The Case for a Historic Reallocation to Emerging Markets | Sony Kapoor

In Episode 464 https://hiddenforces.io/podcasts/the-case-for-a-historic-reallocation-to-emerging-markets-sony-kapoor of Hidden Forces, Demetri Kofinas speaks with economist, investor, and sovereign wealth and pension fund advisor Sony Kapoor about the case for a great rebalancing of capital from developed into emerging markets, generational investment opportunities in India, how the breakdown of the unipolar order creates both challenges and opportunities for EM investors, and whether AI can revive developed economies weighed down by public debt, unfunded liabilities, and faltering demographics. The first hour covers the structural forces behind the outsized concentration of global portfolios in American assets, why the Trump administration's erratic policymaking has made that overexposure impossible to ignore, and a deep dive into India—its evolving relationship with the US, how its elites and citizens perceive America under Trump, what it has drawn from Beijing's development model, and the remarkable optimism pervading Indian society in contrast to Western declinism. The second hour examines the broader EM investment case—why risk across currency, political, fiscal, and institutional dimensions is converging between developed and developing economies, why growth and demographic tailwinds favor dramatic portfolio reallocation toward emerging markets, and whether AI can sustain America's virtuous capital reinvestment cycle or whether rapid global adoption will erode that edge. They also discuss geopolitical complexities shaping these considerations, from India's deep military dependence on Russia to the fraying US-led international order and its implications for strategic autonomy across the developing world. Subscribe to our premium content—including our premium feed, episode transcripts, and Intelligence Reports—by visiting HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you'd like to join the conversation and become a member of the Hidden Forces Genius community—with benefits like Q&A calls with guests, exclusive research and analysis, in-person events, and dinners—you can also sign up on our subscriber page at HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you enjoyed today's episode of Hidden Forces, please support the show by: Subscribing on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334, YouTube https://www.youtube.com/channel/UC8URhgYos5fjHqFSO4RSIEg, Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP, Stitcher https://www.stitcher.com/podcast/demetri-kofinas/hidden-forces, SoundCloud https://soundcloud.com/hiddenforces, CastBox https://castbox.fm/channel/2629539, or via our RSS Feed http://hiddenforces.libsyn.com/rss Writing us a review on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334 & Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP Join our mailing list at https://hiddenforces.io/newsletter/ Producer & Host: Demetri Kofinas Editor & Engineer: Stylianos Nicolaou Subscribe and support the podcast at https://hiddenforces.io https://hiddenforces.io/. Join the conversation on Facebook https://www.facebook.com/hiddenforcespod/, Instagram https://www.instagram.com/hiddenforcespod/, and Twitter https://twitter.com/hiddenforcespod at @hiddenforcespod Follow Demetri on Twitter at @Kofinas https://twitter.com/kofinas Episode Recorded on 02/16/2026

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Demetri Kofinas?

  What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Sony Kapoor, an economist, policy advisor, and investor who began his career in leveraged finance and derivatives at Lehman Brothers and went on to advise roughly 20 governments, including Norway, Sweden, and Germany, as well as some of the world's largest sovereign wealth and pension funds. Sony and I spend the first hour of this conversation discussing the case for a great

• 0:42Demetri Kofinas?

  rebalancing of global capital away from the United States, the structural forces that drove the outsized concentration of international portfolios into American assets, and why the current administration's erratic policymaking has made that overexposure impossible to ignore. We also take a deep dive into India, its evolving relationship with the United States, how its elites and ordinary citizens perceive America under the Trump administration, what it has learned from Beijing's development model, and the remarkable optimism and energy that pervades Indian society in contrast to the declinism that has gripped Western countries. The second hour is devoted to a conversation about the broader investment case for emerging

• 1:23Demetri Kofinas?

  markets, why relative risk across currency, political, fiscal, and institutional dimensions is converging between developed and developing economies, why growth and demographic tailwinds favor a dramatic reallocation of global portfolios toward emerging markets, and whether artificial intelligence can sustain America's virtuous capital reinvestment cycle, or whether the rest of the world's rapid adoption will erode that advantage. We also discuss the geopolitical complexities that shape these investment considerations, from India's deep military dependence on Russia to the fraying of the US-led international order and what it means for strategic autonomy across the developing world. If you want access to all of this conversation,

• 2:05Demetri Kofinas?

  go to hiddenforces.io/subscribe and join our premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q and A calls with guests, discounted access to third-party research and analysis, and in-person events like our intimate dinners and weekend retreats, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to [email protected] and I or someone from our team will get right back to you.

• 2:45Demetri Kofinas?

  And with that, please enjoy this incredibly timely and valuable conversation with my guest, Sony Kapoor.

• 2:55Demetri Kofinas?

