Is our GDP growth rate just 6%? - The 5 Minute WrapUp by Equitymaster
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Is our GDP growth rate just 6%?

May 10, 2011

In this issue:
» ICICI Bank is world's 53rd most valuable brand
» Should inflation targeting be a formal policy goal?
» Will Greece too have a Lehman moment?
» A 'perpetual' bond trouble brewing over Asia
» ...and more!


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00:00
 
A very popular adage goes thus: "There is no such thing as a free lunch."

This is something that holds true for most things in life and economics. We'll of course, stick to the latter. So talking about economics, what is the whole idea about wealth creation? Let's try and put it in simple words. Using the available resources from our environment, we apply our knowledge and intellect to transform those resources into goods and services that would enhance our standard of living. Sounds very neat? Indeed.

But didn't we say at the beginning that nothing comes free. There is price that you have to pay for everything. So when an industry-based economy grows and develops, there are definitely going to be severe environmental repercussions. You will agree that we live in safe homes and travel in speedy vehicles thanks to economic process. But alas, the air and the water that we consume aren't too good. 'Climate change' remains a major global threat. We could go on with a long list. And you would be forced to wonder if your standard of living did improve at all?

In fact, our well-known environment minister Mr Jairam Ramesh has pointed that if the environment costs are taken into account, our Gross Domestic Product (GDP) growth would actually stand lower at 6% instead of the reported 9%. This is surely something to worry about.

Amidst the never-ending debate between growth and environment, the government plans to set up an expert group headed by environmental economist Partha Dasgupta. The group will perform an assessment of the effect of GDP growth on ecology and prepare a road map for Green National Accounting system by 2015. This means that by 2015, our GDP would be reported after taking into account the environment costs.

We believe there must be a proper balance between economic growth and ecological conservation. Hence, we give a thumbs-up to this government initiative.

Do you think environmental issues are a hurdle to economic growth? Share your comments with us or post your views on our facebook page.

01:11
 Chart of the day
 
The legendary investor Warren Buffett has time and again differentiated between commodity and non-commodity businesses. According to him, a valuable brand gives a company the necessary competitive advantage and creates a strong 'moat' against business downcycles. We thought it would be interesting to know which the world's most valuable brands are. According to the Millward Brown Rankings, Apple Inc. has overtaken Google to become the world's most valuable brand with a brand value worth US$ 153 bn. ICICI Bank ranks 53rd in the same list of 100 most valuable brands. The private sector lender is the only Indian company to appear on the list. Its brand value is estimated to be about US$ 14,900 m (approximately Rs 670 bn).

Data source: Mint

01:43
 
India has been grappling with the problem of rising inflation for quite some time now. In fact, the recent rate hike confirms that managing inflation is on the top of RBI's agenda. And rightly so. Keeping inflation under check certainly has to be one of the most important monetary policy goals of any central bank. As inflation management is a key to long term sustainable growth, shouldn't India adopt inflation targeting as a formal monetary policy goal? To let you know, the same is already prevalent in many western countries.

However, RBI is of the view that inflation targeting is not feasible in India for several reasons. First, inflation cannot be the only central focus oblivious of the larger development context. Second, inflation in India is driven by supply side issues. Lastly, there is no uniform measure of inflation in India. We have dual measures of inflation namely WPI and CPI. However, a switch towards CPI over the longer term could be a solution.

So we do agree that inflation targeting can be difficult in India. Inflation cannot be the only central focus of monetary policy. And raising policy rates is not the only solution. It is indeed difficult to curb supply side inflation as it is at the mercy of rain gods. In fact, better storage facilities and reduction in wastage is something which government can focus on.

02:24
 
There is a theory doing the rounds that had Lehman Brothers not been allowed to go bankrupt, the world that we have inherited would have been a far different one. For all you know, the Fed wouldn't have had to undertake a massive rescue effort and asset prices wouldn't have collapsed like they did. The confidence in the system nosedived to such an extent post the Lehman bankruptcy that it set off a domino effect across the world.

But it is a bygone era now and there is no point crying over spilt milk. What is in our hands though is trying to ensure that such a mistake is not repeated. And the odds of the same happening are not higher anyplace else than Greece. Certainly, Greece is perilously close to tipping over the edge. If it has any chance of surviving, restructuring of its enormous debt is a must. But restructuring could also cause mayhem throughout the Euro zone and possibly lead to another Lehman-like episode. Hence, restructuring has to be done in such a way that the rest of the Eurozone is able to withstand the fallout.

The New York Times has offered some suggestions. It has argued for a haircut of about 40% on the troubled nation's debt, recapitalisation of Greece's banks and also for recapitalisation of weak banks elsewhere in the Euro zone. These are really important steps as per the newspaper and failing to implement them could well lead to Europe having its own Lehman moment.

03:15
 
SEBI chairman, U K Sinha has stated that he is in favour of encouraging competition among the stock exchanges in India. Competition in any sector is good because it helps reduce costs, improves efficiency and encourages innovation. Competing bourses is a reality in various developed stock markets.

