India’s Export Engine Faces New Headwinds As Deglobalisation Reshapes Trade
In this week’s The Core Report: Weekend Edition, Govindraj Ethiraj speaks with Sajjid Chinoy, Chief India Economist at J.P. Morgan, on why India must urgently strengthen export competitiveness and build labour-intensive growth as deglobalisation, Chinese import and AI reshape the future of jobs.
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Hello and welcome to The Core Report's Weekend Edition. A current activity indicator produced by Goldman Sachs Bank has found that after slumping in spring, the global economy now is growing nearly as fast as before Mr. Trump got going. The JPMorgan Global Composite BMI, and JPMorgan is relevant to our conversation here, which is a high-frequency gauge of activity, also looks strong.
In August, it hit a 14-month high and a real-time measure from the Federal Reserve Bank of Atlanta in the US suggests that in the third quarter of 2025, America's GDP grew 3.9% at an annualised rate, a strong performance, though almost everyone expects the fourth quarter to be a little weaker. But the larger point is that all forecasts for economic growth are being upgraded as opposed to downgraded, which was the earlier anticipation. And for global, consensus is now 2.6% for 2025 as opposed to 2.2% in April. And some of this is applying to India. The latest forecast for the last quarter are talking about 7.2 to 7.5% growth. So things are quite different from what we thought it would be, which is a good time to bring in my guest, Sajid Chinoy, Managing Director and Chief India Economist at JPMorgan.
He's also a member of the Economic Advisory Council to India's Prime Minister and serves on the Governing Council of CAFRAL, that's the Centre for Advanced Financial Research and Learning set up by the Reserve Bank of India, and is also an advisor to the Army Group Insurance Fund. On that note, thank you so much for joining me, Sajid. It's good to be here this afternoon.
Great. So let's start off by the first point, which is, before we come to India, what's happening around the world and why hasn't that doomsday scenario happened as we thought it would just about seven or eight months ago?
Quite a puzzle, right? On Liberation Day, all economists said, you know, Armageddon is coming. And here we are three quarters later with very strong growth.
You know, those forecast on Liberation Day were, there's this phrase that economists use, satirist parables and all else being equal and all else is not being equal. So I think there are, you know, two drivers of this. And one caveat.
What are the two factors? One is the actual, you know, announcement and implementation of the tariffs has been far less potent than was worried. On Liberation Day, the president said effective tariffs will be close to 26%, which was a ginormous increase from the 3% in 2024.
If you actually see what's happened several months later, the effective tariff is more like 17% because several exemptions have been given. Electronics, semiconductors, pharmaceuticals, right? So the effective tariff it left is about 10 percentage points lower.
More importantly, that is the calculated tariff that economists calculate on a spreadsheet. Actual tariff in the US today is about 10%. When you look at the revenues you collect from imports, tariff revenues, and you divide that by the number of imports, it's about 10%.
So the move has been far less sharp. It's gone from 3 to 10, not from 3 to 25 or 3 to 17. Part of this is because, you know, water finds its own level.
When there are different tariffs in different countries, exporters find ways to circumvent this, right? So a lot of exports from China to the US are going through Vietnam and Thailand, which are lower tariff areas. You're finding people frontloaded stuff before the tariffs kicked in.
You're finding that importers have substituted away from high tariff countries to low tariff countries. This will eventually keep creeping up. So I think the larger point is the implementation of the tariffs is going to take longer.
It's going to take much longer for us to reach higher tariff rates. It won't happen in three quarters. It may take six quarters.
And B, importers have borne a lot of the burden. And so consumer prices are going up, but not nearly as much as was feared. That's the first reason.
The second reason is that you see this huge, big AI boom that no one expected. Massive investments, not just in the US, but you're seeing the equivalent of that in very strong exports in Asia. You look at Taiwan, look at Singapore, look at Korea, look at Malaysia.
They're the big beneficiaries from this. So I think, you know, as we've discussed previously, if you take out AI investments from the US earlier in the year, there are different estimates. Our own estimate is that US growth would be less than 1%.
So two things have happened. The tariffs are less potent for now. They're going to take longer to kick in.