  Sony Kapoor, welcome back to Hidden Forces. Thank you for having me again. It's great having you back on the show, Sony. I brought you on the podcast again because you recently published an article in Bloomberg that fit right into our wheelhouse. And I felt like it was also a really good addendum to the conversation we had last time you were on the show, which was prompted by two papers you'd written, "Winter is Coming" and "The Case for a Great Rebalancing", in which you argued that global capital had been increasingly misallocated due to factors such as the growth of passive indexation, maladaptive benchmarking, and an excessive focus on short-term performance at the expense of long-term returns. And I certainly encourage people to go back and listen to that conversation

• 3:40Demetri Kofinas?

  after hearing today's discussion, which, as I said, was prompted by your most recently published article in Bloomberg titled, "Global Capital's Break with the U.S. Is Long Overdue." Is it fair to say that this article falls in the category of the "Sell America Trade", a narrative that has gained significant mindshare, I would argue, since early 2025, but which you were arguing for much earlier? Is that the correct memetic framework for thinking about what we're going to talk about today?

• 4:11Speaker 01

  I think sell America perhaps is, I mean, it's a nice turn of phrase, you know, captures imagination, that's descriptive, makes a clear crisp point. But that is a bit of an exaggeration by several measures, right? I mean, so there's no one in the world, definitely myself included, who doesn't recognize that the American economy is exceptional. It's exceptionally innovative, it's by far the largest sort of consuming powerhouse in the world, great innovations, massive companies, deep capital markets, all the rest of it, right? So many of the virtues that drew so much capital to the United States in the first place remain.

• 4:56Speaker 01

  But the question is not whether, you know, it's worthwhile being exposed to America or not. It definitely is. But the question is, you know, what is a reasonable magnitude of that exposure, right? And every year of outperformance of American markets, both because of simple arithmetics between flows in stocks, right? So the higher the returns, the larger the increase in market capitalization, the larger the exposure of international investors to the United States became, even if they didn't put new money into the US, right? But the second point, because of that outperformance

• 5:41Speaker 01

  and because it was attractive, a lot of new money was actually sucked in. And so the share of the US of global equity markets, listed markets, bonds, private equity, et cetera, just kept rising and rising. And there was going to be a level at which the pressure differential between, you know, where the US lay, what metrics its stocks exhibited, what the P E ratio, et cetera, was, what the forward earning expectation was, differed so substantially from the rest of the world that it was simply not going to be sustainable. And I think that level, you know, in some sense, really ought to have been reached before.

• 6:25Speaker 01

  But belatedly, that level has arrived. And what was Trump's contribution?

• 6:32Speaker 01

  Within all of this is because, you know, as we know, I think it was Keynes who said that the markets can stay irrational for longer than I can stay solvent, or something to that effect, right? And so this could very well have gone on another year or two, maybe even three years, who knows? But the very clear signaling from this American administration, right from the start, about treating enemies and allies alike, shoddily, public humiliation, left, right and centre of domestic opponents, foreign opponents and allies again, right? Potential threats against

• 7:15Speaker 01

  the sovereignty of a NATO partner, one which I think on a per capita basis, has lost more soldiers than almost any other country in US-led wars in the Middle East, Denmark, and of course, you know, attacks against domestic institutional independence, particularly against the Fed. And it's just been an accumulation of taking potshots, left, right and centre, at anybody who dared defy this administration, that made it impossible for investors to ignore

• 7:52Speaker 01

  how important, how huge, how big their exposure to what is essentially a single point of failure had become. So as this administration concentrated power within the United States, as the ad hocness of policies, be it on tariffs, be it on, you know, industrial policy, be it on security alliances, et cetera, changes, week to week, day to day, tweet to tweet, Truth Social to Truth Social, it became impossible for any half rational person.

• 8:28Speaker 01

  To fail to address the point that more than half of their portfolios are exposed to the whims of one very idiosyncratic man. And so it forced people to take a fresh look at their portfolio exposure. And the answer, which really ought to have, again, been very clear already, became unavoidable, that this is far too high in exposure. And one doesn't need to start selling America, but it begins by stopping allocating new money into America. And then at the margins, because the US Treasuries, for example, remains, you know, by far the

• 9:10Speaker 01

  single largest asset class, the most liquid, it's impossible for any sizable investor not to be substantially exposed to US Treasuries. But at the margin, trying to reduce one's exposure from, let's say, twenty percent of the portfolio to eighteen, seventeen percent, that sort of behavior has begun. So it's not sell America, it's rebalance away from America, diversify away from America.

• 9:35Demetri Kofinas?

  How big is the gap between the consensus among foreign investors and the perception of American portfolio managers, allocators and financial advisors, would you say?

• 9:49Speaker 01

  I haven't looked at the numbers recently, but it is only natural that there is a gap between American and foreign investors, right? So what is often not part of the narrative over the outperformance of American financial assets over the past decade or so, is that a non-negligible part of that performance came from a strong and rising dollar. So the dollar has been, instead of just when Trump took office, I think on a trade-weighted basis, the dollar was at one of the highest points in at least, you know, recent living memory. And so for foreign investors, the single point of differentiation from the United

• 10:33Speaker 01

  States, the biggest one, is that a dollar exposure is a real risk they need to bear or hedge. And as people have Taken into account the real possibility of things as they turned out last year of the dollar falling and continuing to fall, the demand for hedging has skyrocketed along with the price for hedging, right? So hedging, hedge dollar exposure now for foreign investors is very expensive and unhedged dollar exposure for foreign investors is very risky. So it's only natural that American domestic allocators will be more comfortable with a higher allocation

• 11:15Speaker 01

  to US assets because they don't have the dollar exposure compared to foreign investors.

