In Conversation with Dr. Tirthankar Patnaik

National Stock Exchange of India Limited (NSE) is one of the leading stock exchanges in India, based in Mumbai. It is the world’s largest derivatives exchange by number of contracts traded and the fourth largest in cash equities by number of trades. Its main motto is to improve the financial well-being of people.

Dr. Tirthankar Patnaik is currently the Chief Economist at NSE. His work at the exchange involves the confluence of Economics, Mathematics, Statistics, Econometrics and Technology. Read on to find out what Mr. Patnaik has to say about these present-day matters, along with his take on what it’s like to be an Economist.

Question 1: How and why did you choose to study Economics and then practice in this field? Could you tell us about your best moments during your Economics academic journey?

I never planned to study economics, I’ll be very honest, I wanted to be a fighter pilot and I got 76th rank in the all India entrance for NDA, but due to a medical complication I could never fulfill that dream. So the next best thing was to study mathematics. I did my undergrad in Mathematics, and my first masters was in Statistics. I joined the PHD program at IGIDR wanting to study something else, remote sensing, actually, but eventually ended up doing finance and that’s how I got into this field of Economics. It was not really a planned course, I’m sure these days, the new generation is very well informed. much better than I was, I was a little laggard in that sense. But I did find myself becoming an Economist.

Question 2: Sir, could you tell us your experience of working with NSE as a Chief Economist? Also could you tell us about your previous work experience before NSE as an Economist? 

Let me go back to my career of two decades. Initially, I wanted to work in “computable general equilibrium.” You might have studied microeconomics, and general equilibrium might have been a topic that you developed an interest in, or you will study in your master’s courses. At some point, however, finance turned out to be more interesting, as it catered to subjects studied earlier, like statistics and my love for computers. High-frequency finance was something new then. In simple terms, high-frequency finance refers to finance that deals with data obtained with a frequency higher than daily data. Typically, the majority of financial analysis is done with daily data and lower frequencies. In macroeconomics, you generally do not even get daily data; you get monthly data such as inflation rates, wholesale price inflation, and so forth. However, financial data is not just daily; you get it in seconds. This was something very intriguing, and that’s why I pursued my PhD in high-frequency finance.

The idea behind high-frequency finance is to try and answer questions about how finance looks at short intervals. Do downward-sloping demand curves exist? Do upward-sloping supply curves exist? How do agents interact with each other at very short points in time? That was something that got me interested in pursuing my PhD. After my PhD, I joined Citibank as an analyst and worked on what is now called Big Data Analytics for a few years. Later, I joined Citi (Citigroup Global Markets) again in the institutional clients group, in investment banking research, and then at a domestic group called “Religare Capital Markets” for about eight years, involved in institutional investment research. Many of you must be familiar with the sell-side. The buy-side comprises mutual funds, insurance companies, hedge funds, and so forth. The sell-side are brokers, and some of the many famous ones are Morgan Stanley and Goldman Sachs. I worked with two of them for eight-odd years.

Then I joined a Japanese corporate bank. I had done consumer banking, investment banking research, and now I wanted to see the corporate banking side of things. I was there at Mizuho Bank for about four and a half years. My domain experience was in understanding India as a professional economist. My insights were useful for corporate clients who borrow in India, banks to lend in India, and assisting buy-side clients, whether they were domestic or international, to invest in India.

NSE takes me back twenty years, so it has sort of brought me back to things I was doing during my PhD. One of the aims of the National Stock Exchange as an institution of national importance is market development, including investor awareness in developing India and participating in the India growth story. From that perspective, we try to act as a bridge to the extent possible between the investor community and the academic community. Apart from the company, our stakeholders are our regulators, the government, various academic institutions, students, and the wider investor community. 

