Will the curse of below 8% growth leave India?

Jan 19, 2012

In this issue:
» We could see a third world war in the next 5 years
» How do next 10 years look for commodities?
» Has the US forgiven Goldman Sachs?
» Art has been a better investment than US stocks
» ...and more!

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Although we like the ratio of optimists to pessimists on the optimism side of things as far as the Indian economy is concerned, the shift right now seems to be in the other direction. Saddened by the sorry state of affairs, most economists have revised downwards their projections for India's GDP growth in the current fiscal. And the trend appears far from over. Just recently, a UN report forecasted India's GDP to expand at less than 8% in 2011. However, it did not stop at this. Even for the next two years, the projection is that of a sub 8% growth. And if you think that this is being quite pessimistic, what would you say to Moody's projections of a mere 6% growth in 2012.

To be fair to these institutions though, our policymakers have managed to give them enough reasons to take such a dim view of things. In fact, things have come to such a pass that a leading daily has questioned whether our domestic economy risks consigning itself to below 8% growth for a long time to come. In other words, is sub 8% growth the new normal for India's GDP?

To be fair though, this whole idea of GDP obsession strikes a bit odd to us. There is no question GDP is an important indicator but we believe that it also hides as much as it reveals. For e.g. It will not matter to the GDP growth in the near term whether the same has been achieved by converting millions of tonnes of steel into automobiles or plant and machinery. Or whether the same loan that was to be used for buying a tractor has now been extended to buying an item of luxury. But over the long term, the GDP growth would have certainly been much better off had we invested in plant and machinery instead of cars, and tractors instead of luxury items. The former would have given us lasting benefits while things like cars and items of luxury would have become useless in few years.

Our policymakers did not grasp this crucial difference we believe. When India's GDP was growing at more than 8%, they failed to realise that it was more on account of excess liquidity in the West that was finding its way into India and which may not give us lasting benefits. Thus, when this tide went out, their failings have been brutally exposed. It seems we never had the infrastructure or investment required to sustain an above 8% growth. Hence, if we have to get out of this rut, reforms of the highest order will indeed be needed. Reforms that leads to more investments in infrastructure and more efforts towards improving our productivity. Only then an above 8% growth will be the new normal.

Do you think India will ever be able to grow consistently at above 8% per annum? Share your views with us or you can also comment on Facebook page / Google+ page.

 Chart of the day
Imagine paying 9% on your home loan and the bank tells you to shell out around 25% after one year. You will be shocked, isn't it? Something similar could be happening with the Greece government right now. For as today's chart of the day shows, borrowing costs for 10 year Government bond in Greece has gone up by a whopping 175% in the past one year. For the US though, it has come down by 44% as investors have considered US bonds as asset class of choice in uncertain times. India's borrowing costs on the other hand have remained largely unchanged. Thanks in part to the Reserve Bank Of India (RBI) buying program that was recently undertaken.

Data source: Bloomberg, RBI, Agorafinancial

Marc Faber, the renowned publisher of the Gloom, Doom & Boom Report has a very grave warning for the globe. He opines that World War III could happen anytime during the next five years. As per his hypothesis, the epicenter of the war would be the Middle East. As it goes, politics and economics are very intricately related to each other. The underlying triggers of most past wars have been economic. When economies start defaulting on trillions of dollars of debt, war becomes inevitable. How would that affect financial markets? According to Mr Faber, the war would be positive for stocks as unutilised capacities in an economy would be directed towards the defence industry. At the same time, there would be a massive rise in debt and that would affect bonds quite adversely. His warning may come as a shock, but it certainly does appeal to reason. The previous two wars are a testimony to man's warring instincts. And more often than not, it takes just one crazy country and one fanatic leader to start the contagion of war.

How will this affect Indian stock markets? We believe that though the impact would be based on India's involvement in the probable war, it would certainly send commodity prices, especially those of crude oil, skyrocketing. We all know how sensitive our economy is to crude oil.

A beautiful painting or a rare artefact may look great on your wall or in your showcase. But, how does it look in your portfolio? Well, the art market returned 11% to investors in 2011. This outpaced stock market returns from equity investments for a second consecutive year. According to Financial Times, the performance of the Mei Moses All Art index, a leading barometer of art returns has beaten the S&P 500 in six of the last 10 years. It has posted an average annual return of 7.8% compared with 2.7% for the US index. Strong Chinese demand as well as high prices of work by popular artists led to the Art Index's recent rise. But while the art market has shown good returns, it doesn't make sense for investors to jump on the bandwagon. Current economic conditions have made art collectors more cautions, and if the slump continues, the industry may see slower growth.

When Miguel de Cervantes had coined the phrase "Forgive and Forget" for his book Don Quixote, he meant it as a sermon for people who hang on to the past. And the Americans seem to be adopting it as well. They have finally forgiven Goldman Sachs for causing the subprime crisis. The company has come back to its pre-fraud reputation and has been ranked 5 in the Buzz brand score card.

Goldman was touted as "a great vampire squid" that was ready to wrap its bloodthirsty fangs around anything that involved money. The company has come under fire several times for its involvement in the subprime crisis as well as numerous frauds related to the same. But it finally seems to have polished off this reputation and has emerged as one of the most improved brands. Strange that people have such a large heart and a short memory. The repercussions of the crisis caused by Goldman and its peers are still being felt in literally every part of the world. But all has been forgiven and forgotten.

Commodities had a spectacular run in the last decade as population in the emerging markets zoomed, fuelling demand. So much so that all of the 14 commodities (notably aluminium, coal, copper, corn, crude oil, gold, lead, natural gas, nickel, palladium, platinum, silver, zinc and wheat) yielded positive returns since 2002. And the star performer among these was not gold but silver with 20% annualized returns. Gold followed close on its heels with 19% annualized returns after which came copper with 18% returns.

Of course, there have been hiccups in this ride and one such was witnessed in 2011 when silver and natural gas suffered losses. So what is the outlook for commodities for the next decade? Will gold continue its rally after such a splendid run? The answer is most likely in the affirmative. Indeed, given that the developed world (US, Europe and Japan) has racked up so much debt and are struggling to stay afloat, investors will be looking at safe havens and gold fits the bill perfectly in this regard.

Further, the value of paper currencies has also come under question led by massive money printing by governments and given that gold is a tangible store of value, the demand for this precious metal is unlikely to diminish in the longer term. The trajectory of commodities also depends a lot on where China is headed. Although the dragon nation is witnessing some headwinds currently with many predicting a hard landing for the economy, the country is still expected to grow at a much faster pace than the developed world in the longer term. And as long as that happens, demand for commodities such as copper, coal and oil will sustain.

Meanwhile, indices in the Indian stock market have been buoyant right from the beginning today. The Sensex was trading higher by 140 points at the time of writing. Heavyweights like Reliance and L&T were seen driving most of the gains. While most Asian indices closed positive today, Europe too has opened on a positive note.

 Today's Investing Mantra
"We will continue to ignore political and economic forecasts which are an expensive distraction for many investors and businessmen." - Warren Buffett

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1 Responses to "Will the curse of below 8% growth leave India?"


Jan 19, 2012

India can grow above 8% provided the political parties allow it. The reforms such as market determined prices for petroleum products, GST and other reforms should be allowed to be implemented. All the political parties then take credit for the higher growth. As far as Kerosene is concerned, the poor should be compensated through cash payment. It is an open secret that kerosene goes into large scale adulteration of diesel. Also Aviation Turbine Fuel is the same product as kerosene and therefore ATF prices can be made cheaper resulting in profitability for Ailines and cheaper travel.

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