India's AI lag could shield it from a painful market reckoning

The question being asked, often by people who may not like the Modi government, is whether India has missed the artificial intelligence (AI) bus. The answer is both yes and no. Yes, because India’s businesses and stock markets are not part of the current boom. And no, because the final chapter in the current boom could well be an AI bust some years down the line. There are advantages in not being first, as we can learn from the failures.

 

The AI boom, especially in terms of market valuations, is essentially no different from Tulip Mania, the South Sea Bubble, the dotcom boom, the subprime lending euphoria of the noughties, or other speculative bubbles of the past. It is bound to deflate at some point, although nobody can predict when. If India has been left out of the boom, it will also be spared some of the consequences of the bust. 

Those who like to see the darker side of things will also refer to the fact that the current profits of just two South Korean companies (Samsung and SK Hynix) are greater than those of all listed Indian companies; or that India’s ranking in terms of market capitalisation is now at No 7, where it has been overtaken by both South Korea and Taiwan. But market valuations are transient advantages, the result of the willingness of the rich and middle-class investors to take huge bets in the age of unequal wealth accumulation. Once risk-aversion sets in, these valuations will deflate more quickly abroad than in India. 

Others who would like to make unfavourable comparisons will say our gross domestic product (GDP) is less than the valuation of Nvidia or Google, but here’s the counter. America’s GDP is $32 trillion. The market valuation of the world’s 14 trillion-dollar companies is $35 trillion — and this could worsen as new AI and tech companies, such as Anthropic, OpenAI and SpaceX, hit the initial public offering (IPO) market with trillion-dollar-plus paper valuations. The point is: Even the US economy is not big enough to dwarf the world’s biggest companies right now when markets are on a tear. 

And let’s not forget the downside. SpaceX’s IPO is already underway, taking its potential market valuation to $1.77 trillion, which would make Elon Musk the world’s first trillionaire. But valuation guru Aswath Damodaran says SpaceX should be valued lower around $1.2 trillion, which tells you what could happen once the market corrects. 

The current market value creation is driven by the AI frenzy. Twelve of the 14 trillion-dollar companies are tech companies. This lop-sidedness is not going to end well for the stock markets and the individuals buying into fancy valuations in the hope that trillions will become gazillions. The law of gravity does not spare anyone. This does not mean AI valuations will not rise once again after the shakeout weeds out the weaker players (as they did during the dotcom boom) and the stronger ones grow to create more value, but there could be up to a decade of weakness that will not only bring down stock market wealth, but many real businesses as well. 

What we are witnessing, thanks to AI, is the overwhelming dominance of financial capital over human capital. For much of the 21st century, financial wealth has outpaced real GDP growth by a wide margin. According to a McKinsey study, the world’s financial balance is worsening. It notes: “Global wealth is $600 trillion, but it has outgrown GDP since 2000, as paper gains powered its rise. Every $1 in investment generated $2 in debt. The top 1 per cent of people hold at least 20 per cent of wealth. Cross-border imbalances are growing.” McKinsey says that this can only end in three possible outcomes: A global balance-sheet reset to reduce debt, which could mean asset price deflation or even a sharp collapse, high inflation, and low growth — or all three. Since the current boom is led by AI, the collapse will also be led by AI. We should all worry when that begins to happen — though it seems a bit distant right now.   

Those invested in AI tell us very good stories: That AI will improve productivity, create jobs that didn’t exist before, etc. But no one can really guarantee that these things will happen in the foreseeable future. In the meanwhile, there will be job destruction on an industrial scale — or, at least a drastic slowdown in good quality jobs, as all jobs involving middle skills and steady wages are eaten up by AI. It is difficult to see how governments will allow this scale of social turmoil when no AI visionary can be held to their promise that more jobs will indeed be created by AI than what will be destroyed.  If the markets do not lower the AI boom, democratic governments that are accountable to the people, will. 

In 2017, Bill Gates, the founder of Microsoft, famously said in an interview with Quartz that if robots and AI destroy jobs, they should be taxed. The problem is not the idea of taxing robots, but the reality of how we will ever be able to do this any more efficiently than in Luddite Britain. How can we ever know which specific job has been replaced by AI or robots, though we can know that in the aggregate 20 workers in a 100-worker factory or office have been replaced by automation. More important, how do we tax a new company that does not have those workers in the first place? Can you tax a company that begins with high automation more than a company that employs more workers? It will be a regulatory nightmare. 

The truth is we have no real answers to either the problems posed by AI and greater automation, or even the right regulation for it. Technology, once invented, cannot be un-invented. Nor is it wise to clamp down on a technology that may yet offer us a large platter of benefits. When AI frenzy is driven by FOMO — fear of missing out — and a death race is underway, the best we can do is batten down the hatches and hope for the best. Governments must keep the powder dry and help the victims. 

In the long term, governments that want to insulate their own people must focus on creating sovereign AI models that can be regulated at home and not be subject to global pressures. Fiscally, they must prepare for the valuations meltdown when it happens, even if India is singed less than those with high AI quotients.

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The author is a senior journalist