The smaller companies just don’t have the cash buffers. A handful of stocks are leading the stocks in the US as it is in India.
By Malini Bhupta
The pandemic will transform several industries forever and the big will only get bigger as smaller companies just don’t have the cash buffer. Bhanu Baweja, chief strategist at UBS Investment Bank, in an interview with Malini Bhupta, says that if a country’s claim to fame is low wages, then it will be disrupted by robots. Large masses of humanity are at risk in developing countries. Excerpts:
How do you see the pandemic changing the world?
In many ways the pandemic will change the world for the good. Governments for one will be more responsive. The pandemic is about the ESG (environment, social and governance), this is about how we have lived and not given other organisms space to live. I do think these things will change for the better. This is one of the reasons many producers will move to automation. The lowest end of the services jobs will be affected, which can lead to much bigger job losses than other recessions. This may not be a good thing from a social point of view.
How do you see sectors transforming — be it services or manufacturing? How much will be driven by the changed consumer behaviour?
We will continue to see the big getting bigger. Theoretically this is not a balance-sheet shock, this is just a large income statement shock. But it is so large that if you do not have the right buffers, then it can become a balance-sheet shock. This will hit companies that have not built large revenues relative to their debt and they don’t have a large amount of cash. The gap between the large and small cap enterprises will increase significantly. Governments are trying to slow the process by helping the smaller enterprises. Both labour and small enterprises are being protected but this will increase the gap between large and small. The smaller companies just don’t have the cash buffers. A handful of stocks are leading the stocks in the US as it is in India. This will get magnified. Reliance Industries is now 15% of the market. Eventually, we will see regulations and taxes as one of the ways that government takes to slow down the process.
A high proportion of India’s labour force is in the informal sector and so it is hard to protect them as the government is also constrained. This will create income inequalities. This gap can be narrowed through regulations.
From a demand perspective which are the sectors that are the disruptors and which sectors are the disrupted?
If that’s the case then if you look at our report, we went to our analysts and asked them to rank the impact on their sector on the basis some of the themes. The report gives a clear picture of this. Aviation is one of the most disrupted sectors, while e-commerce and education are the disruptors.
Stasis in globalisation is another theme. India hopes to be a beneficiary of the disruption in global supply chains. How do you see that playing out?
There are two or three issues — how do the supply chains break and how do they rebuild. How do you build a new telecom network when you are very dependent on Huawei. The answer to that is that you have to go through pain of creating new supply chains or produce domestically. Both of which takes years and this will change responses on being dependent on one country. Supply chains will be re-established and that will have a significant impact on populations. The broader point is that supply chains will have to be re-established. This will mean some sectors will remain disrupted. The bigger issue is not supply side issue, but a demand side issue. Across the last 30-40 years only few countries could increase savings rate. India is trying to go from an agrarian society to services, that is hard. A bulk of the population is working in low skilled jobs. For this you need low end large scale manufacturing. This is precisely the kind of thing that is disintermediated. If a country’s claim to fame is low wages, you will be disrupted by robots being deployed in factories in other countries. Large masses of humanity are at risk in developing countries. It is very difficult to see the rates of growth that we want to see if we don’t have a strong exports and manufacturing sector. Services cannot achieve that.
India’s growth has been fuelled by foreign capital. Do you see this being impacted because of stasis in globalisation?
So far we don’t see that in FDI in India as foreign investment remains quite strong. Again from a very low level we can celebrate 1-1.5% of GDP but that is a very low number for an economy that needs a lot more capital to succeed to increase production capacity. For this you need higher savings rate and if you don’t have a high savings rate then you need higher foreign capital. If your savings are getting destroyed due to the virus then it will be hard to argue that potential output in countries like India won’t fall. This is a major risk for countries like India. There is a real possibility that potential growth will fall if we are not able to buffer the savings rate decline and investment rate decline, which was a problem even before the coronavirus pandemic.