We work on internal and external research projects. Some of our external output is publicly available on our website, and you are welcome to have a look. The NSE Market Pulse is well-known in that area. It is a report we publish every month, providing a comprehensive view of the Indian markets and the macroeconomy. Apart from macro and financial markets, we also work on a couple of other areas. NSE is a first-line regulator. We focus on corporate governance and ESG (Environment, Social, and and Governance) and the fourth area is market microstructure, which as I told you was the topic of my thesis. My thesis was on market microstructure and financial econometrics. So we are very interested in understanding how the market works, and what we could do to improve the markets further. 

Question 3: By elaborating on your professional life, can you give us a brief idea of what students can expect from daily work as an Economist.

Economics per se is a vast subject today and people that have studied economics could work in broad areas of macroeconomics, they can work as even microeconomists, with the techniques you learn. These days people learn data science, it is very common and in vogue. But data science to me is part of statistics and econometrics and as an economist, many people learn that as well, I’m sure I did. The avenues for a student of economics are very wide, really. My response on the daily life of an economist would have to be calibrated on all of these venues. For instance, if you’re a data scientist or an econometrician, you could be looking at public data, and macro data and trying to understand patterns. 

You could be working for an FMCG firm looking at what kind of products we should be selling, and how we improve your customer experience. You could be as I was doing in Citibank, look at, we called it decision management. So what kind of customers should a bank be targeting, how do we get a higher share of wallet, i.e., how do we improve business with our existing customers? Try to involve them with more of our plans and how to get new customers. All of this involves a good amount of economics and statistics, actually econometrics. These are very known and proper careers today. They have been for the last several years, these days people learn some aspects of this in data science and machine learning. 

But let me go back to macroeconomics. As a macroeconomist you could be in academia, you could be in a research think tank, you could be in an investment bank, a bank or at an exchange, or any MII (Market Infrastructure Institution)–you could be working there as well. And your profile would depend on and differ across all of these categories. So in a bank you would be looking at the yield curve, you would be looking at credit groups, track growth, inflation, money supply, and many related indicators. 

For an exchange, I have already mentioned the kind of work we do. If you are with an investment bank you might be reporting on many similar things for your clients. They could be institutional clients like mutual funds and insurance companies and hedge funds and outside FIIs. What would they do with your knowledge? They do two things. One, they take calls on a particular country, what kind of investment should happen. Asset allocation into equity and FICC, i.e., equity shares and fixed income, currencies and commodities. You will note that each one of them involves economic indicators. An economist can also work in a hedge fund–these are known as macro-strategy hedge funds. They take calls like being long or short on a currency, or being long or short in a particular country’s debt, among other things. I could go on and on, but these days economics is a very, very wide career. You just need to have a very open and broad mind. 


Question 4: On a global platform, how are the stock markets in India performing? Also, could you please elaborate on some challenges faced by the Stock markets in India?

I would not talk about what could happen in future or market direction, only about what has happened in the past, and what is available from public sources. Let me go back to a top-down view as a strategist: the Indian Markets are one of the world’s largest in terms of market capitalization, as we know, the Indian economy is the world’s fifth largest with our GDP around 3 trillion USD.

The IMF numbers say that we should cross about 5 trillion by 2026-27, by then, we would have crossed Germany (USD 4 trillion). By 2030 we would cross Japan (USD 6 trillion) and by 2031-32 our GDP should be around 7 trillion, as per publicly available estimates. To go from 3 trillion to about 7 trillion over a period of 8-9 years from today implies a significant amount of growth in nominal terms. 

A bigger economy would mean that people have a higher disposable income compared to our current per capita disposable income of USD 2000. Discretionary consumption (Spending on Non Food Items) becomes more important for households, and as a market, India will become even more relevant for domestic investments as well as foreign investors. Within India, returns from fixed income securities (deposits, bonds) have been falling for the last 7-8 years in line with the policy rates and therefore household asset allocation has shown a slight shift towards equities, both, in a direct manner where people invest into markets and an indirect manner where people invest in the markets through mutual funds. 

