ANI Podcast #421: w/ Economist Neelkanth Mishra on India’s Economy (Transcript)

And so in the beauty parade, we are behind. So this year even China is underperforming. So all energy importing countries have done badly. So whatever India is going through is not really such a vicious thing that everyone should be fretting about it.

In fact, the underlying economic momentum — look at cement sales, they are still growing in high single digits, which is really incredible because you can’t build inventory of cement. So whatever is being bought is being consumed. There is no formal/informal. Sometimes you may find that PVC pipe sales are good because, oh, they’re gaining share against the informal players. In cement, everything is formal. You can’t use cement by itself, which means that sand is being used, which means the construction is happening, labor is being used.

So I struggle to see where this negative sentiment on India is coming from. This is not to say that we are not vulnerable to energy price shocks, but where we are and how disciplined the government has been in the last 5 years on the fiscal side, I think we are much better prepared this time.

Foreign Investors and India’s Valuation

SMITA PRAKASH: So we’ll pass on, on the economic activity, AI, and currency later in the podcast. But I want to talk about foreign investors that, the articles which have been coming out is that they are not so confident about the India growth story, or maybe they’re confident about it in the sense that on the futures, but there seems to be some kind of talk about the valuation of, whether the India success story has become a victim of its own popularity in the global market, and that is why there is some kind of a course correction and they are leaving and investing in other success stories.

When we were talking about AI, they may be looking at Taiwan and the others or Korea. So tell me about this, this slower growth, and is it impacting on foreign investors? And should Indian investors be worried and see signals from that then?

NEELKANTH MISHRA: Look, there are 3 parts to the FII exit story. The first is that emerging markets as an asset class themselves have been out of favor for many years. So 3-4 years back, there was a Tina factor about India. There’s no alternative, meaning that Korea was having a coup and South Africa was having power cuts and Brazil was having political turbulence and Taiwan was too risky because of China potentially attacking. And Russia, of course, was blocked from the markets. Argentina was defaulting. Mexico hadn’t grown for 10 years. So there was nothing. And therefore, all everyone could see was India.

Now today, we have to acknowledge that the beauty parade is much tougher. So we have Korea, which has rebounded. TSMC is making so much money that people are saying, there may be a risk of China attacking, but we can live with that. There’s too much money to be made. The economy is growing at 14% or something, a ridiculous number. And Brazil is very investable, Mexico, seeing some benefits. Argentina is kind of, well, at least not uninvestable.

So the same PE premium, so price-to-earnings premium, valuation premium that you could command when everything else was bad and you were the only one shining is not justifiable. So the fact that India is relatively — it has always been relatively more expensive because it’s a long-term steady compounder. It’s a very high-quality growth story. So it has always had a premium, but the extent of that premium perhaps needed to correct. And I think mostly that is behind us.

So there is an issue of emerging markets and asset class lagging behind because the US had become 70% of the world market. Every asset allocator wanted to be in the US. So that has affected all — even this year. FPIs are selling out of Korea, FPIs are selling out of Taiwan, FPIs are selling out of China. So this is an EM outflow story.

The second part was we ourselves shooting ourselves in the foot, which is that in FY25, I think the fiscal tightening was well choreographed and well signaled in advance. I think the slowdown in credit growth was unnecessary. And I think it happened because of perhaps some inadvertent messages that were sent to banks and all that. So when you see the worst earnings revisions among all major markets, obviously investors will run away. That’s what they respond to. But that story is also now behind us, meaning that, as I was saying, now monetary is a tailwind. So we have now credit growth picking up, fiscal is no longer a headwind, and therefore growth is actually very strong. 7.5% growth is actually very strong.

The third element is, as we discussed, AI and semiconductors and cycles. And so a DRAM company at 7 times earnings looks very, very cheap. But remember that the same company which is generating more than $100 billion of free cash flow was making losses 4 years back. So these are things which are by definition speculative. I used to be in Taiwan as an analyst 20 years back, and I have seen many of the DRAM companies going bankrupt because it’s a viciously cyclical industry.

Why Doesn’t India Have Its Own Samsung or AI Giant?

SMITA PRAKASH: They were like magnets for investments, right? Foreign investment. And so what held India back? Why don’t we have a Samsung? Why don’t we have these AI companies which attracted international investment? Was the challenge policy? Was the challenge capital? Was it innovation or execution from the private sector? Where was the problem?

NEELKANTH MISHRA: So we have to look at it a bit objectively. See, at $3,000 per capita, generally wealth per capita is between, say, 5 to 7 times. It can be lower also, higher also, but so you’re talking about give or take $15,000 per capita of wealth. At these levels of per capita wealth, there is not enough risk capital in the economy.

Look at even China, the Chinese ecosystem also cannot fund — like, say our large language models will get $100-110 million from the government. One of them is trying to raise $300 million and struggling at it. And some of the US models go and raise $110 billion. So if you get 1000 times more spending, but there’s so much risk capital there. So that’s one.

So I think at this stage of development, like even in the US in the early 19th century or till the mid-19th century, they relied completely on imported technology. So first is that as much as we should try to because of Atmanirbharata and the fact that you can get blackmailed by rogue leaders. We should work towards self-sufficiency, but it is unlikely at this stage of development we’ll have the risk capital to burn.

So remember, even as people are buying some of these stocks, there are many others who think that this is a repeat of like the optical fiber bull run of the late ’90s and early 2000s, which ended with 70-80% of the companies going bust. That you’re investing so much, but where is the revenue, even in AI? But at this stage, because the attraction and the potential —

SMITA PRAKASH: Did you really see it as a bubble then, or do you see similarities?

NEELKANTH MISHRA: It is a bubble. It is a bubble, but it is too early for us to call it for it to burst.

SMITA PRAKASH: So should we be watching any kind of course correction which is happening in the US? Because there is talk now on the AI —

NEELKANTH MISHRA: That talk will always exist. See, for people like me who’ve been in the markets for a while, even as the bubble is building up, so 2 years before it bursts, people will have started talking about it. That’s the beauty of the market, or that’s the nature of the market, that there’ll always be buyers and sellers.

SMITA PRAKASH: But then those who have taken a global lead in this, like say the US, they’re going to reap tremendous benefits, and that will kind of cushion those countries for some time, no?

NEELKANTH MISHRA: I don’t want to be in denial. I wish we had that. So, but this is not to say sour grapes, but look at how things work. One view is that many of these models are now becoming undifferentiated.

SMITA PRAKASH: True.

India’s Semiconductor Journey and Energy Challenges

NEELKANTH MISHRA: So even in Aadhaar, we had this vision committee discussion where what should be the next 10 years of Aadhaar’s technology. And so we are creating a completely new developer environment so that cutting-edge technologies they can experiment with and all that.

And so when it came to that, okay, so if you’re going to get code generation by a model, then the testing needs to be done by another model. So which model should we use for generation and which model for testing? Is that koibhi use karlo? No. So while I think that could just be that they’re equally good, but that also shows that there is a lack of differentiation. And if there is lack of differentiation, where is pricing power?

So look, this is not to say that we should not invest in 6G, but the fact that we got 4G 7 years later or 8 years later, and we got the cheapest equipment in the world. Look, where we are today and the kind of problems we need to solve, even if we are saying—

SMITA PRAKASH: So we’ll be doing catch-up all the time like this?

NEELKANTH MISHRA: No, but see, if you are $3,000 per capita and the US is $85,000 per capita, I mean, I, as much as I would like to, I can’t run a 100-meter race. I mean, even as a child, I never would, but as a 50-year-old, I definitely can’t. So we have to understand our limitations. We have very different sets of challenges.

I think we are going to do extremely well when the narrative shifts from generation of intelligence to deployment of intelligence. So currently all the excitement is about GPUs and data centers and cooling systems and power in the developed world, on large language models. It is when this intelligence starts to get deployed into solving healthcare problems, education problems, banking penetration, that is where I think the true economic value will start coming out. And so long—

SMITA PRAKASH: Innovate looking at our needs. Yes, our needs. Not just replicate what is happening in, say, Taiwan or in the US.

NEELKANTH MISHRA: Is that what you’re saying? Not really. So as much as you try to build the muscle— see, I’m also very deeply involved with the India Semiconductor Mission, and I must say I’m very proud of what we’ve achieved in the last 4 years. So from having nothing on the ground, now we have so many plants doing semiconductor packaging. In another 2 years we’ll have the first fab doing wafer manufacturing.