• 11:21Demetri Kofinas?

  So how much of this is a story about a secular weakening of US sovereign debt as an international reserve asset, even if the dollar remains the principal international currency?

• 11:32Speaker 01

  I think it's definitely part of the piece. And the reason that we are seeing, you know, sort of everything all at once is because we saw the converse for the past decade, decade and a half, right? So the outperformance of American financial assets wasn't just limited to US listed equities. It also very clearly showed up in private assets. It clearly showed up in fixed income and bonds. And on the downside, all of those factors of which, you know, the rising risk premium being attached to US treasuries,

• 12:13Speaker 01

  again, it's not a dramatic increase, but it doesn't take much of an increase to begin to register in terms of the new inflows into US fixed income assets versus inflows into other assets such as gold, which are considered to be potentially competitive assets with the safe haven status. So the credit premium, credit risk being attached to US treasuries is definitely part of the piece. The decline in the dollar is definitely part of the piece.

• 12:52Speaker 01

  The very high degree of concentration of returns from US S and P 500 companies, I think the top seven accounted for, what was it, 50% of returns over the past three years or so? And They are all related and in some cases, as with, you know, the strong dollar and the rising dollar in the past, they have contributed to that outperformance. And so all of those tailwinds that served to make the US share so completely outsized compared to its GDP, its contribution to global growth, innovation, trade, et cetera,

• 13:36Speaker 01

  are now starting to become headwinds.

• 13:39Demetri Kofinas?

  How much time do you spend in India? We're doing this covers, last time we spoke, you were in Norway, where you're based. You're doing this now from Delhi. How much time do you actually spend in India?

• 13:49Speaker 01

  I come at least three or four times a year and now I'm here both sort of on on sort of family holiday, but also for the AI summit that's happening now.

• 13:59Demetri Kofinas?

  So would you say you have a good sense of the zeitgeist in India as it pertains to, I mean, among other things, the perceptions of ordinary Indians of the United States?

• 14:11Speaker 01

  I would say so. I mean, I don't necessarily hang around with everyday Indians in the times that I come here, but I think I have at least got some sense, yes.

• 14:22Demetri Kofinas?

  So what is that perception and how has it changed in your experience?

• 14:27Speaker 01

  So from the time I was a kid and I grew up partly in India, it's sort of gone through various cycles. So broadly, the perception of the US has been relatively positive, but there have been periods where US reputation has taken a beating amongst the Indian mindset, and I think deservedly so. Part of it was historically due to, you know, the Cold War realpolitik where the US significantly supported and gave F-16s to, you know, Pakistan and, you know, all the rest of it, right? Part of it is related to, and we're going quite far back in the day, but I think was

• 15:11Speaker 01

  it Nixon who, who was on the record having called Indira Gandhi, who was, I think, the second or the third prime minister of India in the 1970s, excuse my language, B I T C H. And there's been, you know, US policy. Towards India.

• 15:30Demetri Kofinas?

  We supported Pakistan after nine eleven and Musharraf and and all of that.

• 15:34Speaker 01

  It hasn't been terrific, it hasn't been consistent. But given the fact, so I went to one of the elite engineering schools in India, the IIT, the Indian Institute of Technology, and you know, roughly about a third to half of my classmates, as sort of was generally the case, end up in the US either in at universities with, you know, teaching tenure positions or mostly in Silicon Valley or one of the sort of industrial giants, right? And I would say, I think at least three or four of them are sort of Silicon Valley billionaires now. So over time, the pace of this Indian elite going and making massive contributions to

• 16:19Speaker 01

  the American economy has been picking up. And many of those people have come back. So many people, especially amongst the elite, have deep family links. Roughly half of my family is American. And that has meant that particularly over the past sort of fifteen years or so, the US reputation in India, even amongst ordinary Indians, not just, you know, educated middle classes, has been rising and it's it's quite a deeply held, very positive image. And, you know, even under Trump one point O, where US policy was inconstant and a bit divisive, it didn't do that much damage to American reputation in India.

• 17:02Speaker 01

  But I think this last year, twenty twenty five, has left a very deep crack in the glass. And it's hard to see how it can be fixed anytime in the foreseeable future. So the ad hocness of Trump's stance over tariffs imposed in India, which were amongst the highest, right? The clown show over H one B visas and, you know, the sometimes nearly racist rants and policies which, you know, from which I think Indian Americans as, you know, the supposed sort of model minority. Thought they were insulated.