However in India, NSE has a virtual monopoly. Its rival BSE's share is negligible in derivatives trading and just around 20% in the cash market. This is because it entered the virtual trading network much after NSE had stamped its position. The new entrant MCX-SX is also only allowed to trade in currency futures. But, it has proved that it can rival NSE, in terms of its technology platform. However, if the SEBI is serious about encouraging competition in the stock market space, rules of the game need to be changed. Currently, the ownership of exchanges is restricted to 5% (15% in some cases) for a person or persons acting in consent. This stifles competition and creates a strong entry barrier. Holders of tiny stakes lose interest in the business as they don't have much say. Regulations need to be reworked so that healthy competition is encouraged.

03:56
 
The Asian debt market has seen huge bond issues in recent times. Interestingly a large part of these issues are of perpetual bonds. A perpetual bond is a bond with no maturity date. As a result, the issuer can decide if and when to pay back the principal amount. In theory, this is good as the investor keeps receiving the interest on the bond for a lifetime. But what happens if the issuer is unable to pay the interest at any point of time? The investor's money goes down the drain. Therefore, it is of utmost importance to ensure that the issuer has the capability and the creditworthiness to be able to pay the interest rate on the bonds.

However, if one looks at the recent spate of perpetual bond issues in Asia, this does not appear to be the case. A large part of these perpetual bonds are being issued by companies that do not have a credit rating. Several of these are high-risk Chinese property companies. But despite the risky nature and zero credit worthiness of the issuer, investors are lapping up these bond issues. And if things go bad, these issues would become worthless and the bond markets in Asia would come crashing down.

04:30
 
In the meanwhile, the Indian stock markets have been trading firm after opening trade on a weak note. At the time of writing, India's benchmark index, the BSE Sensex was trading higher by 133 points (0.7%). FMCG and IT stocks were the top gainers while Banking and Consumer durables were among the losers. Almost all Asian stock markets were trading in the green except Taiwan and Korea.

04:50
 Today's investing mantra
"I always knew I was going to be rich. I don't think I ever doubted it for a minute." - Warren Buffett

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10 Responses to "Is our GDP growth rate just 6%?"

Bappu Deshmukh

May 12, 2011

I would suspect that the actual GDP would be much lower. The obsession with the way GDP is calculated or whether it is 8% or 9% must GO. Building massive dams or ports whilst doing wonders to our GDP does not take into account the social cost or the destroyed livelihoods. For every train accident the GDP goes up. Why? Because new tracks are laid, coaches built, engines manufactured, hospital services used, medicines used, etc. We must devise a way to come up with a SOCIAL GDP, which takes into consideration the nett social cost of an industrial or service activity.

Like 

Balaji J. Deshmukh

May 11, 2011

It is fact that natural resources are limited. To consume them economically and wisely would be in the interest of all beings. But if we act against nature, would be dangerous, which we know but do not act in that line. So environmental balance may not be possible.

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S.S.Ranganathan

May 11, 2011

What economic development when there is no life due to environmental degradation?

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Manoj Kumar

May 11, 2011

Given a choice between environment and economic development, the environment is a far far more important and desirable than the economic development in its present avatar.

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sarvotham yerdoor

May 11, 2011

Our GDP growth actually should be above 6%+ 6% considering that nearly 50% of the economy is BLACK/ Unaccounted.The unaccounted money & economic activity funded by it are also growing along with the WHITE economy.

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Shrivallabh Randad

May 11, 2011

Surely growth at the cost of enviroment is detrimental to the growth itself and human existace.The small country Bhutan is good example how far growth is required and how to preserve environment.Policymaker should consider this very seriously.

Like 

R S Chakravarti

May 10, 2011

There would be a lot of benefits in improving the environment. There are plastic wastes everywhere which could be put to good use (e.g., for building roads). What about processing all sewage to generate electricity? Why not promote the use of bicycles in our cities?

Like 

Gopal Kalpathi

May 10, 2011

What AtmaRam says is very true. We tend to look at things from a very narrow perspective. The time frame we take is either our generation or +/- one generation. We also limit looking at geographical boundaries. However, all natural resources are limited and no matter how much science develops, we can not replicate nature, at least not with the same efficiency or cost. We need to take a hard look at the very developmental models which are based on industrial productions and consumerism. This model is faulty in the sense that it looks only at materialistic things (Western capitalist model) while totally ignoring the overall well being, equitableness and harmonious living with nature. We need to remember we are a part of the whole universe and not outside it to master and command. Even otherwise the whole will function smoothly only if all its parts are in harmony with each of its parts. Incongruence of any of its part will lead to the malfunction of the whole and continued abuse or misuse of nature will finally destroy not only the environment but also the planet itself and with it, mankind.

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Neil

May 10, 2011

I believe that the "Green National Accounting" is a really good initiative. We should not blindly follow the western approach of development but be wiser and learn from their mistakes. I do not think that we will have much of a place to live and thrive with such mindless "GROWTH". It is high time we realize the price but the problem is in translating such Environmental expenses into Monetary terms. Also these costs may not be evident to the full extend on a short terms accounting basis like a Quarter or Year.

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ATMA RAM KEJARIWAL

May 10, 2011

This looks correct in the very short term. In a longer term the environment/natural resources will deplete to such an extent that economic growth will not be possible. Thus from long term prospective, it is advisable to stick a balance now onwards.

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