Now unfortunately it is at 28 or 40 nanometers and then 2 years later 28 nanometers. The world is at 1.8 nanometers, so we are like maybe 8-9 generations behind. But there is a Semicon 2.0 coming up and there we can aspire to get manufacturers to do the 7 to 12 nanometers. By 2032, we can get there. Maybe by 2040, ’45, we can at least have some chance of competing at the cutting edge. But to get there, we need to start investing today. So that needs to keep happening.

SMITA PRAKASH: And there is capital for that.

NEELKANTH MISHRA: Yeah, you see, the ₹76,000 crores—

SMITA PRAKASH: So policy is there, execution is in place, innovation is happening. And capital, I want to ask you about that.

Capital, Deep Tech, and the Road to Innovation

NEELKANTH MISHRA: Yeah, so you need to attract capital. See, there is some capital that the government is providing, so like the RDI fund, the Research Development Innovation Fund. Now, 1 lakh crore seems like a large sum, but in the context of how much R&D happens in the world, it is very small. But the type of research that we need to do, see, again, it’s like a multi-speed process, meaning you need to solve hard problems immediately. Meaning we need to have much lower costs of energy, that is completely under our control. We need to ease the pace at which housing gets built, it’s completely under our control. We need to improve urban infrastructure, that is completely under our control.

At the same time, we need to be aware that in the next 15 years, there is a high risk that we’ll get caught in the middle-income trap. So there are so many countries, because the path from low income to middle income, where you’re mostly copy-pasting foreign technology, like us adopting 4G after a while, that is easier. And so from $3,000 to $8,000, $10,000, you can get there, but from $10,000 to $20,000 and above, you need risk capital, you need entrepreneurs, you need technology investment. But with a sixth of humanity, you cannot really start doing that in 2040. You need to start working on it now.

So I’m also part of the fund manager selection committee of the RDI Fund. And one of the things we noticed, one is of course, it’s actually quite exciting to see that deep tech investments have started. So 20, 25 years back we had no VCs in India, then we got the first level of VCs which were copycat models, US retailers who invest in India. In the last 8-10 years we’ve started to see some hard problems that are being attempted. In the last 3-4 years there’s an explosion of engineers with high risk appetite who are going after really hard problems. But that ecosystem needs to be 100 times bigger.

Good thing is that we have started, that this capital is available. But even as we are allocating those funds, or we are trying to find funds where the RDI fund can contribute, we are realizing that that ecosystem needs to be 100 times bigger. The good thing is that we have started thinking about those things. It’s all Hire Deere Lehmana type problems that, in 2022, for example, in semiconductors, despite the central government offering 50% CAPEX subsidy and the state governments giving 20-30%, the quality of proposals that were coming were embarrassing. And it was depressing that you’re throwing so much money at the problem and this is the quality of people who come.

But it takes time. Conviction built, oh, the government means business, oh, the government is not going to run away, oh, the government is actually disbursing money. So the first couple of guys that came in. Micron, for example, was a huge boost for us, a massive credibility booster. And today people are waiting for Semicon 2.0 because they really want to come in.

SMITA PRAKASH: Ecosystem is getting cultivated.

NEELKANTH MISHRA: Yes, but it just takes time. Sure. But while we are obsessing about that, I can tell you that this is for the next 5 years. So we have to build this muscle because we may need it, we will need it 10 years later, 15 years later. But we need to solve the problems of the next 5 years, correct? Like, we need—

SMITA PRAKASH: But did you really say that when we were looking at the problems that existed and what is in our control, did you say energy is in our control? Yes, energy is in our control.

NEELKANTH MISHRA: Yes.

Energy Policy: Vulnerabilities and Choices

SMITA PRAKASH: How do you say this? Because the West Asia crisis has happened and the shock that we have got.

NEELKANTH MISHRA: So the fact that we are deeply vulnerable to imported energy currently is obviously a problem, and I’ve been saying this.

SMITA PRAKASH: So how are you saying it’s in our control then?

NEELKANTH MISHRA: We have so much—

SMITA PRAKASH: It is not in our control, right?

NEELKANTH MISHRA: Okay, in the current mix, it is definitely not under control. Yeah, but can it be under control? 100%.

SMITA PRAKASH: How?

NEELKANTH MISHRA: You have so much sunlight. You have so much wind, you have so much hydro, you have so much coal. You know, if 70% of Chinese energy or electricity supply comes from— and you look at the electricity, look at electricity as a mix of energy. 15% of our energy is consumed as electricity. China was there 20 years back. China is today at 27%. Just the electric vehicles in that economy, the proliferation has meant that their oil imports have fallen by 1 million barrels a day. Now, why shouldn’t we accelerate?

But the point I’m making is that we are refusing to make the hard decisions. That is where I say we have energy, we have to show agency, meaning we have the cheapest household electricity prices in the world. We give free power to farmers. I think some of them need it, some of them of course can’t afford to pay, but in an economy which is energy constrained, can you believe that 18 to 20% of power goes to farmers for free? And who pays for it? Industry.

Now we have to ask ourselves as an economy a question: is it better to give cheap and free power to people or give them jobs so that they can pay for it themselves. So if your industrial power is costing ₹6 and ₹8 a kilowatt hour, if your commercial power, like in offices and malls, is ₹10, ₹12, ₹15 a kilowatt hour, why would anyone invest? Now, in economics, the basic thing is if you’re constrained on something, make it much more efficient. So the guys who can actually drive electrification need to get the right price of energy now.

And this is what I’m saying, that look, in the next 5 years we have to have— so perhaps the narrative that I should have used, and where perhaps you got confused, is that I’m not saying that we are currently not vulnerable. We are vulnerable. But this whole approach, ki hai, we don’t have oil, we don’t have gas, and we are stuck— that is not correct. Because that may have been correct 20 years back.

SMITA PRAKASH: We have options which we need to—

NEELKANTH MISHRA: We have not explored them. We are not taking the tough decisions.

West Asia Crisis and the Global Oil Market

SMITA PRAKASH: But the current problem is that when the West Asia crisis is deepening, it’s not resolving in any manner, and its impact will be seen for at least 2 quarters. At least 2 quarters that we are looking at. Are we looking at global recession? Are we looking at that happening? Should people be ready for that?

NEELKANTH MISHRA: I was fearful of that. I must say that in early March, when I was asked by people in the firm and the media, I thought that 15th April was pretty much the deadline. If it didn’t open up by then, there would be a global recession. I think most of us were misled, or not misled, we missed the fact that China could release so much inventory.

So you had a headline-level oil supply restriction of, say, 21 million barrels, 20.9, which used to flow through the strait. Some of that has been offset by the East-West pipeline in Saudi Arabia, the Fujairah terminal in Dubai, some extra production elsewhere. So about 12-13 million barrels of supply got restricted. You know what, in the month of April, there was 12.6 million barrels of inventory release by the world outside the Gulf. The Gulf was still building inventory, of course, they’re producing and storing it.

Now, China in the month of April on average released 3.5 million barrels a day. I saw estimates this morning that right now they’re releasing 5, 5.5 million barrels a day. The US is shedding inventory left, right, and center. So again, 2.5 to 3 million barrels a day. You put all this together, what has happened therefore is that the period of acute shortages in the current market have gone down.

So there was a time when, what we call the physical premium, meaning that the price that we see on the screen is next month’s delivery. So if you’re buying oil today at Brent, say, $94, $95, you are effectively saying July delivery, I’ll get this price. But if you want something in 2 weeks, 3 weeks, it’s called dated Brent. So that is effectively like physical, I mean, you’re kind of bidding it out of someone on the sea. So the ship was going somewhere, you’re saying, nahi nahi, tharaja, so and so, and we pay more for it. That premium at one point was $40 in March. By early May, it has shrunk to zero, which meant that there was enough inventory in the system, so the panic had died. Once people understood that this was happening because there was so much release. See, China is a black box. So you were talking to some oil traders in April.

SMITA PRAKASH: You don’t know when they will stop, when they will start again.

Oil Markets, Backwardation, and Global Pressures

NEELKANTH MISHRA: Yeah. So they had no idea. These are oil traders. I mean, that’s what they do every day. I mean, they can tell you which ship is moving where, and they had no idea. They said China is still buying. But in April, China was selling, or at least not buying as much because domestically they were releasing inventory. And looks like they’ve done even more of that in May.

Now, so what this does is that, see, there’s a commodity market phrase called backwardation. Now, what backwardation means is that your current price is higher than your future price. So you have $100 oil today, but you have $80 oil in March ’27. So the oil was in steep backwardation, right? The assumption was at some point the strait will reopen. You are saying 2 quarters, could be 3 quarters, who knows.