And you've had this other AI boom that's masking some of the effects of the tariffs. The caveat is the following. It's too early to claim victory.
Yes, headline growth is strong, but the labour market in the US has weakened materially. And there's been a data blackout in the last couple of months. But anecdotally, you know, firings and layoffs have picked up in October and November.
So the concern is the labour markets are in a very precarious situation. You can have a situation where growth is strong, but because it's all AI driven, it's creating more jobs. Uncertainty is high.
The tariffs will slowly begin to bite as inflation goes up. So we're still at a point where, you know, this could break either way.
Right. Okay. So let's come to India. And you wrote an article recently in the Indian Express where you asked at a global level whether this exuberance was getting irrational. And you also said that basically, to what extent or rather asked to what extent will AI be labour substituting versus labour augmenting. So now to look at it from an India lens, how do you see this exuberance affecting us at all in any way?
So a couple of things, you know, even before we get to India, the way I think about emerging markets is if you look through all the noise, that there's a lot of focus on what happens to the US, a lot of focus on what happens to China. But the ones that get really squeezed are going to be emerging markets, because I think the world is getting much less globalised. I think there's a consensus now among developed markets that the globalisation of the last 10 or 15 years failed them.
Right. There's a lot of muscular industrial policy, fiscal policy has become much less well-behaved and much more vulnerable and precarious in advanced economies. But you're in a world where you will face much less globalisation or much more deglobalization, much more economic balkanisation.
Why does this matter? Because if you look at emerging market growth over the last 25 years and you take China out of this picture and you look at those growth rates and you plot a line of global trading volumes, it's essentially the same line. In other words, emerging markets, including India, have been far more reliant on export led growth than we believe, number one.
Number two, you know, in talking about trade, we're forgetting that with the U.S. putting on high tariffs on China, what China used to export to the U.S. is now being progressively redirected to the rest of the world. Think of a river flowing down. Those are Chinese exports.
And the U.S. puts on a big tariff wall akin to a dam. What happens? The water floods the adjoining areas.
That's what you're seeing. The Chinese exports are flooding Asia, coming into India, the Middle East, North Africa, even Latin America. So now emerging markets, including India, have got a second problem.
One is how do you get, how do you find export growth in a world that's more balkanized? And the second problem is how do you protect your domestic manufacturing sector from a flood of cheap Chinese imports, given the excess capacity and the deflation that China is foreseeing? So you're also playing defence at home.
The third issue comes to your point about AI and labour substitution. Already we're seeing manufacturing has become so automated that it's hard for countries to create jobs because every unit of output involves more machines and fewer people. That was happening in the blue-collar level for manufacturing.
The worry is AI will do this at the white-collar level. So if you're an ageing economy like Japan, you know, China, Europe, you don't worry about this. When you're India and you've got your dividend in front of you over the next 15 years, that's a very real question.
Let me give you one final example in Taiwan, because I now look at Asia. The build-out of Taiwan is very instructive. This is AI build-out, not adoption.
Taiwan's been the biggest beneficiary of all these data centres in the US. All the servers and the GPUs and the high-end chips go from Taiwan, from TSMC. Taiwanese exports have been growing at 33% over the last year.
Taiwanese private consumption over the last year has grown less than 1% because all of this is so capital-intensive that there is no spillover to the labour market and therefore no spillover to consumption. And guess what? The Taiwanese government has had to roll out 2% of GDP in fiscal support and cash transfers for an economy that is at the centre of the AI boom that's growing at 7% this year.
I think that's a harbinger of things to come globally.
So you raised a few points and maybe one can pick up each one by one. So the inequality, which I guess is a global phenomenon, which Taiwan seems to really highlight, is one of them. The second point you're saying is, or rather the first point in sequence, is the clear now separation between the G2 maybe and the rest of the world.
And you're saying that the rest of the world is now likely to suffer more than ever before. Again, if I were to look at it from an India lens, are we more affected by this, less, or are things going to be roughly the same?