In the last three years, in the pandemic, the number of people participating in the Indian Markets has increased significantly, with the number of demat accounts being more than 10 crores (100 million) with around 6 crores unique investors. A working age population of around 600 million or  about 100 million middle income households, provides meaningful headroom for participation to grow further. This provides us a feel about where we are. As it is for Exchanges, for NSE today is the world’s largest derivative stock exchange for the last four years and if you include cash markets, then NSE is probably the 3rd or 4th largest Market. We have foreign investor participation of about 20% in our markets, we have about 20% Non promoter holdings (Banks, Mutual Funds, Insurances, etc). Among others, the combination of (i) Fast, Cheap and Reliable Internet (ii) Affordable Handsets (Mobile Phones), and (iii) the Government’s Aadhar Programme which allows Identification in a seamless manner, have contributed to wider participation in the markets and I see such trends to continue in the market.

Question 5: What are your views on depreciating INR and its impact on the domestic as well as foreign investments in India?

The idea is not whether the currency is depreciating or appreciating. Yes, these are movements that we comment about, but as the Central Bank would always tell you that it’s not the direction of the currency that really matters, it’s the volatility of the currency that matters. As students, you would study that currencies are random walks, we do have all past information recorded in them in their prices when we look at market efficiency, so only the random changes make them move. Hence not looking at the direction, I would look only into the volatility of the currency. The Indian Rupee (INR) has been on a depreciating trend since the last several years but its volatility is meaningfully low vis-a-vis its emerging market peers. If you look at the depreciation or valuation of a currency, we look at the real effective exchange rate of the currency and we will notice that it is quite north of 100 at this point. So from that perspective a depreciating currency does make sense. 

Question 6: As a Chief Economist of NSE what were your expectations before the budget was presented, for the growth and stability of the financial markets in the current scenarios?

India’s growth since the pandemic has been impressive. Last year and this year India will be one of the world’s fast-growing economies. In fact I would say, the fastest growing economy. Could India do better? As per the central bank we do have a gap between our potential growth rate and our current growth rate. I will talk about the potential growth rate a little more, coming into the FY 2023-24 budget. We have reasonable growth, but we are looking at a slowdown in the coming fiscal. Why, because large central banks including India had to face inflation meaningfully last year and they have raised policy rates. From that perspective what happens when you raise the cost of funds? Demand slows, and economies will slow down. I remember the IMF managing director saying that a third of the global economy will go into recession, at the beginning of the year. We have a reasonably high debt GDP ratio, north of 80%, quite high. Most of it is domestic debt, we don’t borrow much from outside, if at all. 

On the positive side, we see GST collections sort of pick up, thanks to a number of steps taken by the government over the last several years. I mentioned the Aadhaar, I have to mention the JAM trinity–Jan Dhan Yojana, Aadhaar, and Mobile, the India stack, an initiative like Digital India, all of which have contributed to what could be called as soft infrastructure in the economy. All of this is leading to two things: in the near term it has led to a higher collection of taxes, and more adherence with taxes both under direct state and indirect, so GST collections are visible and rising. And on direct taxes, we see more and more people filing with minimum fuss. 

The focus of the budget is in line with what the government has been already talking about, which is supporting investment and moving towards fiscal consolidation. Let me explain what it means: we are at a 6.4% fiscal deficit for this current fiscal year. We are looking at 5.9% for the next year and over the next three years we are looking at a 4.5% fiscal deficit. So this is what the finance minister mentioned in terms of getting back to fiscal consolidation, this is a positive. 

Question 7: Sir, according to you, is the Union Budget 2023-24 an election budget?

Government spending on welfare programs is expected to rise in a pre-election year,  as they spend more to keep the household happy. How do they do that? They do it at the cost of not spending somewhere else, given the limited amount of money. I mentioned we have about 45 trillion of expenditure, what’s the total tax revenue against that? It is ~30 trillion. Where is the rest 15 trillion coming from? It is coming from borrowing from the markets which are around 11 trillion or so and the rest 4 trillion is small savings. This is the broad idea, so the government gets around 30 trillion in taxes and spends 45 trillion and it borrows the rest. This means unnecessary expenditure needs to be avoided. Since the government’s focus has been visibly high on CapEx rather than revenue expenditure it would be hard to call it an election budget in any manner.