• 17:47Speaker 01

  They found out much to their chagrin that they clearly were not, right? Anybody could come into the crosshairs of the people going down this path. And so there's been a proper, real breach of trust. As far as I think Indians are concerned, both within the elite and ordinary Indians. That has come about over the past year of what is seen to be American misbehavior. And bullying tactics of India. So I think, you know, for now with the trade deal. Things have become a bit more normalized. If there's, you know, further agreement on H one B visa. If some of the more nakedly anti-immigrant policies are either, you know, defeated at the Supreme Court

• 18:33Speaker 01

  or Congress sort of takes action. They will slowly heal, but there's a definite rift, a breach. That's going to take a long, long time to heal that that mistrust will not go away easily.

• 18:46Demetri Kofinas?

  So in the world that I grew up in, the antipathy that existed, to the extent that it existed for America abroad. Seemed to stem from a perception that America was an unaccountable superpower. That used high minded ideals and pluralistic and multicultural rhetoric. To mask its pursuit of empire backed by hard power. That the issue was more the perceived hypocrisy, in other words, of American foreign policy. Are the elites in India primarily upset that they've now become a target at times of the very bullying that you mentioned earlier? Or does the concern really extend beyond India's own experience towards the larger frame of the international system?

• 19:28Demetri Kofinas?

  Under the capricious leadership of this administration and the wave of populism that it rode in on? In other words, does the chaotic nature of the policymaking that seems to be emanating out of Washington represent the greater concern for New Delhi today?

• 19:44Speaker 01

  I think if you follow the lives of ordinary Indians, for the most part, isn't that much bandwidth, given, you know, the day to day challenges of coping with normal life, you know, poor infrastructure, very competitive work environment, so on and so forth. There isn't that much bandwidth to follow the nuances of, you know, principled foreign policy. That's more of the pursuit of the foreign policy establishment and the media elite. And I think the primary sort of breach of trust that is felt by the majority of Indians comes from the administration's behavior towards India specifically, right?

• 20:28Speaker 01

  So there isn't that much depth of engagement and following up of how capricious Trump has been towards his NATO allies, right? And as much as Trump threatened to annex Greenland, would it have moved Indian public opinion about the United States by more than, you know, a percentage here or there? The answer is probably not. Most people simply don't follow that blow by blow account. So, so it is mostly to do with those two main factors. One is the tariffs. The second is, you know, sort of Trump claiming credit for having

• 21:12Speaker 01

  engineered a ceasefire between India and Pakistan and, you know, entertaining the Pakistan, sort of Pakistani, sort of head of military service with lunch at the White House, which is sort of unprecedented. And it was seen to be, you know, a public humiliation of India. And the third, of course, the mismanagement of the whole H1B visa and the, you know, perceived mistreatment, rising mistreatment of Indian Americans. So I think it's the India specific issues that have contributed to the biggest negative swings in public opinion against the United States here.

• 21:52Demetri Kofinas?

  Which counterparty do you think has more leverage in this relationship? And can India afford to be on the outs with the United States? Not suggesting that it is, just in terms of putting this through the they don't have the cards framework that Trump has operated with in a number of his bilateral relationships.

• 22:12Speaker 01

  Well, clearly, India simply doesn't have the cards that China has had, right? I mean, the rare earths embargo, for example, from China caused immediate pain in the United States and amongst Western allies and, you know, was a big factor in bringing Trump to have a more conciliatory stance towards China. Is there one single issue over which India can exercise that kind of leverage over the United States? The answer is simply not. So at this point, India has a much weaker hand

• 22:55Speaker 01

  compared to China or even the EU in its dealings with the United States. That having been said, there are advantages to India not being that deeply integrated into the global economy. India being primarily a country where growth has been driven more or less by domestic consumption as the single biggest factor, right? We are not manufacturing powerhouse that has massive exposure to, you know, trade embargoes, et cetera. And Trump's tariffs did begin to cause pain, certainly in some sectors. But in macroeconomic terms, I think the number is probably, you know,

• 23:40Speaker 01

  had the tariffs continued at fifty percent, Indian growth would have been maybe, you know, half a percent of GDP lower than it would have been, which when you're growing at seven percent is pain that you don't want, but you can take. So India has had the capacity, and still does, to take more punishment from the United States.

• 24:06Speaker 01

  In order not to give in to public humiliation of the kind that I think was felt here. And I think, you know, there's a, in terms of the political constituency, even if more pain were to be inflicted, the political constituency domestically is sort of strong enough to rally the troops, to, you know, bring everybody to, to make sacrifices, you know, not massive sacrifices for the sake of sort of national unity and national pride. So I think, given that, the US also has relatively limited leverage in the damage it can inflict on India.

• 24:48Speaker 01

  And of course, you know, the fact that we are having this discussion is itself nonsensical, right? I mean, it's a marriage that ought to be made in heaven, given the amount of talent that has gone from India to the United States. I think some statistic I saw, I'll need to verify it, is that about a quarter of Silicon Valley firms were, were founded by Indian ethnic, you know, folks with sort of Indian ethnicity. And I definitely know that, you know, a reasonable number of those were founded by my classmates. And given, you know, the fact that the US is sort of demographically stagnating and, you know, if not in decline, India has got about, what, 12 million people coming into the workforce every single year.