So in the near term, because we're less open than some of the other economies, you know, we are more insulated because we still have a large domestic market. We'll talk about India's growth prospects, you've got external headwinds, but a bunch of cyclical domestic tailwinds that are kicking in so we can rely on consumption investment. But from a medium term perspective where every bit as much affected, because India, given its demographic dividend, over the next 20-25 years has to grow at least 7% in real terms and ideally 8% or more.
Now if you go back to history, only 13 economies since the Second World War have averaged 7% growth over 25 years. And they all had one thing in common, very strong global engagement. There are no examples in the last 100 years where without export growth, we've seen 7% for 25 years.
And would most of them or many of them would have been Asian? Absolutely, Asian, right? And so the question for India is, how do we undertake, how do we get export-led growth in a world that's getting progressively more closed?
I think that's the fundamental challenge for India. Now I think the moves in the last year have been very encouraging because we should not succumb to export pessimism, right? Manufacturing, our share of global manufacturing exports is still less than 2%.
When your share is less than 2%, you don't care about how much the pie is growing. The pie can stay stagnant for all we care, we have to raise our share. But raising our share then means a lot of emphasis on competitiveness.
It means doing the deep reforms where to raise your market share, it's not like a rising tide lifts all boats. To raise your market share, you have to become more competitive and productive, right? And that requires deep reforms.
We've shown on the services side that when you leverage your comparative advantage, how dramatic the increase can be, right? Indian service exports are now almost 4.5% of global service exports. They were less than 3% five years ago, growing very rapidly, creating a lot of white-collar jobs and helping a lot of urban consumption.
You know, these GCCs, it's not just the number of people they're employing. It's JP Morgan, you know, our workforce in India has doubled in the last five years. And every year you're seeing higher value-added services being added, legal, accounting, technology, cybersecurity, risk management, card structuring, right?
So we've shown that this can be done on the services side. We need to replicate this on the manufacturing side. We're too large and complex.
We need all engines to be firing to grow at 7, 7.5% for the next two decades.
So the service exports number is not something that's widely discussed, right? I mean, this must be maybe the first time I'm hearing it in this form. And if we are growing at the pace that we are, as you said just now, so we must be amongst the few countries who are then.
Absolutely. So I think on services, our global market share has gone from two to three to now four and a half. And, you know, we just got the trade numbers out earlier this week, again, surging service exports the last two months.
If service exports grow at this rate and continue to grow at this rate, you know, our share will keep rising. And I think this is actually a more structural story. Because if you think of what's happening globally, the global population is ageing.
You need young workers. India can provide those young workers. But immigration has become a really bad word in the US and in Europe.
So those young workers can't physically go to these places, which means the work has to be done remotely. And the benefit of technology has been that services that were non-tradable until a few years ago are becoming completely tradable. So you put these three things together.
The world needs young people. These services become tradable. Immigration is a bad word.
It boards very well structurally. I think at some point a few years from now, the constraint will be on making sure India has enough engineers and MBAs and white collar workers to fill these jobs, because my sense is the potential is very strong.
If you were to look back now at 2025, we've talked a little bit about it from a trade point of view and what we thought will happen but did not happen, at least so far. How would you describe the year?
I think a year was just, you know, so much uncertainty. I think we're ending 2025 with even more questions than we began the year. Because early in the year, the uncertainty was deep but narrow and related to Trump tariffs.
How broad, how deep, is there taco, will this go through? But as we end the year, there are, of course, cyclical questions about will the U.S. economy go into recession? Will the labour market break?
We haven't spoken about the legality of the U.S. tariffs, the Supreme Court's hearing right now about whether the tariffs under IEPA are legal. But I think there are more fundamental questions about AI and can this boom be sustainable? This is, you know, breathtaking investments.
Are we setting ourselves up for big disappointment? I think part of this is because people believe this technology has, unlike previous, has exponential growth. So people like Nouriel Roubini will say the productivity gains from AI are exponential.
In previous technological disruptions, things were concave. So it actually paid to be the second mover. Because at some point, the first mover would hit a concave patch and the second mover could catch up with the first mover and learn from their mistakes.
If something is truly convex and exponential, then the first mover can never be caught up with and it's a winner take all. And everybody wants to be the winner take all of you. So there's a lot of capacity being built.
