A Chartered Accountant and Company Secretary, Sanjay is a first-generation entrepreneur with an experience of more than 25 years in Investment Banking. He’s also an avid investor in early-to-growth stage companies and a philanthropist.
Manga. Karaoke. Sushi. Anime. Bullet trains. Suzuki Hayabusa. The original Walk-Man. The original Asian economic miracle. Japan is the country we dream of being – so why should India avoid Japanification?
Japanification, in the words of Naohiko Baba of Goldman Sachs Research, is “the combination of low growth, low inflation and low interest rates that has plagued Japan since the collapse of its real estate bubble in the early 1990s”. Any country that shows conditions similar to where Japan was at the start of the 1990s is said to be at risk:
- an ageing population, which means fewer workers and more pensioners, and declining demand for most non-medical, non-food goods; leading to
- low inflation, causing cutbacks to production and eventual shrinkage of demand for credit; causing banks
- to lower interest rates, hoping to boost lending.
What happened to Japan in the 1990s? From the 1950s onwards, Japan was the poster boy of Asian revival after more than a century of colonial and imperial humiliation. It was the fastest growing major economy in the world, doubling in size every 7 years on average. It exported high value manufactured goods to all the countries of the world and was seen as a rival to the USA for global economic dominance. It achieved the longest average lifespan for its citizens (with global interest in Japanese diet and lifestyle). Nothing could go wrong – till in the late 80s, Japan’s banks, handheld by its central bank fuelled a lending boom, especially in real estate. Trying to contain the ensuing bubble the central bank raised interest rates – puncturing it. The real estate market collapsed and hollowed out the banks. Even today, three decades later, several of its banks are laden with unpayable debts – so called zombie banks. The lost decade of the 90s is on its way to a fourth one. Meanwhile, its export-driven model was being slowly upstaged by its neighbour that made the same goods for much cheaper.
The Next Japan
That neighbour – China if you haven’t guessed yet – is now on the Japanification waitlist. The symptoms are all there. Just as the Japan of the 90s, China’s economy depends on exports and real estate for growth – both facing choppy waters. The one-child policy led to a drastic slowdown in population growth, and has now led to a situation where the number of young Chinese entering the workforce is outstripped by the number of those retiring. Its exports have faced several headwinds – a trade war with the US, pursued by both Trump and Biden administrations, accusations of intellectual property theft, additional scrutiny of human rights practices, and finally the disruptions in the global supply chain due to the pandemic. On the other hand, Evergrande, Kaisa and Fantasia are names that have kept China in the news for all the wrong reasons – over-leveraged and over-indebted, leaving behind a trail of ghost buildings across the country’s landscape. And broke creditors, among them China’s leading banks. Have the first dominoes fallen, in the eventual Japanification of China? Is this the start of a recession that could sink the world still tottering from the effects of the COVID-19 pandemic? Will China throw good money after bad, in trying to shore up the banks? The jury is out – largely because China has recovered from past predictions of collapse – in 1997, in 2008, in 2015 and in 2020.
The other candidate is Europe (Britain included). Its population has aged as well, though a lot slower than China, with its root cause going back to the massacre of millions of young men in the World Wars. The heavy emphasis on social welfare with generous medical coverage and pensions has left its countries with big bills – and voters who will punish any government that tries austerity (not that they haven’t tried). Reducing the average national age by encouraging immigration is a non-starter. And it is European banks that introduced us to the phrase “stress tests”.
Will India Japanify?
In a nutshell, no. India does not have the perfect storm that will cause a Japan-like cycle of stagflation yet. Here’s why:
- India isn’t getting old yet. A country where the majority is under 35, means it has more people entering the workforce than leaving it – the so-called ‘demographic dividend’. Young people want fewer medical goods, and more cars, homes, clothes, holidays, education and technology. They work for these things and pay their taxes. And since the government does not real pay fat pensions to older Indians like other welfare states, there is no looming pension bill. Maybe a good thing economically, but not a pleasant record socially.
- India is not going to see sub-3% inflation any time soon. Those memes and sarcastic songs about mehengai are going to continue for a while. People may complain about inflated home prices, but they are not a bubble. Despite the -8% GDP growth of 2020 because of the pandemic shock, India is still a growing country, and has mostly clocked a speed of 5+ percent since 1991. A growing country inflates.
- India has some of the highest interest rates for a large economy. The 8.5% interest rate for Provident Funds, or even the 4% interest you get for a no-frills saving account are Himalayan by global standards. Yes, our banks have over-lent and are over-leveraged and that’s a crisis in its own right, but that’s not going the Japanification way. The collapse of IL&FS was swiftly handled, and did not lead to the house of cards crumbling.
Does that mean I recommend you go full bullish on the Indian economy? Obviously, no. There are danger signs, and if they are not given attention, India might contribute its own name to the Dictionary of Economic Disasters. Here’s why:
- A lopsided economy. The least productive part of the economy – agriculture – employs the most people. Urbanization and industrialization need to proceed faster to put better incomes in the pockets of people.
- Suicidal banks. Every few years there are alarm bells about our banks, private and public. Stopgap measures are tried every now and then, like recapitalization of PSU banks for example, at taxpayer expense, or creating a bad bank. But no one wants to bell the cat.
- Poor public and private investment in health and education. Th Indian middle class is among the smallest in the world by share of population – with fewer well-educated people making money. Most live on subsistence wages even today, due to lack of education and opportunities. The population is young and relatively healthy, but it will ultimately grow older and sicker. As family expenses on medicines rise, they will cut back on things that fuel the engines of the economy. Not making the mistakes of Japan and Europe does not mean making new mistakes.
- A poor public sphere. India is not expected to reach where China has gotten to till 2070 – but it will get there. As John Maynard Keynes said about human long-term thinking, “in the long term, we are all dead”. With a general lack of policy ideas or debate in the public sphere, we might still get to Japan.
- A huge forex outflow. It’s mostly petroleum and servicing some debt, but it leaves India mohtaj to the moods of OPEC. Apart from drilling our own oil, we need a faster push to solar and other renewables. That it makes our climate CV look good is a bonus.
But it’s not an endless Meena Kumari film. India has pluses that Japan doesn’t – self-sufficiency in food for one, and in most industrial ores for another. An economy not dominated by such giants that a burst bubble will sink all. A tourism sector that has unrealized potential. A population that truly values education, and a loyal diaspora. An economy that is not misbalanced by lopsided military spending.
But Japan isn’t just an economic cautionary lesson. It’s also a country that has – as a soft power – karate-kicked above its weight with its Anime and Bullet Trains and Sushi. And that’s a lesson we could learn.