The untold story of India’s economic shift: Morgan Stanley's Ridham Desai explains

You see there's a fundamental change that has happened in India and it is not what people in this room are thinking.

>> Yeah.

>> The fundamental change has happened on uh our saving deficit or what we call as current account deficit. The current

account deficit technically is the gap between our saving rate and our investment rate. And India has

investment rate. And India has historically always had a higher investment rate compared to saving rate.

So we have had a higher current account deficit and behind this the reason is because we had very little to sell to the world and we had to import our

energy requirements and it was very large quantity of energy that we had to import. So at any point in time we ran

import. So at any point in time we ran current account deficit which would be between 2 and a half and 5%. Now

historically this current account deficit was largely funded by flows from the capital markets because we didn't really attract much FDI. See putting up

manufacturing uh units in India for a multinational company is a nightmare and therefore multinational companies preferred not to do it. If they wanted an operation in

do it. If they wanted an operation in India they would go and acquire something that was already on the ground. So we always struggled for FDI.

ground. So we always struggled for FDI.

So we would get funded with capital market flows and largely equity capital market flows because our fixed income markets were large closed to foreign investors.

>> Now equity market flows tend to be very cyclical uh and in fact they hit a trough exactly when it goes against

India's cycle which is during US recessions. So when we most need it it

recessions. So when we most need it it they actually vanish. So in 2008 as an example, India had nothing to do with the global financial crisis. Our banks

were absolutely fine and I was discussing this with Tamil before this uh session that you know the RBI was already anticipating problems so had already tightened up. Our banks were in

very good condition but we were the second worst performing market in 2008 and that was largely because the global capital market cycle turned and we lost

access to flows. Now, I'll come to this point a little later, but I'll still make it today. And this happened at a time when oil prices were going up because there was a supply shock in the

oil market. And people in this room may

oil market. And people in this room may not recall, but in July 2008 for reasons that were completely separate from financial markets, oil price hit a peak

of $148 a barrel.

>> And and Goldman Sachs was talking about $200 a barrel.

>> You've got good memory. And by the way, we have never gone back to that level since. Okay, so since in the last 16 17

since. Okay, so since in the last 16 17 years, oil has never gone back. It

threatened to go back during 2022, but it never really went back. Now just, you know, I'm going to digress a bit and keep this math in your head. India had

just become a trillion dollar economy then. And how much oil were we

then. And how much oil were we importing? On a net basis, we were

importing? On a net basis, we were importing 900 million barrels of oil.

Now at $148 into 900 million that is $140 billion was our annualized import bill in the

month of July 2008.

Nobody on the planet will fund 14% of your GDP.

>> Yeah.

>> Because that was 14%.

>> Yeah.

>> And so we crashed. We had to. The rupee

had to go down. Interest rates had to go up and and stock markets had to react to this. So that was our situation then. In

this. So that was our situation then. In

the last 10 years, we have completely transformed this. And it's a story that

transformed this. And it's a story that even the government doesn't advertise, which is that our oil dependency has

gone down by almost 60%.

Trailing 12 months, India imported 1.7 billion barrels of oil net on a $4 trillion economy. So, our economy has

trillion economy. So, our economy has quadrupled since 2008. Our oil import bill is up 80%.

Now oil is of course at $60, but let's assume it goes to 140, >> right? 140 into 1.7 billion barrels will

>> right? 140 into 1.7 billion barrels will get us to about an oil import bill of 325 $330 billion, which in a really

worst case scenario will still only be about 6% of our GDP. So even if oil went back there which it is not going, oil is

no longer consequential to our uh current account and this fundamental change means that we are now not running such a large saving deficit. Now on the

other side something quite uh you know good has happened to India in the last 5 years and this is the silver lining of COVID. So COVID was bad news for

COVID. So COVID was bad news for everyone. But one of the good things

everyone. But one of the good things that happened was that typical MNC CEOs realized that it's okay to work from home. And if you're going to work from

home. And if you're going to work from home, you might as well work in Mumbai.

It's a whole lot cheaper than working in Florida. You know, a lot of Americans

Florida. You know, a lot of Americans went back to Florida and to uh warmer places during co uh but Mumbai tended to be much cheaper and you could hire

talent at scale. So what we have seen in the last 5 years is a big boom in what we call as GCC's or global capability centers.

>> Uh they exported circa $70 billion of services uh last 12 months >> and uh this is a secular shift that has happened on the planet AI or no AI and

if you want we can investigate this later but this 70 is probably going to double in the next uh four or five years. Now this is unlike IT services.

years. Now this is unlike IT services.

IT services are also cyclical because they depend on glo US growth in large part and when US growth goes down IT services growth also goes down and that happens exactly at the time when India

most needs the money. So as a consequence of the lower dependence on imported fuel and uh the emergence of a

secular export uh for India.

This has meant that our current account deficit now is largely less than 1% probably.5% of GDP and.5% is about 20

probably.5% of GDP and.5% is about 20 billion and $20 billion is loose change in the global markets.

Fundamentally we are no longer as dependent on FBI flows because FDI has become more viable and so this has completely altered India's external dynamic.