And the question is going to be, you know, will the use cases justify this level of investments? Can these investments be monetised? So I think there are big doubts about whether a bubble is developing.
Two other issues, right? We've gone exactly reverse of the Washington consensus where advanced economies have now become highly fiscally irresponsible. And debt in the G7, debt is going from 120% this year of GDP to close to 140% over the next five years.
So at what point does that come undone? Because if there are concerns in those debt markets, it spills over to emerging markets. And then, you know, central bank independence from the US to Japan is now under question.
So I think we're ending 25 with some cyclical issues about tariffs and growth, but more fundamental issues, not just about global trade, but about institutional integrity, you know, debt dynamics and whether at some point all of this will have to be inflated away. I mean, the whole debasement trade on gold is predicated on the notion that at some point the only way to rein this debt in is central banks will be forced to inflate it. Right.
And therefore gold prices are rising. So I think 25 has been a very uncertain year. But I think if anything, the uncertainty at the end of the year is even broader and wider than it was at the start.
So I'm going to come to 2026, therefore, and your prognosis. But when you talk about AI and the AI exuberance, my question is, sitting in India, why do we care? Because it seems to have passed us by mostly, hasn't it?
So we care when this begins to get diffused in the economy, because we spoke about service exports and how the number of white collar jobs is created and the potential that has. And the question is going to be that, you know, if AI, can AI replace some of these white collar jobs? You know, will India service exports, that's the question I get all the time, be hostage to what happens in AI.
And that's a that's a very real concern. So I think that's the issue here, that you're already seeing more automation on blue collar jobs.
So what you're saying is the actual impact of AI, rather than the.
Not the build up. So right now, the issue is about investments, build out, stock market euphoria. Thankfully, India is immune to that.
The worry is when this actually gets implemented, right? Does it begin to replace? Does it become labour substituting versus labour augmenting?
If it's labour substituting, what kind of white collar jobs? And India's service sector, you know, embodies that white collar jobs. So will the service sector be under some pressure at that point in time?
And, you know, this is not a new phenomenon. I mean, for over the last 300 years, every time there's a technological advancement, this question about labour arises. I think Claudia Golden, who won the Nobel Prize in labour economics, has written a great book to say it's a race between technology and education.
And the typical thinking is the faster you can move up the education curve and the skill curve, right, the greater the chance that you will be a complement to technology rather than being a substitute. But there is a broader lesson for India over here, that this is going to be a race between capital and labour. Technological progress is inexorable.
Capital productivity is rising every year. How do we give labour the best possible chance to compete with capital? And the answer is there's no magic wand.
There's no panacea. It's the old stuff. How do you double down on giving people a really good education, skilling, right, education, skilling, health care?
How do you create an economy which, you know, is forced to deal with creative destruction? I mean, things are moving so rapidly. What are sunrise industries today become sunset industries two years from now.
And I think those economies which allow capital and labour to move from the sunset to the sunrise more easily and more nimbly will prosper in this environment, right? How do you how do we ensure that labour laws, which are meant to protect labour, don't actually hurt labour? So you want to give labour the best possible chance to education, skilling, you know, labour laws that work in labour's favour, not against it, the best possible chance.
And then, of course, think about safety nets, because some people will inevitably get left behind. And we need to do enough to make sure that those safety nets, you know, are intelligent. But but again, are nimble, because fiscal space is constrained.
So I think there are a whole host of existential questions that India will have to confront like other emerging markets, you know, in the coming years.
And I'm going to come back to that in a bit. And if you were to now look at how things are right now, you know, the last few quarters have seen, you know, the tailwind picking up, so to speak, the last the latest quarter earnings have been good and turned around finally, yes. And the prognosis is that it would be better, or at least similar, if not better in the next quarter as well.
And inflation is low, interest rates are low. So everything is dying or many of the things are looking good. How are things from your vantage point?
So I think cyclically, India seems to be in a sweet spot at this point in time, because two things are happening. You have both fundamental and technical factors that are reinforcing domestic demand. And the headwinds from tariffs haven't materialised.