Question 8: How do you think the fiscal policies presented in the Union Budget 2023-24 are going to have an impact on the macro variables, specifically inflation, tax cuts and other factors affecting the Indian financial markets. What is your take on this?

I think there are two things here. Usually, what’s the biggest challenge today for the central bank? It is inflation control; you will agree with this, as of last year, and today also. While the inflation numbers have sort of come down, and we have probably seen the peak of inflation, as Governor Das has rightly pointed out, the war against inflation is far from over.

So for the central bank, the primal objective remains inflation control. In this scenario, you should not have fiscal policy working at cross purposes with monetary policy. They should work together. What does that mean? Fiscal policy should not be expansionary.

Fiscal policy has remained rightly conservative in India over the last three years, while given the circumstances under which India has been operating in the pandemic and the last year in the post-pandemic period. It could have been more profligate in terms of spending more on the revenue account, like in many developed countries, but that has not happened. A lot of the composition of this spend has progressively shifted towards CapEx. 

Where does all this CaPex go? Where is the government spending? A good part of it is towards transport infrastructure. For the last three years every year the projected root kilometers on national highways has been exceeded. So the government, for instance, says, we are going to have 10,000 km of national highway added in a particular area, the number becomes higher, 12,000 kms, 13,000 kms.

So to come back to your question, in my understanding, I think there is, I don’t see much divergence between the objectives of fiscal policy and monetary policy.

Question 9: There is a continuous capital expenditure by the government in the last 3-4 years including in this year’s budget, however the private investments have not reached up to the mark, with an expectation that the Private CapEx will pick up pace soon, what do you think are the issues hindering private CapEx?

India’s twin balance sheet crisis had corporates with high leverage and Banks with high Non Performing Assets (NPAs). So what happens when you are a Company that has so much leverage that you can’t borrow anymore? So you don’t borrow anymore, you stop and wait to work on your cash flows and try to retire your debt, try to meet your obligations which are on a more short term nature and not increase capacity. 

As a Bank what would you do? You won’t lend in the same manner anymore, you won’t take risks, try to shore up your capital against which you have lost money and that took us around 6 – 7 years and we sort of came to the trough of the twin balance sheet crisis by 2020. Today these balance sheets look much better, Gross NPAs in banks have dropped, the corporate leverage has gone down by about 30% from its peak in terms of debt.

So to answer your question today, I pose two questions (i) Is my Balance Sheet in a position to make that CapEx? And the answer today is yes. For the last several years this probably wasn’t. 

(ii) Do I see demand? Because if there is no demand why will I add CapEx. So today, there are companies that see this demand. However, people also notice that due to all the rate hikes and inflation control measures taken last year by the Central Banks, the cost of Funds are likely to rise. So why would you buy more when the cost of funds is rising? And that might remain a hurdle for now, however I am more sanguine about the corporate CapEx revival today than I was two years ago. 

Question 10: How do you think Indian financial markets are behaving in response to the slow pace of Private CapEx and what are its future implications?

I won’t comment on the specific directions of the market but I would say that many of the factors are turning positive for India. I will just compare where India is today with where India was 5 – 8 years ago. I mentioned we had demonetization and GST which put some minor roadblocks on the unorganized sector and the informal part of the economy. We had the twin balance sheet crisis and then we had the pandemic. Today, balance sheets are better, corporates are in a better form and due to many intangible steps from a macro perspective taken over the last several years, I am more sanguine about the growth today. 