What happened when the inventory data came out was that the spot went down because people realized that, oh, inventory is available, but the futures went up. Because if all the people who are releasing inventory are going to replenish it as well, so even when the strait reopens, for a long time the demand will be higher than consumption because all of that inventory has to be rebuilt.

Which is why I think the March futures price is the only thing I track when I’m looking at the economic prospects. It is still at $80. So it is higher than $70, but it is not $100, it’s not $120, it’s not $140. So this is where we are.

And I must say that as much as I worry about our vulnerability, it is important to see where we are compared to the rest of the world. Because when something breaks, that’s when there is compulsion for people to come to an agreement. The reason why I’m very worried that the current conditions are not suitable for a consensus is there’s not enough pressure. So it is for the two sides. True. And so what do we need?

SMITA PRAKASH: Do we need some kind of a crisis point, like say the 2008 financial crisis that happened, and it’s only when that crisis happens that people do these, because otherwise you’ll get band-aid measures.

NEELKANTH MISHRA: Yes, which is exactly what is happening. So because, see, think about the people who are taking those decisions. So Iran, I mean, we don’t even know who’s taking the decisions, and the hardliners generally. And see, these times what happens, if you think about crowded decision-making it is, you know, so suppose there are 15 people in the room and everyone has to nod. It is the worst-case outcome which everyone will nod on because no one wants to show that they’re weak or they’re pro-America or whatever, right?

So same on the US side, you know, if you’re not getting the nuclear thing done, so already the Congress is starting to act up, already the slush fund has been withdrawn. So the president is coming under pressure now. He cannot give up on the nuclear claims. He cannot now after having criticized— of course he can, because he has done that, bold-faced, several times. But there’s not enough compulsion.

See, there was a time when 10-year yields were going up to 4.6. The yields on 10-year government bonds were at cross 4.6, and we were all— at least I was hopeful that goes to 4.85, and then there’s some panic in the bond market. And then they will come to some agreement. But as of now, I think there is enough inventory. So the question to ask is, how long will this situation last? So now we are waiting for the inventories to deplete.

What has also happened, unfortunately— well, fortunately meaning that at least oil is flowing, but unfortunately meaning that the conclusion, or at least a conclusive or a decisive outcome, gets further pushed out. Is that, you know, if say a few ships are starting to move out, so then the crisis gets further postponed.

India-US Trade Deal and Tariffs

SMITA PRAKASH: So since we are talking about a global situation, we’ll stick with that before we come back to the Indian economy. President Trump introducing extra tariffs on India and 60 other countries, but 60 countries including India. 12.5% tariffs. Do you see this trade deal actually fructifying at all now, India-US trade deal?

NEELKANTH MISHRA: Well, both sides seem to be quite positive that something will happen. And some of these Section 301 investigations are, I think, mostly for the US government. So there’s another one happening actually, where, if I think right, I think there’s some 12 or 16 countries that are affected. This is on labor, that one is on excess capacity and capital.

SMITA PRAKASH: So this 12.5% is on labor itself, that forced labor practices.

NEELKANTH MISHRA: Exactly. So this is one Section 301 investigation. There is another 301 investigation which is happening on excess capital.

SMITA PRAKASH: These are pressure tactics.

NEELKANTH MISHRA: Yeah, absolutely. So this is just negotiation. But I think all sides have wisened up because, you know, even the Section 301 investigations, we’re doing 60 investigations in like 6 months or 4 months. Obviously there’ll be loopholes, so you can challenge them in the court and courts will strike them down. So even that fear people had that Supreme Court will agree with whatever this administration says is progressively becoming less likely.

See, frankly, you know, whether if it is everyone is at 10 and we are at 12.5, frankly, I don’t think it is. First, even when this deal, when we had 50% tariffs, at least my point was that, I mean, okay, we should get lower rates, it’s a big market. But you think about the various categories and it becomes very clear, meaning suppose something is a pure commodity. Like shrimps. So yeah, you lost 1 or 2 months of— when there was someone from Singapore was saying that, that inventory that was supposed to go to— send it to us, yeah, send it to us or whatever, right? And so there is actually, they were told to take a lot. They said, well, I can’t take that much. I mean, Singapore is a small island, but eventually it got—

SMITA PRAKASH: There’s all of East Asia—

NEELKANTH MISHRA: Got rerouted to China, Japan, Europe. So if it is a commodity, it will kind of water finding its place, it’ll settle down. If it is, say, electronics or pharmaceuticals, they’re exempt. So there was maybe a handful of categories which are, I would say, commodity-like. It’s not that we are doing very high-tech stuff for export anyway, which I think needed that extra—

SMITA PRAKASH: It’s gems and jewellery and textiles, I think, which were—

NEELKANTH MISHRA: Yeah, but in gems and jewellery also, the workaround had been created. Meaning that, you know what, we are not buying jewelry from them. We are just sending our rough cut jewelry for processing. So this is not an import, just a processing charge. So it’s in everyone’s interest. And there is under-invoicing, there is transshipment. Yes, because, and this is in everyone’s interest because it’s the state in the US, the government in the US, which is trying to influence things, and everyone has financial and economic interests, which are— so I’m not— while I think it makes a good headline, and this is what the politicians would like, especially on the US side, that look, I’m doing so much. Frankly, these are not tools that have worked in the past. It does cause near-term pain to Indian exporters. It’s not to say that there is no damage, but at a macroeconomic level, this is something that I don’t think worth discussing.

The Falling Rupee: Should the RBI Intervene?

SMITA PRAKASH: So let’s talk, move to another topic, which is the falling rupee. Should the RBI try to control it or should it allow the markets to determine its value? There are two conflicting opinions.

NEELKANTH MISHRA: Yes.

SMITA PRAKASH: And some say that this price barrier, I mean, this barrier of 100, it’s just a number. The others say that, look, it’s affecting my purchasing power. So most people say that it’s affecting my purchasing power. So how are you saying that it’s just a number? How do you see that?

NEELKANTH MISHRA: So first, I agree, it is just a number. 100, 101, 99, how is it any different? But at the same time, to make the case that let the rupee go from 95 to 105 or 110, and then if it is weakened too much, then it’ll come back to 95, that is perhaps okay in theory. But in practice, it does a lot of damage.

So what it does is that it raises your long-term cost of capital. So imagine a fund, fund of funds, or some asset allocator who’s thinking of putting money into India. And they see, what has been currency volatility over the past 20 years? And you say, whoa, this is really very volatile, and therefore the risk premium for India goes up. So your long-term cost of capital starts going up even though you’ve come back to the 95 level, but because you allowed the volatility to happen, that’s point one.

Second, it delays growth for a while because I know of so many very high-performing fund managers who have great track record and people are willing to give them money, but they say, you know what, let the rupee settle and then we’ll give you money. So in a way, everyone speculates when this kind of volatility is happening and you lose a year or two of growth. And we need to be cognizant of that. We cannot just say, in theory, let it free, let it move freely.

And the third, and perhaps in my view, the most important, and this is conditioned by my experience of 2013, is that the small and medium enterprises they get whipsawed both sides. So they hedge too late. So like in this case, they may have hedged at 98, and now if the rupee really goes to 93-94, they will have lost both sides. And so it’s important to have less volatility.

So on the currency side, see, I can sense that there is panic in the currency market, and let me explain why I say so. All economists look at balance of payments on an accrual basis. What that means is that suppose I am selling, I am exporting $100 of textiles, the moment I report it to the RBI, RBI says, as per the IMF BPM-6 accounting rules, says okay, $100 export came in. I am suppose a steel manufacturer and I import $100 of metallurgical coal, and I reported to RBI. RBI said, okay, $100 gone out, right? So exporter $100 comes in, importer $100 goes out. Fine.

What could be happening is that the exporter may have told the customer that, you know what, the rupee looks like it’s going to weaken, you can pay me 3 months later. And then once that is paid, I have 1 month to bring it back. So I say, okay, I can keep it outside. When I’m forced to, then I’ll bring it back. Now, the importer may have actually taken a foreign debt, it could have hedged it. So there’s lots of things that happen.

Now, in between October and March, October ’25 to March ’26, the accrual basis balance of payment deficit was $24 billion. But RBI’s balance of payment deficit means that there was excess demand for dollars than there was supply. The intervention size was $75 billion. So where did that extra $50 billion get demanded from? It was because the importers panicked that the rupee is going to weaken. And they started overhedging, or people who never hedged earlier started to hedge.