• 25:32Speaker 01

  Indian share to global growth now, you know, year by year exceeds American share to global growth. We are still, you know, relatively poor country. And I think India fairly soon, if not already, is going to be the third largest economy in the world. And of course, if the United States foreign policy establishment on both sides of the aisle is as paranoid about China as they appear to be, you know, given the amount of noise that comes out of DC, there's only one country in the whole world that allows the United States to have a potential counterweight, and that is India, right? And we have clearly aligned interests.

• 26:15Speaker 01

  And I think folks in the EU and the United States forget, or don't even know, that unlike them, you know, who've never been at the receiving end of aggression, by military aggression by China, India and China actually fought a war, you know, over Tibet when India gave. Asylum to the Dalai Lama and the Tibetan Tibetans who were fleeing China's occupation of Tibet, I think in nineteen sixty-two. And we were sort of handily beaten. And the level of mistrust that has existed over the past several decades between India and China, in particular, you know, the Indians being, I think, you know, not entirely without

• 26:56Speaker 01

  reason, paranoid about China's growing economic prowess, but of course, military expansion, you know, the number of nuclear weapons it has, the assistance it has provided repeatedly to not just Pakistan, but, you know, the military junta in Burma, for example, in Myanmar, you know, the port, strategic ports they have tried to get in Sri Lanka. So it's a sort of surround strategy. So if there's one country that has a real reason, besides Taiwan, to be paranoid about, you know, Chinese military expansionism, it's actually India.

• 27:35Speaker 01

  And to, to basically, you know, deliberately shatter what had been a wonderful, increasingly strong alliance, not just economic but also military, between India and the United States within the space of a few months. I mean, it's the biggest sort of, you know, shooting oneself in the foot that I can think of in recent foreign policy. So it's a terrible, terrible, terrible thing for the United States to do out of its own self-interest, and it's not great for India either, but, you know, it wasn't India that fired the shots in this particular conflict.

• 28:15Demetri Kofinas?

  Yeah, and speaking of firing shots, wasn't it, what was it, five and a half years ago that there was a border clash between the Indian Army and the People's Liberation Army that led to several deaths?

• 28:28Speaker 01

  Yeah, I mean, it's, again, you know, in geo-economic terms, it's pretty shocking. So here you have two giants, right, one point four billion people each, with a border that runs into, you know, probably, I don't know, thousand, two thousand kilometers, right? And given the size of these economies, there's more or less

• 28:50Speaker 01

  Almost no trade that goes on between them, right? There's not massive contingents of Chinese engineers and scientists coming to India. There's not that many Indians that go to China. And since that conflict you mentioned, where there were a lot of, maybe even in the hundreds, but definitely in, you know, like fifty, sixty deaths of soldiers on both sides. Direct flights were suspended, right? So we did not have for the past five years, any direct flights between the two largest countries in the world, which share more than a thousand kilometers of border, right?

• 29:29Speaker 01

  And the reason they have begun to sort of talk again, the reason that relations have been, you know, have been toying a bit, the reasons that the direct flights have been restored is because of Trump's aggression towards both India and China. So I don't know if this was a goal of foreign policy to bring India and China closer together, but it's definitely something that is happening directly as a result of recent American foreign policy.

• 29:59Demetri Kofinas?

  How do Indians, again, it's tough to talk about a country of a billion people in this sort of just general sense. So maybe we should try to narrow the focus to maybe India's elite or those sort of in charge of, in one way or another, influencing the direction of Indian foreign policy. But how do, how do India's elites view the rise of China and, and Chinese power?

• 30:24Speaker 01

  There's always been a very strong element of, of China envy amongst the Indian elite. Now, I was just listening to something on my flight from Bahrain last night. Is it, I'm Chinese, there's like a trending social media hashtag from TikTok or something, where people are, are, you know, you have, you have politicians, you have ordinary citizens, et cetera, either those who've been to China or, you know, sort of just talking about, you know, this with sipping a cup of Chinese green tea. But.

• 31:05Speaker 01

  You know, of like massive envy about China's remarkable ability to build infrastructure. And of course, you know, China's been pushing that narrative too. I think there's a reasonably famous media coverage, I can't remember if it was a video clip or not, of President Xi pouring tea for Putin in one of the high-speed trains. And the train was clocking three hundred one kilometers per hour and not a drop was spilled, right? And there's these sort of memes flooding. So this is something that's that's a relatively recent phenomenon in the West, in the US and the EU.