I did mention some policies, the India Digital Stack, and the Soft Infrastructure we are building, all of which make me positive about India’s growth aspects for the next 5-6 years or so. I believe that therefore the Private corporate CapEx should reflect. One other segway that I mentioned was that the budget should be boring, so if there are no major changes in corporate tax policies from the government, if the budget remains supportive then I don’t see why people should not put more CapEx. I see fairly positive implications from these macro underpinnings coming out for India going forward with ceteris paribus. Now one does not know what kind of events can happen, nobody could have foreseen how bad the Russia-Ukraine crisis could have been. People were worried about Inflation in the wake of all the Central bank loosening that was done in the pandemic and the fiscal impulse that was given by several western governments but the Russia-Ukraine war was an unforeseen event that led to huge price rises in food, fertilizer and so forth. Our food subsidy bill went up to about 5 trillion INR (5 lakh crores), these kinds of numbers were only there because of the Russia-Ukraine War. But ceteris paribus I feel much more sanguine about India’s prospects.

Question 11: In a world where crypto currencies and NFTs exist as potential investment opportunities, how do you reckon the NSE as a key financial institution?

I see crypto in two senses. One is the background technology and decentralization aspects about it, which is a block chain, a distributed ledger, that technology is very welcome and it is used for several things now, and this is something we should all learn from and utilize also. Crypto as an investment I would say, I will simply reflect to you what our central bank has been trying to say. They don’t see it as a store of value, they say it poses risks for the system. I do not see intrinsic value in cryptocurrencies, although the idea of decentralized finance is something else, that’s an idea we should all learn from. Usually finance or any other field of knowledge improves from friendly competition, challenges and new technologies. We’ve all seen the benefits of the internet. I mentioned something earlier about cheap, reliable internet, and affordable handsets. Technology does help us, but specific assets like that, my view is no different at all from what the central bank says.  

Question 12: Sir, is there any advice that you would like to give students who would like to be professionals in the field of economics?

I will tell you what we do. I write macro reports, my team writes macro reports. We also deal with big data, the kind of which most people do not hear about. Those numbers will take time to understand. For economists, the field is very wide. In its crudest sense, in its simplistic sense economics is about the allocation of scarce resources, that’s all there is. So understanding the problem, trying to explain mathematics in it, and then solving it is what students should learn. I keep telling my kid that he should know how to write well, he should write well enough that people should want to read him. Secondly, he should know mathematics well, so he should be able to explain something in mathematical terms which includes coding for me because I started coding way back in 1985. But I have been regularly coding since 1996 and I still do it, so there is no reason why an economist should not be doing this. The third part is to make lots of friends, and have a network.

Question 13: For students like us, it is inspiring to have someone like you Sir, so according to you what are the factors one should consider when planning a career in investment banking or in stock markets?

Read. Read and Read. That’s it. So you can hear it from me or you can hear it from Charlie Munger from Berkshire Hathaway, the advice is the same, please read. Read as much as possible. There are no two ways about it. Kindly spend at least 1.5 hours everyday reading and it all adds up. Arnold Schwarzenegger says the same thing, Charlie Munger says the same thing and we all do it. So do some of our most sought after and you know storied investors  of our times, they read.  You should be comfortable doing math actually. All of higher economics is math. That’s the best way, make friends with mathematics. Try to explain things in a language others would want to read, not you alone. This itself will take you a long way. And then what do I do? We try to keep up, because it is part of my role, to keep up with current affairs a lot, and read a lot. Otherwise, try and learn new concepts. 

Two years back, I studied philosophy for a whole year, before that I was reading world history. I am interested in high performance computing. There are several topics, very varied topics and they give you insights and one of the jobs of an economic analyst is to connect dots. There is knowledge everywhere and you see many interesting things. These things fascinate me quite a lot. Nonlinear dynamics, railway locomotives, different topics and they are all useful and very exciting. You should have your interests as varied as possible so that leads to in some sense a very fulfilling life. 

Curated by:  Saloni Gala, Nevelee Shekhar and Jillian Tauro

Edited by:  Aman Kayal (Editor-in-Chief) and Khushi Shah


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