Foreign portfolio investors— so I had a trip to Singapore, Hong Kong in early May. I was surprised. I mean, people who would never have hedged their India exposure on the currency side have started to hedge. So when you have people hedging much more than they used to, there is an excessive demand for dollars.

Now, this is what I call speculation by real economy participants. So there’s no George Soros equivalent, some evil mastermind trying to short the currency. It is people, small businesses, individuals who are panicking and therefore then creating it, making it worse. So this is what I call a stampede, that people are running because everyone else is running.

Now, to control this, you need crowd control measures. So people like me saying, oh, the rupee looks undervalued, it has fallen, real effective exchange rate is down 12-13%.

SMITA PRAKASH: It’s not believable.

NEELKANTH MISHRA: No one is going to listen because they say, ‘Dhaakhu kya pata? Up to ’93 bhi we bol rahi the.’ So ’96 bhi you’re saying the same thing. Mera toh nukhsan ho gaya. Correct.

SMITA PRAKASH: I would say that.

NEELKANTH MISHRA: And it’s perfectly normal. This is how markets work. So, and so what is happening is, for example, an exporter is happier hedging the medium term to long term, meaning exporter hedging means that he’s forward selling dollars. So he’s happy selling 3-year, 5-year exposure. Udhishchota quantum hota hai. And the importer wants to hedge the next 3 months. But in the next 3 months, there is no dollar supply because everyone is worried that the rupee is going to fall. So this is the problem. Now, this is your classic stampede happening. Now, what do you do? Use batons, right? I mean, equivalent of that.

SMITA PRAKASH: I know, I don’t want the trolls to say, ah, Marpitai.

NEELKANTH MISHRA: So you start to say that, okay, this is not allowed, this is not allowed. So some of that happened end of March. Markets didn’t take it very well, but some of that happened.

SMITA PRAKASH: Yeah, nobody likes crowd control measures anyway.

Managing Capital Flows and Currency Stability

NEELKANTH MISHRA: Exactly. So that may have to be done, or you give a signal. It’s like, people are worried that there’s fire and then suddenly it starts raining badly. People will stop worrying about it. So you show the path to significant dollar inflows in the next 2 years, which is — so like, this is what has come in the press on withholding tax removal for bond investors.

SMITA PRAKASH: That it’s not being confirmed, has it?

NEELKANTH MISHRA: I haven’t seen the confirmation, but it is being considered from what I see in the press.

SMITA PRAKASH: So there’ll be some inflow then?

NEELKANTH MISHRA: Yes. So what happens then is that India’s Indian bonds, the inclusion in the bond indices — the Bloomberg Global Ag Index and the FTSE Index, which in 2019 had about $4.5 trillion of assets benchmarked. And all of those guys want to invest in India, but they want India to be part of the benchmark. But if you don’t have withholding tax exemption, it is harder. Some people say, oh, China is not giving it, why should India give it? Fair point. But then you look at it carefully, even China gave it. So China actually gave it for index inclusion. So the funds that are coming in because of index participation, around that time they gave an exemption. And then every 2 years they keep extending it. So the current exemption runs till ’27.

So if China has done it, if every other large economy has done it, and it is cheap capital — see, think about it this way. You are running a current account deficit. It is not that you’re getting permanent capital in, to fund for it, pay for it. So, why is there a capital problem today? Because many of the funds like private equity venture capital funds that brought in money in 2017-18, they have 8 to 10-year funds and some of the investments are now in the money. So, they’re listing and taking money out.

Now, because that money has, for some funds, generated substantial returns. So they brought in a dollar, but 8 years later, they may be taking out 6 to $8. Now, that’s huge. Or maybe say $4. Maybe let’s say 6 to 8 is too much, but say $4. And which means that you are getting a compounded return of 14, 15%. Now, that is the cost that the economy is paying.

If you get a foreign investor into a bond fund and through index inclusion, you are getting 7% interest, or you’re paying 7% on it. So it is a much more manageable interest rate, so cost of capital. So I think it is a wise thing to do. I’m hoping that it’ll go through.

You can also give exemptions on — like, external commercial borrowings, there is again a withholding tax exemption. So what happens is suppose I as a company go and borrow from you as a foreign lender, and the government says that because borrowing is by an Indian company, there has to be a 20% withholding tax. Now, you’re not willing to pay it. So I pay it on your behalf, and which means that my cost of borrowing then goes up. But if you remove that, and you remove that for say 6 months, there will be a flood of borrowing that can happen.

And so all you need — see, okay, so what is the currency market panicking about? It is panicking about the fact that if oil prices stay at $100 for 1 year, you have a $60 billion balance of payment deficit. So this narrative that why should I pay ₹100, boss — if you are an energy importer, you’ve not solved your problems in the past and you have to pay more for it, the rupee has to fall. That’s the only way to balance it.

But our point is, or people like me who are saying that, look, $100 oil is not going to stay forever because the world can’t take it. The futures price are at $80. At $80, we don’t have that big a problem. But the market is worried, what if it stays at $100 and then the rupee needs to fall and therefore I want to hedge it.

Now, if you say that, you know what, I have $100 billion, $70 to $100 billion, which I’ve added to my reserves — now go and short the currency if you want. I won’t let it fall. And then the rupee stabilizes. We get 6 months where we understand how the economy is adjusting. Because in the near term, this stampede can take us anywhere because there’s no limit to it. So which is why I think some of these measures can be helpful.

And there is a lot of discussion on how much they cost, meaning, oh, are we paying 2% extra, 1% extra for 5 years? If it’s a $50 billion deposit we are raising, is $4 or $5 billion of extra cost — even if that is the case, given the scale of the negative narrative that is building up around India, it’s not really that much.

The Bloomberg Gold Report and RBI’s Reserves

SMITA PRAKASH: So speaking of short-term measures, Bloomberg had come up with this report that India’s central bank may have offloaded a portion of its gold holdings to shield its foreign currency assets from cascading because of the fallout of the Iran war. Now, this is according to an analysis by Bloomberg Economics. Then late last night, this report came out where Bloomberg retracted its story and said it erroneously used same-day gold prices to value RBI’s gold reserves. Using previous day London Bullion Market Association price showed that gold holdings were unchanged in May. So the story stayed for a day and then it was corrected on June 4th at 9:12 PM GMT.

So now this is what has happened. Could you explain to me what now the situation is? This was a wrong report and it was retracted. So tell me about now whether this can happen and why is it a psychological impact about selling gold?

NEELKANTH MISHRA: Yeah, it’s actually — I mean, Turkey is selling gold. See, the whole point of having reserves, whether it is dollars or gold, it is an asset. And so if you bought gold at 2,800 and you’re selling it at 4,600, well done. But I’m not your average commentator. I just see that as a financial asset. I think there is the scarring of ’91, which I think still influences our sentiments around such things.

SMITA PRAKASH: But prudent to do it if need be.

NEELKANTH MISHRA: Yeah, if you’re not getting a good price for — see, okay, finally, just for a cushion for short term. So if you have $690 billion, say $150 billion in the form of gold — maybe I don’t know what that number is, they don’t disclose it. Let’s guess it, $300 billion of US Treasuries, and there is some JPY and some GBP and some EUR. So now you, in order to stabilize the currency, suppose you want to shed $5 billion, that you want to intervene and sell $5 billion. You can do that by selling gold, you can do that by selling treasuries, or you can do that by selling euros or yen, whatever, right? I mean, for me, it’s all fungible. Whether you did this or that, how is it even headline-worthy?

It is possibly headline-worthy if you think that, the US Treasury is now too cheap, that the yields have gone to 5%. So from a trading perspective, it doesn’t make sense to sell at this price. Maybe that’s — I doubt that central banks take those kind of calls. It is more for market people like me. But I don’t see any emotional stigma here that, oh my God, this was — because a lot of this gold was accumulated only recently. And it was instead of buying US.

So suppose, let’s put a counterfactual here, that people are worried about de-dollarization, people are worried that at some point — and I agree with that view — that at some point Americans will dramatically bring down the value of the dollar. And so in preparation for that, you start building up other assets. Now, what other assets? The Europeans themselves will have challenges. You don’t want to buy yuan. Yen, I mean, seems to have no bottom. So we’ll end up buying more gold.

Now suppose 5 years later you have a situation, argument’s sake, where instead of 20% of your foreign currency reserves or 22%, you have 60% of your currency reserves are gold and you have to intervene. Will you not sell gold?

SMITA PRAKASH: Yes.