• 31:46Speaker 01

  But this has been something that's been part of the Indian mainstream discussion, you know, the Indian elites of China envy for at least the past sort of three decades or so, right? And our sort of, you know, Indian

• 32:06Speaker 01

  self-justifying, you know, the grapes are sour sort of answer always was, yeah, you know, this is all easy because it's authoritarian, they can, you know, ride roughshod over everybody's rights and, you know, do all this fantastic infrastructure. But, you know, we may not be like China, but at least we're a democracy, right? We're a noisy democracy. We have debates and discussions and so on and so forth. And we hasn't really gone away. And the elite have felt increasingly pressured over the years as more and more ordinary Indians are able to compare how China, starting from an even poorer background, and in some ways, you know, even poorer resource endowments compared to India,

• 32:50Speaker 01

  has leapfrogged India year after year after year. And that's something that, you know, people haven't really made made their peace with. And I would argue that the current Indian obsession with and focus on, and in some ways, you know, remarkably

• 33:12Speaker 01

  Decent, recent track record of a massive expansion of infrastructure from, you know, metro lines to highways, to train links, to airports, et cetera. Has been this pressure that has been felt as they have compared themselves with China's trajectory, et cetera. So the Indians are still not as good as China, as efficient as China at that. But frankly, you know, the India that I come to now is not the India I grew up in. And for someone within whom it's hardwired that we in India are just completely crap at infrastructure, right? I mean, we don't do infrastructure.

• 33:56Speaker 01

  To see every single time I come, you know, there's a new metro line, there's new highway being built, often under budget and on time of, you know, reasonable quality. It is exceptional how transformative the past ten, fifteen years have been on India's development trajectory. And part of it definitely comes from looking at and trying to copy China.

• 34:24Demetri Kofinas?

  That's really interesting. So what would you say explains China's relative outperformance? What specific lessons has India's government drawn? And how are those lessons reflected in some of the changes that you've seen in the build out of the country's infrastructure and elsewhere?

• 34:42Speaker 01

  Well, I mean, one of the things that's often not discussed in China's sort of remarkable success is how cities and regions were allowed to experiment across the board, right? I mean, China is significantly bigger than India, you know, the populations are more or less even. There is a huge amount of diversity, not the same sort of linguistic ethnic diversity as in India, but, you know, regional diversity, cultural diversity within China. And successful experiments in policy from cities and regions were relatively quickly copied and translated and scaled up in other parts of China.

• 35:26Speaker 01

  And India is, you know, like the United States, very federalized country. There's state responsibility, there's federal responsibilities, and the federal government has been relatively weak, both in terms of fiscal capacity, but also in terms of, you know, what it can implement. So many of the things that one would need to do to put India on a fast trajectory, developmental trajectory, were things that were either primarily the responsibility of states or a joint responsibility of the federal central government and states. And, you know, often it was not the same political party, often

• 36:10Speaker 01

  there was a lack of coordination, et cetera. And we never really got into that idea of encouraging experimentation at the city, local administration and state level and copying the policies large scale. There were no mechanisms for that. So you still get in India, you know, places like Bihar, I think, if not the poorest, one of the poorest states in India, versus Kerala, which is not that, you know, remarkably rich. But I, if I recall correctly, it achieved hundred percent literacy back in the nineteen seventies. It's one

• 36:52Speaker 01

  of the most gender equal states, has got amazing welfare standards, you know, sort of the stuff that one says about Cuba. And, you know, there is sort of Communist Party that has been in power in Kerala, but, you know, democratically elected sort of year after year after year. So you've got a remarkable quality of life. GDP hasn't sort of, you know, been so remarkable, a GDP growth. But then you have Tamil Nadu, you have Maharashtra, and you have Gujarat, the state from which, you know, the Prime Minister Modi comes from, which have registered growth trajectories upwards of sort of ten percent, you know, year after year. And we're getting better at two things.

• 37:34Speaker 01

  One, there's been a significantly greater degree of sort of centralization of developmental policies, including infrastructure, cross-border, intrastate border, infrastructure, et cetera. A rationalization of the tax system, where there's a national sales tax that was introduced about, I think, seven, eight, nine years back, that has rationalized trade within country. A significant, you know, increase of the capacity of the federal and the state governments to cooperate and learn from each other. And of course, you know, going up the experience curve. You do one or two things successfully. I think the Delhi Metro was one of the first

• 38:18Speaker 01

  large-scale projects that came in under budget and on time. And the very same team that then built it was asked to build several second-tier city metros, et cetera. And it's been sort of replicated successfully since. So I think India started relatively late, about twenty, thirty years after China trying to do not all of the same things, because that's not possible, but many of the same things.

• 38:45Demetri Kofinas?

  So I remember reading an article not that long ago, and maybe it was Patrick McGee who wrote it, who had been on the podcast, who wrote a book called Apple in China, or maybe he sent it to me. But it dealt with efforts by Apple, nascent or maybe even aborted efforts to transfer iPhone, some portion of the iPhone manufacturing chain to India from China. What do you know about some of these efforts? And to the extent that that they've hit snags, what is it about India's economy or its workforce that explains it?

• 39:21Speaker 01

  Well, so it's a little bit of a chicken and egg situation. But I would say the three biggest.