Let me start with the first one, which is India now has the highest effective tariff rate imposed on by the US. The effective tariff rate is 34% in India, Brazil is 33, China is 32. And the worry was that that's going to really affect the export sector.
Yes, exports to the US in the last three months have come down. But the good news is Indian exporters have found other markets from Asia to Africa. At least for now, we've been able to offset the impact.
So the headwind hasn't been as potent as we thought. What are the tailwinds? I think there are six different factors that are cyclically helping India.
This year, even before the GST cuts, inflation is going to be 2.4%, I think the lowest in 46 years, very benign inflation, which helps growth because it boosts household purchasing power. We've had another strong monsoon. So the combination of low inflation and a strong monsoon has meant rural consumption after many years has finally begun to pick up smartly.
Then you had the direct tax cuts in the February budget. We've had the GST cuts in September. You've had 125 basis points of effective easing by the RBI, which is now percolating through the system.
And you've had regulatory easing by the RBI last month. So you put these six things together, and you should expect to get a cyclical pop. And we're seeing that if you look at the auto data, for example, or look at credit growth, things have clearly picked up this quarter.
There are some technical issues that are going to make growth look even stronger in the first few quarters. The base effects are very favourable. Fiscal spending and fiscal policy has been front loaded this year.
So it helps in the first two quarters. And you've got very, very low wholesale price index, which also is going to boost growth. We should talk about nominal GDP as well.
So real GDP is going to look very strong in the first two or three quarters because you've got the perfect storm. These six cyclical tailwinds, three technical factors, and for now, the US tariffs haven't impacted. But at some point, at least the technical factors will reverse.
I think the challenge for India is we want private capex to pick up. And for private capex to pick up in an uncertain world where China's got so much excess capacity, you need to see domestic demand visibility, not for one or two quarters, for several quarters. So the hope has to be that these factors will drive consumption for two, three, four quarters enough to convince businesses that I should start.
Because that's the problem even before...
Absolutely. I think that is the key known unknown, that can these tailwinds drive consumption for more than one or two quarters? For one or two quarters, we'll do very well. But can we go on for three, four quarters to convince businesses that this is the right time to invest?
I think that's the open question.
So which I guess also brings me to my slightly larger question here. If we were to look at the economy post-COVID, so we've seen these big post-COVID spending phases, bumps, globally. I think the rest of the world, particularly the Western world, seems to have reconciled or understood that it's seen the fading off and adjusted to the new normal, so to speak, or the old normal. Where are we? And have we have we adjusted?
So we're in that transition phase. So where did growth come from immediately after COVID? You had very strong levels of high end consumption, right?
So upper end urban consumption is very strong. You had a big push on public investment where the centre was pushing very hard on infrastructure. You had service exports do very well.
And you had the housing sector pick up. And these four things were driving growth. Now you're seeing that some of these impulses are naturally fading.
The stock of excess financial savings that households had were exhausted by 24. And until the recent GST cuts, urban consumption had begun to slow in the last year or so before the GST cuts. Public investment is still growing, but it can't be expected to grow at the 30%, 40% growth rate post-COVID.
So now it's growing more like 10, 9 or 10% in line with nominal GDP. So those growth rates have slowed. Service exports are doing well.
And the sense is at least real estate was not growing at the rate it was two years ago. So some of these factors are coming off. And therefore, the fiscal and monetary stimulus we've seen this year was important to kick start growth.
But if we just step back and think about GDP as being C plus I plus G plus X minus M, right? So net consumption plus private investment plus government spending plus net exports. The outlook on net exports is a bit clouded, X, because we're doing well on services which are investment light.
But goods exports are clouded because of the deglobalization. M is going to be strong because of cheap Chinese imports. So we shouldn't expect much to come from X minus M, right?
G has done a lot of the heavy lifting. At some point, G has to go back because of fiscal space. So I, which is private investment, is endogenous.
I think what is the issue with investment? Balance sheets are very strong. Leverage is low.
Cash levels are high. But for the first time in a long time, the last few years, demand has become an issue. For private investment to pick up, you need to have more demand visibility.