NEELKANTH MISHRA: So I think this — even the fact that this made headlines and then people are doing analysis — like I said, psychological. Yeah, there’s a scarring. There is a scarring of the pledging of gold and all the 1991 — that I think was the Chandrashekar government. Yes. So, or have we reached that stage? We have not because there is sufficient cover. In fact, there are people in the establishment who believe that let’s keep intervening.

Gold Overtaking US Bonds as the World’s Top Reserve Asset

SMITA PRAKASH: So when — why has gold overtaken US government bonds as the world’s top reserve asset? Why has this shift taken place?

NEELKANTH MISHRA: Various reasons. The first is that — see, the weaponization of interdependency will have consequences. So if you make it necessary — the Americans did have a role in that, but the world in general — if you wanted to show that you are safe, you had to show that you had reserves, right? So today, the fact that we have $700 billion is the reason why there’s no outright panic in the market.

And so once you have that, and then you say that, you know what, if you act on something which is against my interest, I’ll block access to those. Because if it’s the US dollar, you can’t run it without the Fed permitting you to do it. So then they confiscate your assets. And so you build in, say, $50, $100, $200 billion, and suddenly one fine day the US government wakes up and says, I don’t like your face. So, people will want to diversify. So, that’s I think the first, I think the most important catalyst.

I would like to put an overlay on that — and I’m not saying that all central bankers think the same way. I mean within our central bank or other central banks there’ll be divergent opinions on this. Is that I think the trade-weighted dollar today is too expensive. The strategic objectives of the US government — that they want to revitalize their manufacturing, they want to bring down their debt-to-GDP, they want to create manufacturing jobs — all of that cannot happen when the dollar is so strong.

And frankly, what tends to happen for most economies is that it’s like — when, say, a patient is told lose weight, drink a lot of water, eat healthy, walk a lot, do that for 1 year and things will be fine. It’s like telling a government that you want to get manufacturing in, okay, show fiscal discipline, bring down wages, build a lot of infrastructure, ease regulations. All of these things are very hard to do. Instead, you say, okay, devalue your currency by 20%. That’s your Ozempic, right? So that temptation of Ozempic is, for the government, much stronger because they want quick fixes. And it is very hard to change behavior of 350 million people, which is the US population.

So they have done it twice — in ’71 and ’85. ’71, very famously, when Nixon broke the peg to gold, and ’85, the Plaza Accord. At that time, it was much easier — well, it was tough, but it was easier than it would be now, because at that time, the two manufacturers you were competing against were Germany and Japan, and in both places, the Americans have military bases. So you can say please, pretty please, but they know they can’t say no.

SMITA PRAKASH: Today, China.

NEELKANTH MISHRA: Yeah. So unless the Chinese allow their currency to appreciate, this is not going to happen. But see, it’s going to be a challenge. In fact, the Chinese themselves are coming under pressure. Chinese outbound FDI is $200 billion a year now, because China cannot have — I mean, they’re still investing, I don’t know why, but anyway, the point is they have excess capacity. And Chinese manufacturers are realizing that import barriers are on their way. So the US has done it. Now Europe is about to do it. And in order to counter it, you will need to have manufacturing capacity. It is better to set up your own factories in the destination geographies than lose that business. So they’re aggressively investing outside. And so on the balance of dollar supply perspective, China is actually not very good.

The Path to Next-Generation Reforms

SMITA PRAKASH: So what should we learn from the Chinese model? How to manage our economic vulnerabilities? What should we do? Is it the moment for the next generation of reforms that we need to do, which, as you said, is the harder way to do it, right? But do we really have an option? And sometimes crises push you forward to do those. So how do you see this? Do you think that we can be bold enough to do that next-gen reforms that are needed?

Domestic Demand, Housing, and Infrastructure

NEELKANTH MISHRA: We need to be bold enough to do those next-gen reforms. And I believe that in some ways we are starting to do them. Most of these reforms need to happen at the state level. So which is why somehow they don’t show up in the national media or don’t get enough attention in the national media.

Because frankly, if, say, Andhra Pradesh is giving DISCOM license to Google or giving 50-year leases at ₹1 or has freed up land use conversion, these are remarkable reforms, right? Or that UP has freed up FSI for hotels, because the biggest problem with our tourism is that hotels are too expensive. There’s too little supply. And one approach is, “oh, you know, we have to control everything, this approval, that approval.” Second is, “you know what, you go and build and increase productivity.”

SMITA PRAKASH: Yeah, in any which way. Any which way. Because there is consumption, there is domestic consumption.

NEELKANTH MISHRA: So you increase supply. And if you allow market competition to select — if you have a bad hotel, people give bad rating, don’t go there. So why does the government and some babu have to collect bribes to approve a hotel? Correct. So I’m not saying there should be no control, but I think you can relax control significantly.

So I think some of these things are starting to happen at the state level, and we need to accelerate that. We definitely, on the energy price reform, need to do a lot, lot more and do it really fast.

What we have also not done is relied meaningfully on domestic demand, or at least in our policymaking priorities, focused adequately on generating domestic demand. See, somehow the narrative in Delhi among the advisors to the government has always been about exports. Because this is what everyone reads — How Asia Works, Studwell’s book, everyone reads the Asian Tigers and this and that. Those are small economies. If you want subcontinental-size scale economies like ours, generate demand, domestic demand. And where will domestic demand come from? Domestic demand will come from housing, from offices, from infrastructure.

SMITA PRAKASH: Is it coming from rural, or did we overestimate the rural demand?

NEELKANTH MISHRA: No, but see, rural demand, how will the—

SMITA PRAKASH: That’s what I’m saying. Is there money in the rural sector? Because everybody’s saying that their money has gone in because—

NEELKANTH MISHRA: No, no, because look, this level of demand cannot be generated by the government, and you don’t want it to be generated by the government. And clearly, at least our leadership does not want it to be generated by the government. But all they’re saying is that, look, we are going to bring down our fiscal deficit. And so that money in the hands of the private sector is far more productive. So whatever happens has to happen to the private sector. The government has to be a facilitator, not a doer.

And that facilitation — because see, suppose UP wants to go from $250 billion to $1 trillion of GDP. Even if you assume GDP is income, for a company, an income means return on capital employed. So you assume 25% return on capital employed. There are very few companies that generate that, but suppose UP as an economy generates that. You still need $3 trillion of investment. So to get an extra $750 billion of income, unless you put $3 trillion at 25% ROE, at 25% ROC, how will you generate $750 billion? So $3 trillion doesn’t exist with the UP government, definitely doesn’t. The central definitely doesn’t have. So it will be brought in by the private sector, it will be brought in through capital creation.

Like, in the 1920s, Hoover’s administration — in fact, Hoover himself — was 100% committed to house construction being a strong driver of the US economy.

SMITA PRAKASH: Yeah, he didn’t know 40 years later it will bust.

NEELKANTH MISHRA: Yeah, 40 years later, right? But look at what China has built in the last 20 years. In fact, this is a point I keep emphasizing, that at some point, and hopefully sooner than later, we will be a $20 trillion economy. So 4 to 20, so there’s $16 trillion added. Not more than $1 trillion will come from a change in net exports. At least 15%, if not more, has to come from domestic demand.

The Hoover Plan, Housing, and Urban Infrastructure

SMITA PRAKASH: Explain to me how the Hoover Plan can be something that we can do. Housing. Can we do that? Can we replicate the Hoover Plan?

NEELKANTH MISHRA: We cannot, and we maybe should not, meaning the regulations are different. Like, they actually created—

SMITA PRAKASH: Because housing is such an issue in India.

NEELKANTH MISHRA: It is. So, but see, they did see the US.

SMITA PRAKASH: It boosted the American economy at that stage tremendously.

NEELKANTH MISHRA: Tremendously.

SMITA PRAKASH: So what can we do? Is it building roads and bridges?

NEELKANTH MISHRA: Yes, urban infrastructure. See, freeing up regulations. See, the constructed floor space in India per person is 130 square feet. I’m basing it on the 2019 Housing Condition Survey. The average size of an Indian house was 460 square feet. There were give or take 4.5 people per household. So give or take 100, I’m assuming there’s some growth on that. So 130 square feet.

In a tier 3 town in China — and tier 3 towns in China have 80% of the constructed real estate. They have 737 total townships, 700 of them are tier 3 towns. So the very large set of population in Lhasa. In a tier 3 town, the average constructed floor space per person is 550 square feet. The US, it is 700 square feet, and it is still growing. Why should we be at 130? Even in the tier 1, tier 2 towns of China — Shanghai, Beijing — it is 250 to 300. So as people grow, or grow slightly more prosperous, their demand is to get into bigger houses.

