Saturday, April 19, 2014

Force = Mass * Acceleration

Aristotle described force as anything that causes an object to undergo unnatural motion. Then, came Newton after many centuries and postulated the above formulae but he also missed a few aspects which were then improved upon by Einstein when he developed his theory of relativity and therefore added aspects like gravity to the equation. One additional aspect that matters importantly for our discussion in the above formulae is the direction of the acceleration. This concept works in the physical world but there is a parallel in the political world.

‘Mass’ of a nation is a composition of the factors that a nation is endowed:
  • Geography – A relatively static factor defining a country. Like the Himalayan ranges provide protection towards the north and east, the Rhine provides excellent navigation capability to the German industrial heartland reducing transport costs, US Mid-west provides vast agricultural lands and, therefore, sufficiency in food;
  • Population – The fact that the French could wield 1/3rd the army of Germany in the Second World War was a critical factor as the declining population of Japan, Russia and Western Europe will have on their ability to ensure adequate manpower for industry and for their armies;
  • Resources’ including energy – Japan is a major importer of all mineral resources and oil. This leaves Japan at the mercy of suppliers (e.g. rare earth from China) and security provided by maritime power for its shipping lines (e.g. US). Germans are dependent on the Russians for c40% of their energy supplies. But having the resources itself is not a sufficient enough i.e. inability to use the same like India’s coal reserves or Chinese shale reserves or Congo’s uranium reserves

The acceleration of this mass is in essence provided by national character and leadership. While this may tend to be a bit vague it has an undeniable presence in determining the force of a nation. For example, one may have the resources but industrialization or creating requisite infrastructure is part of national will and leadership. Similarly, the Russians are known for their ‘rugged persistence’, Americans for their general reluctance for war and inventiveness, British for their common sense and Germans for their thoroughness and efficiency. While I will come to India in a bit, the reason that these views are there is because this displayed as a regular feature of their lives and in the most difficult moments. British foreign policy since the Second World War has been conducted with a complete understanding that they are no longer the pre-eminent power. Germans in the thoroughness forget restraint and want complete victory; had they understood their limitation in their conquest of Russia the outcome may have been different.

Leadership of a nation has three important aspects: understanding of power, statesmanship and diplomacy. While understanding of power needs no further elaboration, statesmanship is about looking and achieving long-term interest of the nation which may be at divergence with current popular mood and the ability to mould the popular mood. Diplomacy is the element which multiplies raw power of country e.g. how Jaswant Singh worked with the US administration post the nuclear test to lift sanctions or how Chamberlain prior to the Second World War blew it.

However, the most critical aspect is the direction of acceleration. Hitler won phenomenal victories both diplomatic and military but the continued attack to achieve complete control over Russia resulted in suicide, the American’s post the collapse of the Berlin wall became the sole super power which since then has squandered significant gains by their acts in Middle East and Afghanistan – it allowed a period for Russian’s to resurge and free hand to the Chinese, India has in the last 5 years has lost complete control of foreign policy in its near-abroad – inability to look at long-term interest versus alliance politics in Sri Lanka and Bangladesh, inability to counter Chinese influence in Maldives  and Nepal.

India’s over-population tends to be a significant challenge as the resources of the nation are not sufficient and what is there of the leadership is focussed inwardly on dealing with the diverse challenges like naxalism, water and regionalism. Like Germans are known for their thoroughness and efficiency, is there a common Indian character? I have not come across any literature that ascribes a unique character to India as a whole, it is always known for its diversity. The Indian nation as today existed was resembled closely only during the Mauryan dynasty, then during Shah Jahan / Aurangzeb and then the British controlled it through alliances with local kings / zamindars. As nations go we have a very short and dispersed period of shared experiences to form a unique national character!

“Also unlike a planet, an electron—if excited by heat or light—can leap from its low-energy shell to an empty, high-energy shell. The electron cannot stay in the high-energy state for long, so it soon crashes back down. But this isn’t a simple back-and-forth motion, because as it crashes, the electron jettisons energy by emitting light.” – Sam Kean, The Disappearing Spoon: And Other True Tales of Madness, Love, and the History of the World from the Periodic Table of the Elements.

It is important that we morph from being an electron constantly needing external stimuli. We have the mass (good geography, resource base of agriculture and minerals but albeit a large population and surely no nation has the perfect mix) but the pace and direction of acceleration can come only through transformational leadership which shapes national character, a shared perception and aspiration.

Saturday, April 12, 2014

Demographics and Capital

India is among the youngest population in the world with a median age below 30. While the net addition to the working population is the highest in the last decade (2000-2010) but the overall working age population will continue to rise until the early 2030s. Simultaneously, it is also adding significantly to its old (60+) population which will be more than its addition to the working age population.
The cycle of capital creation / consumption is the simply the following:
  •  0- 20/25 years: Parents spend the child’s food, clothing, education, travel etc. This category is a net consumer of capital;
  • 25-35/40 years: This is a category which has begun to work and is borrowing for its first car loan, to purchase a house and is a net consumer of capital again from the system. In India till the early 1990s this cycle never played out as young adults were less mobile living in joint family systems plus retails loan availability was extremely restricted. This is also the segment which is the primary consumption driver;
  • 35/40 to 60 years: This is the saving class which is in essence providing capital to all other demographic categories;
  • 60+ years: This category is essentially in retirement and drawing upon its savings over the last 20-30 years.
Simply put Indian economy will continue to import savings, despite its high savings rate, for a very long time as both the youth and the old continue to expand relative to its mature working population. Most of the German population is currently in their 40s and one can witness the savings bulge. Urbanization, infrastructure and consumption imports will all need foreign capital.

The Indian currency was Rs.8.4 in 1975, Rs. 17.5 in 1990, Rs.44.9 in 2000, Rs. 45.73 in 2010 and Rs.60 now per USD. Given this continues propensity to import savings and relative high inflation to the developed world, rupee will be in secular decline, except for unusual duration experienced in 2000-2010 when the external environment was extremely benign followed by easy money by the Fed.

As we look into the next 2 decades the Europeans, Russians, Japanese and Canadians will be experiencing a massive surge in the number of retirees. The Americans will continue to have reasonably good demographics as the baby boomers are replaced by the next generation in 8-10 years and by 2020 even the Chinese median age will cross the American median age. In this environment the global availability of capital will decline over the next few decades. This is the period when the need in India for global capital will continue to rise. Having said this, given the pension imbalance in the developed world the last 5 years of low interest policies have created, the need for higher currency adjusted return on capital will continue but this will be counter balanced to an extent by increasing Fed rates. The basic reason for economic slowdown in India over the last 3 years is its inability to keep the investment cycle going which is in turn dependent to a large extent on availability of foreign capital.

In this backdrop, political stability and policies that create a conducive investment environment is critical if we seek to achieve our national aspirations and benefiting from positive demographics. We are probably the country receiving the highest remittances (again savings) globally which means we export a lot of talent. Do we always want to keep exporting talent or use our people to enhance India’s productive capacities?