Because capacity utilisation for manufacturing has been at the 75 to 77 for many of the last five years. In a world where China has so much excess capacity and there's so much uncertainty with Trump, one would argue you need utilisation levels to be rising more rapidly to higher levels to crowd in private capex. So the question is going to be, where is that demand visibility going to come from?
It may not come from X. It may not come from G because G has to retreat. So it has to come from C, consumption.
Now in the near term, consumption is going to get a pop from fiscal and monetary. In the medium term, we go back to the key challenge is employment. Once you know, if we can keep pushing on, how do you make growth more labour intensive?
If you get more labour intensive growth, more job creation, improve household balance sheets, then you get sustained consumption, which in turn drives investment and you get a virtuous cycle. So we have to separate the cyclical tailwinds from the medium term structural ask of making growth more labour intensive.
So you touched upon what China is doing. You use the analogy of a river hitting a dam and then flooding the adjoining areas, which includes India. So in our conversations or our negotiations with the United States, one of the things that they want from us is to obviously lower our barriers and which we may not in some areas like agriculture, but in other areas we will be forced to.
Now my question is, in a world where we too have been traditionally walled off, though we've reduced, but then raised again. How does this dovetail with our own, let's say, desire to build manufacturing competitiveness, jobs and everything else to keep the economy going?
Right. So is the question about protectionism? I am very old fashioned that exports have to be a key driver of growth.
And you know, the first thing I learned in trade theory in graduate school was an import tariff is equivalent to an export tax. It's called the Lerner symmetry theory.
But this is happening to the U.S. as well. I heard from the DHL CEO the other day that exports have fallen from the U.S. in the last six months because imports have fallen.
Absolutely. In a world where there's so much intermediate trade in goods, where you make a small part, you ship it off to somebody, as they add some value, they ship it back. You look at the ASEAN trade cycle, things are going back and forth across borders multiple times.
So we have to believe that if exports has to be a driver of growth, which I believe the government is focused on, that import tariffs have to be rationalised. Now, how do you reconcile that with China? Well, I think, again, I'm not in favour of broad-based tariffs.
And I think even the QCOs, I'm glad the government's reviewing it. Some of those non-tariff barriers are coming down. That's, I think, some of those typically non-tariff barriers are even more pernicious than tariffs because they're less transparent and more opaque.
So I think we have to be very careful and judicious, right, that if there is a particular sector from China, if there's any, it has to be very narrow and specific. The other thing that works, Govind, is the exchange rate, right? So we should not be queasy about letting the exchange rate depreciate because it achieves the same purpose.
When you exchange rates, let me give you a number. In the last five years since the pandemic, the rupee has depreciated vis-a-vis the CNY by 15% in nominal terms, which seems a lot. But in real terms, we've appreciated by 10% because of the inflation differential.
China's explicit deflation. That means that Chinese imports today are 10% cheaper in real terms than they were five years ago. So one way to protect domestic industry is to have a weaker currency because that makes imports more expensive and gives domestic competitors an equal chance without biassing exports.
Because the currency is weaker, it's neutral towards imports or exports. So we'll have to be very clear headed that we can't be putting on big tariffs. I don't think that's the government's intention at all.
That tariffs will have to keep coming down to make India an export destination. If we want to attract more multinational companies like Apple, which is a goal and which we're making progress on, apart from, you know, doing business in India, land, labour, power, they also need a free trading agreement so they can import the stuff, add value and ship it out.
Let's come to 2026 and to, you know, if you were to look at everything that we've just talked about and and now try and project onwards, what would you say are the two or three key things that we are facing and have to reckon with? I mean, both positive and India now, and some of it is to do with the world, as you pointed out, in the context of AI and the impact of AI.
But if you were to look at, I mean, now seeing in India, in Mumbai, where we are right now, how would you look at the sort of our imperatives in 2026? I mean, maybe the pros and pros, as well as some of the challenges.
So I think the first thing I'd be looking for is how long these tailwinds will drive consumption for. And the hope is that they keep driving consumption for several quarters. And that will give you some impetus for private investors.