SMITA PRAKASH: True.

NEELKANTH MISHRA: And it is the strongest generational demand. Now, are you creating enough space? People say affordable housing. Affordable. Exactly. And that needs infrastructure.

SMITA PRAKASH: Yeah, China did that.

NEELKANTH MISHRA: And people say affordable housing. Affordable housing is an oxymoron. Other than Singapore, no one has been able to do affordable housing. Affordable housing is like in Mumbai, which where real estate I understand better. You start building affordable houses in Dombivli, which is very far away. No one’s going to go.

SMITA PRAKASH: But China also learned it like that. Yeah, they learned that bitter lesson too. You have to pull down those structures.

NEELKANTH MISHRA: Correct. Yeah, but instead, if you just build infrastructure so that the travel to Dombivli becomes 40 minutes instead of 2 hours, the developers will stampede to build houses there. Which is exactly what is happening when the Atal Setu got built in Bombay, and the Noida and Greater Noida.

SMITA PRAKASH: Yeah, nobody wanted to go initially from Delhi, but once the highways came out. Exactly. And UP is another example of that, what they have created, expanded beyond Lucknow. And once the proximity to the major cities happened.

NEELKANTH MISHRA: Yes.

Top 3 Policy Recommendations for India

SMITA PRAKASH: And the tech parks. So to deal with the current vulnerabilities, what would you say should be the top 3? What would you advise since you are in the EAC too? What would be your 3 points of advice for the Government of India today to deal with the crisis currently?

NEELKANTH MISHRA: So the first is that just get done with the currency market panic, meaning that there’ll be a cost to it. It’s what they call in financial market parlance a liquidity problem, not a solvency problem. Our foreign currency debt to GDP is very low. So just get $70, $80, or $100 billion of visibility of capital flows. Currency market stabilizes, a lot of the narrative will stabilize automatically.

The second is that you need to, instead of relying on systems or very generic schemes, sit with the top 50-100 companies and say, “kya chahiye?” So, for example, if a major shoe brand in the world buys 500 million pairs of shoes, why aren’t they coming to India? Because our shoe manufacturers set up lines which are half a million shoes annually because they don’t have capex. And then the government offers a production-linked incentive scheme. And the industry says, “no, no, the minimum investment has to be ₹20 crores.” Boss, they’re not going to come to you.

Now, we’ve known this. We’ve known that Walmart buys more leather stuff than all of India’s exports, just one company. And so we have to sit across the table with them, just like we did with Apple — look at how much investment Apple is bringing to the country, how much technology it is bringing to the country. And it was, “okay, you tell us what you want. We’ll do something. You do something. If you commit to what — or if you deliver on what you committed to, we’ll give you more.” And so that support keeps coming, and it’s a win-win for everyone.

Why can’t we do that in footwear? Why can’t we do that in apparel? And this has to be done because, see, the standard government approach where, “oh, you know what, I will open a storefront and say 20% discount,” and wait. 6 months later you say, “hmm, nai chala, okay, 25.” You’ve lost 6 months. Instead, you go and sit with them and say, “what do you want?”

And same with semiconductors — there are 12-15 large companies which can do cutting-edge manufacturing. You go and sit with them and say, “kya chahiye aapko?” So you want this, you want that, I will get it done. And there are so many state governments today which are hungry for investment. So you don’t have to be socialistic and have everyone get some. There’ll be one or two state governments which are proactive and they’ll get those investments, and then they will provide the land, they will get the clearances, get the power connections, get the water connections.

So I think that’s the second one — there is a massive churn happening in the world, in terms of the shift from hyper-focused on efficiency to an increasing focus on resilience. That supply chains cannot be 80% dependent on China, even if they’re far more competitive than anyone else, which means that they will shift away. There is a trillion dollars — I’m not kidding, it’s a trillion dollars — of goods exports annually from China from multinational companies operating in China and exporting. So out of the $3.5-4 trillion they export, $1 trillion is — and it’s been flattish, it has not come down. Why can’t we go to them and say, “boss, you know you’re vulnerable, right?” And I’m sure they know they’re vulnerable, but they don’t know the alternative. So you go and sit with them and say, “what do you want?”

I think the third is we need to accelerate this tier 3 infrastructure development. Because look, people in Mumbai are amazed by how travel times have been completely transformed by the coastal road. Now with the metros coming up, it is astounding. And people ooh and aah, “oh, what, I did it in 20 minutes.” We had to do that over 1,000 towns.

SMITA PRAKASH: Correct. You couldn’t do more than 2 meetings in Bombay in a day. It was just not possible unless everything was in the middle of the city. Otherwise you just can’t because of travel time. But now you can, you can actually fly from Delhi to Mumbai, finish your meetings, and fly back, which never used to happen. You had to stay overnight because it was not possible, but now you can. And that’s just talking about Mumbai. You can’t do that in Bangalore because they didn’t do it. And forget about tier 2, tier 3 cities. This is Bangalore.

NEELKANTH MISHRA: And it is also about that the role models are there. See, because what I’ve understood having worked in government, that nothing works better than precedence — that it is much easier to approve something if it has been done before somewhere. Now, if Hyderabad has already proven that even before some other city starts to think of a highway or a flyover and build it, Hyderabad built it. So if you have cities like that, why would you not just copy-paste stuff and see how other cities can do it?

SMITA PRAKASH: And the satellite towns around those cities, economic activity picks up. So build more satellite towns around these major metros?

NEELKANTH MISHRA: I’m not an urbanization expert, but what I can tell you is that for an innovation-driven — we want to create the infrastructure which will support a massive surge in innovation.

Selling the India Story Abroad

SMITA PRAKASH: For that, Mr. Mishra, you’re headed to Washington, D.C. This is a question that will be asked of you. About why is it — the ease of living and the ease of doing business is difficult in India. This is the opinion you get. I mean, you travel a lot, so this is what you will get a lot. How will you say that, yes, come and do business in India? How will you sell the India story abroad?

India’s Growth Potential and Entrepreneurship

NEELKANTH MISHRA: There’s so much demand. Which other economy are you seeing visibility of steady compounded growth rates of 7%+ in real terms? Imagine the amount of incremental GDP that is going to get created. You think about the productivity enhancements that AI can bring about, meaning that there are so many vicious problems.

And just to give some flesh to that, in financial services, till the time that we were doing only branch banking, whether the government did privatization or nationalization or not, if the only way you could bank was through branch banking and the cost of a branch bank visit was ₹100, there was only a certain pace at which banking penetration would improve. You bring down the unit cost to ₹1 or less, and suddenly everyone gets a bank account, and then we start creating digital public infrastructure on payments, on lending, on ONDC and all of that. AI can actually help us solve those problems in education, in health. And it is when you solve those problems is when you generate wealth, when you generate income. And all of those problems are yet to be solved.

We look at the boom that is happening in hospital development and the investments that the private equity firms globally are making into Indian healthcare, diagnostic labs. There’s a whole range of sectors where the Indian car market is 5-5.5 million units. China is 35 million units. I’m not saying that we need to get there, and we need to build a lot of infrastructure to get there. Public transport. Public transport. But can it expand? Can it double in the next 5 years? 7 years? It absolutely can.

So there is no other place which offers this level, this scale of— there will be small economies, like, take Taiwan. An economy growing at double digits. One quarter was 14, but I think 9-10% is the annual growth. They’re doing income transfer schemes because all the wealth is being created by one company, which is locked up capital. So you saw the $340,000 per person bonus given to Samsung employees. If you’re generating $250 billion, it is very lopsided.

In India, you have 600 companies above a billion-dollar market cap, and I can tell you that there are fascinating stories coming out. I think this is a golden age of entrepreneurship in India. We are seeing cost and availability of capital the best we could have ever dreamt of in the last 70 years. Of course, there’s a long way to go. We need to bring it down further or make it more available. But you look at weighted average lending rates, you look at bond yields, of course right now they’ve gone up because of the oil crisis, but I think that once this subsides, they will come down again because the government has been remarkably focused on fiscal discipline.

Every small city has an angel investing club. Equity capital is much, much more available, and you have all types, right? You have pre-Series A, Series A, B, C, D, E, F, G, H. If you want half a billion dollars, also there is a venture capital firm giving it to you. So the financial markets are getting more sophisticated, regulations are easing, state governments are giving land. So what we are seeing is a very sharp pickup in new company formation. There are new hubs developing.