• 39:31Speaker 01

  Reasons why it is far harder to set up any form of advanced manufacturing in India versus China today. The first one is just far, far poorer infrastructure. Everything from, you know, reliable grids to port capacity, to roads, railway links, logistics, gold chains, you know, what have you. The second big problem is the quality of the workforce. So again, in theory, India, I think, produces the largest number of engineers in the world. But the difference between, you know, sort of the top tier institutions such as the IITs

• 40:16Speaker 01

  versus the long tail of far poorer institutions that, you know, are often private universities and engineers can sort of come out of there with a degree, but frankly, not much in the way of ability. So there is a quality of workforce issues where the numbers exaggerate the amount of human capital, high capacity human capital that is actually available on the tap. And number three still is, is, you know, bureaucracy, whether it's the state level, federal level, local level, you know, noisy democracy, et cetera, where if President Xi

• 41:01Speaker 01

  announces a strategic initiative for the Chinese government of something that needs to be accomplished by 2030, every single Communist Party cadre at the regional level, at the local level, will, you know, go out of their way to try and deliver.

• 41:23Speaker 01

  India doesn't have that apparatus and cannot have that apparatus. So everything takes longer, is more unpredictable. And I think that's why, you know, India is never going to be a China. And it doesn't need to be, and it shouldn't aspire to be.

• 41:42Demetri Kofinas?

  So one more India specific question, Sony, before I move into the second hour. First of all, maybe you can confirm this for me. I've noticed a lot of excitement in the Indian American community, among those who still have ties to India, about India's future. I've noticed people spending more time there. In fact, I know some people that have actually moved back there. Because this is the thing that's so, I think, notable about America, living in America today, is the sense of despondency and declinism that you find everywhere in the conversations. Everything is scary, even the way we think about artificial intelligence. And I'll fall into this category as well, though I do admittedly get excited about some of the prospects of what it can do for us.

• 42:27Demetri Kofinas?

  I also tend to maybe focus much more on the negative side of everything, technologically speaking, than people in emerging markets. How different is the attitude in India about the future? And how are obstacles viewed? Whether those obstacles are China, AI, climate? Just so we can get a sense of the zeitgeist of the people there.

• 42:54Speaker 01

  Well, so, you know, I'm British and declinism and issues, you know, you speak about in the United States are of course very much the same in the United Kingdom, right? Not just the United Kingdom, but, you know, large tracts of continental Europe, you know, France. I mean, the French are perpetually depressed, but nowadays even more so than before. You know, the Germans are not very cheery lot. The Italians have been a bit happier the past few years, but, you know, again, coming from a terrible slope. And India has just a completely different feel.

• 43:36Speaker 01

  Apart from the Covid years, those two years were really bad. And I think part of it was, you know, just poor population, you know, poor health infrastructure, but compounded by, by, you know, bad policy. But with the exception of those two years, in my recent memory, you know, at least over the past twenty five years that I've been working, I haven't seen Indians being unhappy or depressed. I have mostly just seen unprecedented levels of energy, enthusiasm, openness towards the world, support for globalization,

• 44:21Speaker 01

  you know, what have you, right? I mean, on climate change, for example, you know, I mean, somebody asked me after a recent election in in Norway, you know, what was gonna happen, given the rise of the far right and climate denialists in the EU? And I said, well, you know, the future of climate change is not going to be determined by the EU Green Deal, but it will be determined by the actions taken or not taken by folks in India and China and Sub-Saharan Africa. And in none of those places is this a divisive issue, right? I mean, so there is no discussion, there's no rear guard action.

• 44:56Demetri Kofinas?

  You're also more vulnerable to the effects of climate change.

• 44:59Speaker 01

  Definitely, right? And there's a huge awareness for that. And on an income and, you know, development status sort of adjusted basis, I would say India has already done far more to address climate change than, you know, the United States has. And so there is just this remarkable level of positivity and energy. And what really stands out, right, is, I mean, again, you know, from my. Relatively privileged background, I see the suffering that is very real, right? I mean, even people that you and I would think have nothing, have no particular reason

• 45:41Speaker 01

  to be happy and cheerful, given where they are in life, you know, given the relatively poor prospects that await them, are actually upbeat and energetic. And I think part of it is, and perhaps let me just bring the discussion back to Europe for a second. So, I don't know if you remember, but peak Euro crisis, there was this narrative of Spanish exceptionalism that I might also have contributed to, and it went as follows, that, you know, the Greeks had Golden Dawn, you know, the French had, you know, Marine Le Pen, and, and, you know, so there were all these sort of far-right parties rising as a response to

• 46:25Speaker 01

  Eurozone, European austerity, and, you know, the financial crisis. But Spain, which had seen, I think, two, three million immigrants come in, just in the five, 10 years before the crisis, had a 25% unemployment rate, was the country's second, third most affected by the crisis, still didn't have one. And sort of the narrative that I contributed to was, it's the ghost of Franco looms large, right? They had living memory, both Portugal and Spain, of far-right dictatorships, and hence, you know, there wasn't this knee-jerk reaction against immigrants. And now, if you look at Spain, I think they have three far-right parties, I mean, it's

• 47:10Speaker 01

  still a remarkably progressive, open-minded, and I think, you know, economically sensible immigration policy from the centre-left government in power, but there are three far-right parties. In Portugal, unlike in many other places, you know, the sort of racists are actually young, you know, folks in their twenties and thirties, which is rather rare, it's mostly sort of, you know, old white men who sort of drive this racism. And I think I have sort of revised my understanding of this, and then this is as follows, right? So, when the pie is growing.

