any appetite for restraint on spending. All of these forces are driving inflation higher, but perhaps not to the double-digit levels seen in the 1970s, as some forecasters fear.
The government's unusually high stimulus spending of 2021 should ease into 2022, as should last year's worst price spikes, centered on transport and accommodation. Technological change will also continue to dampen prices.
For once, India is an inflation outlier in a good way. In the United States and globally, inflation is at least twice as fast as forecast, but in India it is slowing at the consumer price level and has fallen below the global average inflation rate for the first time since 2005.
The bigger risk is asset prices. Financial markets have grown more than four times the global economy, and when markets collapse, deflation often follows – as Japan learned the hard way in the 1990s.
5. Greenflation:The fight against global warming is known to increase demand for green metals such as copper and aluminum; less well understood that the green policy greatly reduces raw material stocks of all kinds. Over the past five to 10 years, investment in new oil and mineral production has fallen by more than 50 percent as local and national governments resist building new production facilities and investors shun fossil fuels.
The result is "greenflation" in commodity prices, which have just experienced their largest annual rise since 1973. India is among the larger net importers of commodities, making it one of the countries most vulnerable to greenflation.
6. The productivity paradox remains:Hopes have faded that the rapid adoption of digital services during the pandemic would end the long decline in global productivity growth, which has fallen from 5 percent in the mid-1960s to 1 percent today. A 2020 spike was limited to the United States and phased out late last year. A recent study of 10,000 employees in Asia found those who work from home worked nearly 20 percent more hours, but with a slight 0.5 percent drop in output. The paradox of weak productivity despite accelerating technological change remains.
One explanation stems from mounting debt, which is fueling a global surge in zombies, or corporations, not earning enough to even pay interest on their debt. In India, the zombie class has indeed shrunk somewhat in recent years, but it is estimated that they still make up around 35 percent of listed companies.
7. Data localization:The virus hit a world turned inward, with declining flows of everything (trade, money, people) but data. Internet traffic in 2022 will likely top all flows by 2016, with a twist. Despite hopes that the internet would escape government control, authorities are successfully filtering data and preventing it from crossing borders, effectively deglobalizing data and locating national networks.
Some follow China's example and control data for political reasons, others follow Europe's example and regulate data with a view to protecting individual privacy. The most restrictive data regimes are emerging in emerging economies, led by China, Saudi Arabia, India and Russia, according to the Organization for Economic Cooperation and Development.
8. Empty Bubblets:While this has been dubbed the “everything bubble” era, some assets are showing classic bubble signs, from 12-month price doubling to manic trading. These bubbles are grabbing popular cryptocurrencies, clean energy, the surprisingly large proportion of U.S. tech companies that are not making profits, and SPACs, or so-called “blank check” investment companies.
Over the past year, all of these assets have seen declines of 35 percent or more from their peak, a level beyond which bubbles rarely recover. They typically continue to fall for about two years, bottoming out an average of 70 percent below the peak. One bright spot: Tech-oriented bubbles often drop a few potentially huge survivors, and all of those bubbles feature new tech.
9. Retail investor frenzy cooling down:Retail investors stormed into the 13th year of the global bull market, and excited laggards often signal the party's over. From the United States to Europe, new and often young investors have been opening trading accounts, buying stocks and, most dangerously, borrowing to buy stocks at record speed. Worse, retail buyers are still overwhelmingly enthusiastic while corporate insider selling is at its peak. And corporate insiders have a much better track record: They tend to sell at the top.
In India, the number of active retail investors has tripled from 11 million to 30 million in the last two years alone. Retail investors now account for nearly 60 percent of trading volume, up from an average of less than 40 percent in the years leading up to the pandemic. Such a mania rarely lasts, suggesting that even when the stock market as a whole is not at risk, the names most popular with retail investors are likely to be.
10. The physical world is still more important than the metaverse:In 2021, the rising hype surrounding the metaverse appeared to portend a decline for the physical economy, but demand trends suggest otherwise. Digital natives also need physical protection. The renewed demand from millennials helped inflate housing markets in 2021 and is one of the factors driving car prices higher. While electric cars are a lot smarter than older petrol cars, they also use a lot more copper. Behind every avatar is a human, and labor shortages are pushing up wages even in jobs most at risk from automation, such as truck driving. Requiems for the tangible are premature.
(Ruchir Sharma is a global investor and author)
Disclaimer: The opinions expressed in this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV assumes no responsibility or liability therefor.