For example, the Raipur-Visakhaghat Expressway, once it is commissioned, and the distance, the time taken to travel falls from 16 hours to say 6 hours, and the naxalite problem has been curtailed to a large extent, why wouldn’t you be setting up factories in Raipur? So I think some of these dramatic changes — even also when you see the Delhi Expressway, all people worry about, talk about is the traffic congestion has shifted to Dehradun now.

SMITA PRAKASH: Yeah, but it’s the same with Raipur. They say, okay, it’s a ghost town. But those who have seen Gurgaon or Noida — they used to be ghost towns and then it boomed. So when you hear that, oh, all this infra, all this development has come, these industries coming up, but nothing really happening — just wait. When the roads get constructed and when the people movement happens, those ghost towns turn into industrial hubs. And productivity increases.

The Role of Government as Facilitator

NEELKANTH MISHRA: Exactly. I think we are too used to in our thinking — and the good thing is that many people in the government have already made that mental transition of government the doer. I think the transition to government the facilitator and the government deliberately wanting to do less and just pulling back and letting the private sector do its own thing. So it’ll be a small entrepreneur who says, hmm, I can build a 10-story tower here. And it works. And then he says, I can do another 20 and I can do another 100. And then my bank is running after them to do their IPO. This is how business and economic activity builds up.

So I think the facilitation through low cost of capital, easier availability of capital, better infrastructure — because no one talks about power outages for industry now.

SMITA PRAKASH: Correct.

NEELKANTH MISHRA: So these are things that we have solved. These are not sufficient to get us to rich country status. So we need to keep reforming. But to anyone outside this — and imagine that this is not about one Communist Party leadership in China realizing in 2012 that, oh, private sector has become too powerful. And then by 2016, ’17, they’re really worried. And then the infamous Ant Financial thing happens.

In India, it is all — there are democratic pressures. Of course, in the near term, they look like they’re headwinds, but people are changing. People are accepting that private sector is good. Bureaucrats believe in market forces, that we have to be facilitators. Not everyone — we have to convince more people to think like that. So some distance to go, but for me, it’s a very positive story.

A Culture of Ambition and Entrepreneurship

SMITA PRAKASH: You mentioned banks being facilitators. And of course, overriding ambition — it’s the time to have ambition and overriding ambition. This tweet by Mr. Uday Kotak where he says that Google, which is cash surplus, just announced an additional capital raise of $80 billion. Google annual profit is $160 billion, last quarter $62 billion, and market cap of $1.5 trillion. That is close to profits and market cap of all Indian listed companies put together. It’s a wake-up call to all companies to invest into the future, whatever the present might be. And then he adds that now that the IPL is done and dusted, time for India to focus on business of business. Now this is something a market leader is saying, that time to look forward and say nay to the naysayers.

NEELKANTH MISHRA: Yes, and there’s this fascinating book, The Culture of Growth by Joel Mokyr, the person who got the Nobel Prize last year. Fascinating insights into how growth happens, why growth happens — like why did the industrial revolution happen in Europe and not in China? And it’s very often about culture. What are you rewarding? Are you celebrating wealth, are you celebrating entrepreneurship, are you celebrating risk-taking?

And frankly, I think that the environment I see today — maybe I have this habit of seeing the glass half full all the time — but the acceptance of entrepreneurship. When I tried to start a company late in ’99, I used to work with Hindustan Lever, my family said I’d gone mad. If I do the same thing today, not at age 50, but maybe some youngster doing it today, they said, yeah, doesn’t work, 4 years later you’ll get a job.

SMITA PRAKASH: So it’s also about the job thing. If I’m just to interrupt you — in 1990, if somebody said you’re working for a startup or a small company, it was like, why? When will you transition to a Tata Birla company or a Modi Birla company or something like that? But today, working for a startup is like, okay, there is — tum apna startup ka shuru karooge. Learn and start your own startup. It’s a mindset which is changing.

NEELKANTH MISHRA: It’s a mindset that is changing. And the risk appetite of some of the youngsters is absolutely incredible. Which is great, which is great. Some people look down upon it. I say that, unless you have — now I wish that, just like I think Uday’s tweet says, just like we celebrate business innovation, I think we need to start celebrating technology innovation.

So what Joel Mokyr writes about — the biggest change brought about was a number of philosophers and what he called social entrepreneurs, that they accelerate change. So there is a certain pace at which things happen naturally, but then there are people who have massive credibility and they come in and just change people’s beliefs and thought processes — that science was good, that technology is good.

The good thing in India is that those beliefs are very deep, meaning the poorest of families will think that if my son and daughter is studying engineering or something, they’re very good. So we are there, but I think the desire to build something, to make the best drone, the best battery, the best semiconductor chip — I’m seeing that happen. Because I’m involved with ISM, I see youngsters — maybe they think they’re old enough, late 30s type folks — that say, oh, in 2029 we’ll take on Nvidia. Okay, I think it’s a hard ask, but you never know.

SMITA PRAKASH: It doesn’t seem in the realm of impossible.

NEELKANTH MISHRA: Yes, and they believe it. Whether I believe it or not is not important. Frankly, maybe I’m past my prime on doing startups, but those guys are committed, they believe, and many of them have the best quality training.

SMITA PRAKASH: The ambition that we can have an Apple, Google of our own — first you have to think that we can have it.

NEELKANTH MISHRA: Yes.

SMITA PRAKASH: Before you start building on it. If you just think that, arey, hamare bas ki nahi hai, then it’ll never happen, right?

NEELKANTH MISHRA: Exactly. And for that to happen, there has to be an environment which encourages it. So for example, if you are—

SMITA PRAKASH: And do you think we are reaching that stage, or we are taking policy measures to encourage that?

NEELKANTH MISHRA: Yes, we are moving in that direction, but there’s a long distance to cover, meaning the time it takes to start a new company, the time it takes to close a company that’s not working. Both are very important. You need to have an exit which is easy so that entry becomes much more common.

Challenges: Judicial Reform, Taxation, and Policy

SMITA PRAKASH: And judicial reforms, sir, because any foreign investor I talk to, they say that the entire processes are so long and so cumbersome in your country, you cannot do it. We can’t get in. Koi bhi kahin pe bhi FIR kardega, some environmentalist, somebody PIL kardega, and you’re stuck. Lots of people say this.

NEELKANTH MISHRA: And tax.

SMITA PRAKASH: And tax.

NEELKANTH MISHRA: I know of one very large multinational. The day they confirmed they’re investing in India, their global head of tax quit. And this is genuine. So why do we have such a reputation? There are many things that we need to do.

SMITA PRAKASH: Just sorry to interrupt on this. As we are shooting this, the RBI has kept the repo rate — abhi announcement hua — the RBI has kept the repo rate unchanged at 5.25% despite the West Asia crisis. Question is, does it signal economic resilience that we are ready to absorb shock? What do you think? Why is the repo rate unchanged? What do you think?

India’s Monetary Policy and the Case Against Rate Hikes

NEELKANTH MISHRA: See, there are only two reasons to change repo rate or raise it. The first is that there is evidence of sticky inflation in the economy. Which there is none. In fact, the last inflation print was lower than expected. There is fear that inflation will go up, expectations are definitely going up, but mostly it is what I would call a pass-through or a step jump.

So, for example, what happens is suppose your Consumer Price Index is 100 and steady state, I mean, so the last inflation print was 3.4, so you go to 100, 3.4. And then because oil prices have gone up and because of that some chemical prices have gone up, gas prices have gone up and other things are going up, you add another 1.1, 1.2% to that. So suddenly you are at 104.5 and say, wow, it’s above the 4% threshold. But unless you expect that the oil price increase from $70 to $100 is now going to $100 to $130, $140, this next year will that 1%, that 1.1%, 1.2% extra will come off, which is the decision a central bank has to take, that is there evidence of sticky inflation.

So one, the headline itself is too low right now, but even if you build in current high oil prices and you assume they last for a year, it is still not reason enough to raise rates. The second reason to raise rates, so the first one was sticky inflation evidence, which frankly is not there and there’s no reason, and we’ll have to see what the commentary is. But the second reason is to protect the currency from further depreciation.

So what happens in the currency markets, and so in Treasury we call it the rates and FX market, so basically that in the near term, if there is a massive, say, interest rate gap between what the US is at and India is at, then there is a reason for people to sort of whenever they have surpluses, to put money in dollars. And so then money goes out and all that. So, but rate defense for the currency is, in my view, option number 15, not option number 1. So I’m very happy that the RBI has stuck to the guns.