• 47:42Speaker 01

  You know, if your gut instinct is that your children are gonna have a better future than you, right? If tomorrow intuitively feels that it's gonna be better than today, then it's not that hard to support globalization, right? To be open and welcoming and to be more willing to share. And even if your share of the pie is shrinking, as long as the absolute size of the pie tomorrow is bigger, right? It's not that hard to have sort of the progressive kind of mindset and this, you know, cheerfulness, right? And what we have seen in Europe, and this is, you know, real time experiment that has turned out over the past sort of ten, fifteen years,

• 48:23Speaker 01

  is our mode of thinking is hypersensitive as a body politic to expectations of economic growth, right? And it doesn't take much, because frankly, arithmetically, right? There's not that much difference between a growth rate of two percent and, you know, one percent, right? Or one percent and zero percent. So in arithmetic terms, you know, there hasn't been that substantial decrease in growth. But it's just fed this self fulfilling narrative of declinism of, you know, no one in their right mind can honestly, but not no one, but you know, large tracts of population no longer feel in their gut that their children are definitely gonna have a better future, right?

• 49:08Speaker 01

  And of course, this is perfect hunting ground for far right opportunists, as also in the United States, to immediately blame the other, right? To say that your prospects are worse because these people who look different, sound different, have come and stolen your jobs and are stealing from you. And of course, this is so counterproductive because the one thing that countries with declining demographics need, right? In, you know, Italy, Germany, Japan, and also the United States soon, is immigrants, right? And this then further reduces potential growth rate and further feeds that narrative.

• 49:51Speaker 01

  And eventually it'll run out of steam, but not before it has done a lot of damage. And in India, a lot of the cracks, the ills of the system, the problems, et cetera.

• 50:03Speaker 01

  Are are sort of papered over because of this generalized feeling that the arrow is pointing up, that people expect their children are going to have a better future, that tomorrow somehow intuitively feels that it is going to be better than today because it has been year after year and with the, you know, six, seven percent growth rate, it's likely to be. So I think that's something we we don't think about often enough when talking about, you know, it's not growth for growth's sake, right? I mean, the political economy of a growing versus a stagnating and a shrinking economy. And I think that is the single biggest differentiation now between the rich OECD economies who are caught in this downward spiral of declineism that becomes self perpetuating,

• 50:48Speaker 01

  and emerging economies with younger demographics who are exactly at the other side of the spectrum. A lot of optimism, a lot of energy, not everything is justified.

• 50:58Demetri Kofinas?

  Very well said. And I remember what it was like to live in a country that felt that way, that felt inherently optimistic, because that's what America was like in the 1990s. And by the way, that was the feeling in Europe as well. And it was the driving force behind the expansion and integration of the European Union from German unification, the Treaty of Maastricht, through Nice and Lisbon, because people were optimistic about the future and saw crises as opportunities to improve upon the visions of people like Jean Monnet and Valérie d'Estaing. So Sony, we've spoken quite a bit about India in the first hour, but I want to broaden the conversation in the second hour to encompass a wider range of developing economies, because

• 51:41Demetri Kofinas?

  while the traditional thinking states that developed economies are on average safer places to invest one's capital, and certainly this is true, I mean, no one would argue that Egypt or Indonesia are safer destinations than Canada or the Netherlands.

• 51:56Demetri Kofinas?

  The risk weightings that investors are putting on companies and opportunities in those markets are what is being repriced. And that's a big part of the story here. I also think there's another aspect to this story, and this applies to India as well as other emerging markets, which is that many of these economies aren't as integrated into the global supply chain as are China and the US and Europe. So in some sense, one also adds a kind of diversification to one's portfolio that goes beyond just exposure to growth. And I think a conversation about AI, both where it fits in EM and how it may also elongate America's own capital cycle, is something that we should explore in the second hour. For anyone new to the program, Hidden Forces is listener-supported.

• 52:39Demetri Kofinas?

  We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second hour of today's conversation with Sony, head over to hiddenforces.io/subscribe and sign up to one of our three content tiers. All subscribers get access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device using your favorite podcast app, just like you're listening to this episode right now. Sony, stick around, we're going to move the second hour of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io/subscribe and join our premium feed.

• 53:22Demetri Kofinas?

  If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at Kofinas, and you can email me at [email protected]. As always, thanks for listening. We'll see you next time.