I think that's the most important thing that we should be focussing on. You know, how do you drive consumption? Will these factors be enough to drive consumption deep into 2026?
And will that stop more private investment? I would look at what's happening globally because we will not be immune to that. If the U.S. does go into recession and the labour market cracks, there'll be implications for the rest of the world. So you look closely how the U.S. is evolving. I would look at what's happening with AI because, again, if this is a bubble and the bubble bursts, there'll be big implications around the world. So I think externally, you've got how tariffs evolve, how the U.S. economy does, what's happening to AI and what's happening with China. Again, you know, if consumption in China doesn't pick up, you have another year with a lot of excess capacity, then India should be wary about what's going to come our way. So I think the risks seem to be more external than internal. I think internally, you know, from a macro stability perspective, we are in very good shape.
Inflation is very benign, below target at the moment. I think there's a credible fiscal path. Yes, the current account deficit is widening this year.
You know, which has gone from half a percent last year to one and a half percent this year, still financeable, lastly because of gold imports. So I don't think from a stability perspective, there are concerns. It'll be nice to attract more capital flows that we've seen FDI falling off.
But in my mind, FDI is very complementary to private investment. So I think for me, perhaps the most important near term policy objective is what do we need to do to stoke private investment at a time when public investment, which has done all the heavy lifting in the last four years, is forced to retreat for fiscal. I think that has to be the biggest near term ask.
In the medium term, it comes back to some of these existential questions. How do you make growth more labour intensive? What do we need to do to give labour the best possible chance to compete with capital?
How are we going to ensure that AI doesn't cannibalise white collar jobs? And the other is, you know, if you think about the big reforms, land, labour, power, it seems to be happening more at the state level. One thing that gives me a lot of hope is that there's a lot of competition among states.
There's a lot of competitive federalism. Right. And when a couple of states do something well, three others want to emulate that.
So can we accelerate that process? I think there are lots of, you know, asks both in the near term and the medium term. But for now, at least we're in a cyclical sweet spot for the next couple of quarters.
And last question. How do you see the markets going in all of this?
Oh, gosh. You should never ask an economist how markets are going to evolve. Offloads.
One thing I will say is, you know, we've spoken about strong real GDP growth. We haven't spoken about normal GDP growth this year could be less than 8 percent. Right.
It's going to be our calculations are you could get real at seven and nominal at seven and a half. And in a world in which outside the U.S., you've got sustained disinflation in part because of China and in part because most emerging markets haven't caught back up to their pre-pandemic path. So many economies, including India, have some slack and that's exerting disinflationary forces.
If the new normal in the next few years is that inflation is going to be lower, that's a relief. But it also means that the GDP deflator, which used to be four and a half percent between 2016 and 19, could be two and a half percent. If growth is at six and a half in the medium term and deflator is two and a half, the new normal will be nine percent normal.
Now, why am I saying this? Because I'm no equity market expert. But when we talk about price to earnings, if nominal GDP growth is nine percent, all the variables in the economy, earnings growth, credit growth, tax collections, GST collections will have to be marked down to that base.
These are all some multiples of nominal. If nominal is going to be nine and not 11, we have to get used to nominal variables coming down. It also has implications for debt, because if nominal growth is lower, then countries will need more fiscal consolidation, all else being equal, to bring debt levels down.
So we are in a new normal here with low inflation, which will have implications for how we interpret high frequency data.
OK, so you can tell me about Apple in China.
Yeah. So we won't discuss it now. But Apple in China is basically about the fact that what you're seeing is some Apple was able to influence Chinese policy in a manner where, you know, rather China was able to learn so much from how Apple was assembling smartphones in China that the technology transfer that happened to China through Apple was against U.S. interests, is the hypothesis of the book. So people like Trump are very influenced by this because there's a belief that you have to be very careful about the kind of FDI that you allow in U.S. companies to take to China, because inevitably at a time when you worry about smart chips and the like and high end chips, this will get disseminated, which is against national security interests. That's the premise of the book. Right.
Govindraj Ethiraj
Sajid, it's been a pleasure speaking with you. Thank you so much for being here and dropping by.
Absolute pleasure. Thank you. Take care.