So there are, as I was saying, there are many more measures like cutting withholding tax on bonds, like withholding tax on ECBs, like maybe getting some foreign currency bonds or foreign currency deposits, those will give fillip to the economy without causing economic damage. Because if you raise rates, it then raises the cost of borrowing, the economy slows down, the whole economy.

Government Announces Measures to Deepen G-Sec Market

SMITA PRAKASH: Right. The other thing which, while we are shooting the interview, it’s had is this Government announces measures to deepen GSEC market and facilitate greater foreign policy investment in equity segment. This is the Government of India, the PIB press release.

NEELKANTH MISHRA: Yes, this is a great thing.

SMITA PRAKASH: As per this, yeah, the exemption of interest and capital gains on GSECs from tax. This has just been announced. The exemption will come into effect from the 1st of April 2026. And it shall apply to any interest or capital gains arising to FPIs on or after 1st of April in respect of investments in G-Secs. So it’s similar to the income tax exemption provided for Bank of International Settlements, BIS, for any interest or capital gains from its investments in G-Secs. So this has been done to ensure stable, systematic inflow of durable, patient foreign capital and long-term investors.

So you’re the good luck signal. So we have the repo rate, and then we have this, while we are shooting this. And after we decided on having you as a guest, you are going to Washington, DC. So 3 things which are happening as a result of this. So we scheduled it today. So tell me about this, what is your response?

NEELKANTH MISHRA: What this— I know this thing’s a great step forward. I think it’s an acknowledgment that some of the stresses in the currency market are more because of the capital account and not because of the current account. See, 2013 was mostly because of the current account. We had 4.8% of GDP fiscal deficit, current account deficit, which means that we were consuming more than we were producing, way more than we were producing. Today, our current account deficit is barely anything.

But the problem is that global capital flows have become much tighter because the US 10-year bond yields are like 4.5%. So we need to then work extra hard to get the capital in. So we cannot run it as status quo. And it is great to see that the government is responding to that imperative.

Tax Reforms to Attract Foreign Investment

SMITA PRAKASH: Okay. Before this thing came in, we were talking about our tax regime and foreign investors when I interrupted you on this. So can you tell me a little bit about what tax reforms you would like to see to get more inflow of funds?

NEELKANTH MISHRA: Inflow of funds, I think this is pretty good. But see, for businesses to come into India, so on FDI, on, say, GCCs, so, you know, things like advance pricing agreements. So why does it take 9 months, 12 months, 24 months to get one advance pricing agreement signed? It should be. And so that kind of clarity and transparency that, you know, you come in, we agree on a tax rate, and that’s what you pay. I think that solves a lot of the angst that foreign firms have, that Indian tax authorities are nasty.

And that, you know, you know what they worry about is that their CEO lands on a visit to India and there is someone sitting with— standing with handcuffs there. There are people who worry about that. Now, we may think that, right, but that’s the fear. And so how do we reassure them that, look, you know, there are people who do, I mean, who misuse the trust that India has in some of the firms, and going after them is finally perhaps okay because it’s not that— I mean, everyone in their own domestic economies has also—

SMITA PRAKASH: And the fear sometimes is not misplaced. There have been cases. So the fear every time it is, is this, that PIL ho jaayega, FIR ho jaayega, and some random person will slap a case on you. And this will happen. So the country needs to work on that.

Is India in a Phase of High Growth?

Anyway, towards the conclusion, we’ve talked on granular issues so much. Let me just come to the macro thing. Shamika Ravi was on the podcast this week, and she says that the Indian economy is in a phase of high growth. And she got trolled a lot by people who were saying that this is too rosy a picture that she was painting. You are also optimistic about it, and you tend to see, you say that you see the glass half full. There are shocks which we have to absorb, given the current situation in West Asia and its impact, and also certain measures that we need to take. Do you agree with Shamika Ravi’s assessment on the macroeconomics scenario?

NEELKANTH MISHRA: Yes, we started off with that, right? That we, that, you know, if you have 20%+ auto sales growth, and I’m talking car sales, not just two-wheelers, was slightly weaker, but I think car sales are so strong. If you have strong tractor sales growth, you have very strong credit demand, you have strong cement volume growth, you have mall footfalls. After a long, long time, in the March quarter, the FMCG companies, you know, the sabun tail, basically the fast-moving consumer goods companies, they reported 6% volume growth. So these are all signs that the underlying momentum is very strong, and we are seeing very strong demand for credit.

SMITA PRAKASH: So you would say that invest, invest, invest in India. Would you tell foreign firms to do that, investors to come to India rather than—

NEELKANTH MISHRA: Absolutely. But, you know, at the same time, as much as I’ve been for too long in markets and doing investment banking to just say that my saying so will solve the problem. It’s always a relative game. And so, you know, just like what the government has done now with the tax cut for FPIs and GSECs, realizing that the beauty parade just got tougher means that we have to spruce up even more and work harder and communicate better. And we have more aggressive sales processes.

So yeah, so we need to work hard. We can’t, because see, we have, and I’ll keep saying this, we have to get rich before we get old. There is a deadline. It is not ajna hi to khal. 2047, 2050 is around the time that our median age will cross 40. After that, growing fast is very hard. We can still happen. The world is changing, but you can’t assume that. I think it is reasonable.

SMITA PRAKASH: The Japan model. Yeah.

NEELKANTH MISHRA: And so you have 20-25 years to grow really fast. So we cannot be satisfied with 7% growth. You have to aim for 8-9% growth. Beyond that, the car moves too fast and it can get very wobbly.

SMITA PRAKASH: Despite shocks like COVID or West Asia?

NEELKANTH MISHRA: Exactly, because—

SMITA PRAKASH: Or make room for that too?

The Urgency of Growth: India Must Get Rich Before It Gets Old

NEELKANTH MISHRA: See, those things are on the fiscal side. So the fact that the government has been extraordinarily focused on fiscal discipline, create space for interventions when those crises happen, right? So what we are seeing now, like, you know, fertilizer prices not go up— whether they should or not is a different debate— but if the government does not have fiscal discipline, then even that would have been a problem.

So I think that realizing that a large part of demand— see, we are not Korea or Thailand or Malaysia, where the local economy is too small and there is too much, too little internal demand that you have to necessarily work on exports. I think export competitiveness is extremely important from a productivity angle, meaning if you are able to export something and compete with global manufacturers, means you are really good at it. And then if the same guy is selling in India, that means that, you know, you’re all sorted, meaning that Indian market is getting the steel or the cars or the consumer goods or whatever, which is the best in the world, which is very important. That’s productivity. So exports are important from the productivity channel, but for demand, all the demand is in India. 80% of the infrastructure we need in 2047 not yet built. What are we doing to accelerate that build? Those need to be priorities.

So as much as I think that this paranoia, the sense of foreboding that somehow the whole pain has not been felt, at some point will be felt, and the economy growth will collapse, is I think misplaced. At the same time, I think for 20 years we need to remain paranoid. So we need to remain focused.

You know, the Chinese— I mean, the parallel I use is that we have been so risk-averse in our policymaking. That it’s like driving a car at 20 kilometers an hour. I mean, okay, fine, there’ll be no accidents. It takes a long time. The Chinese, from 1975, ’73 to— I mean, we’ve been thinking Deng Xiaoping, but actually Cultural Revolution destroyed the elites and then allowed a lot of new innovations to happen in small provinces, and then they got cut-pasted by Deng Xiaoping and his leaders and his colleagues. So for 45, 50 years, they’ve been driving the car at 80 kilometers an hour on a bumpy road and then not slowing down even as, you know, something burst and it would change it.

We need to have that willingness to live with discomfort, that things are uncertain, unpredictable, but you know what, we have to keep growing, we have to keep innovating. And I think that energy, that passion needs to be there. So as much as I celebrate the fact that we are doing much better than what people fear, and which is great, sooner than later they’ll figure it out. I want to build on it. I mean, I think we should be looking to build on it and not just rest on our laurels.

SMITA PRAKASH: Nice. Anyway, on that note, wishing you all the best.

NEELKANTH MISHRA: Thank you.

SMITA PRAKASH: For being— for your tenure in On 8th Street. And thank you very much.

NEELKANTH MISHRA: Thank you. Thank you for having me.

SMITA PRAKASH: Thank you for watching or listening to this edition of the ANI Podcast with Smita Prakash. Do like or subscribe on whichever channel you’ve seen this or heard this. Namaste. Jai Hind.

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