Forget 10%. It's now time for 100% GDP growth

Jul 23, 2010

In this issue:
» Can investments be judged without looking at their prices?
» Roubini: The double dip recession is already here
» The US is at China's mercy
» India could emerge as the third largest recipient of FDI
» ...and more!!

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A simple question to begin with. Who do you think spends money more productively, the Government or the private sector? We bet you don't have to do a detailed analysis on this one. A casual observation of things around you would take you to the answer. It is indeed the private sector that spends its money more productively. Infact, it will not be wrong to say that by taxing the private sector, the Government tends to divert quite a bit of productive resources away from it and thus, actually ends up hurting GDP growth.

The problem is more acute in case of countries like India. Because apart from taxes, what also hurts India is the rather distorted nature of taxes. We certainly do not expect the Government to reduce taxes substantially. There are simply too many vested interests involved for it to take such a step. But we would certainly love it if the Government took steps to correct the current distorted tax regime. It seems the Government has not disappointed us. A huge step in this direction has been taken in the form of Goods and Services Tax (GST). Infact, the Finance Minister believes that the gains from GST will propel the country from US$ 1 trillion to US$ 2 trillion in a short span of time. A well designed GST, as per the FM, could see an increase of 2-2.5% in the GDP growth per annum.

We are all for such kind of a step. The Government certainly needs more money and hiking taxes would have meant robbing Peter to pay Paul. If the FM is indeed right, GST would ensure more money for both Peter as well as Paul without taking anything away from either of them. What's more, it could also mean greater wealth creation for shareholders as firms rake up more profit growth than usual. Is this the best thing to have happened to India after the LPG (Liberalisation, Privatisation, Globalisation) of the early 1990s? Well, let's just wait and watch.

 Chart of the day
With the developed world languishing and emerging countries still growing, the latter have come into focus like never before. However, as the chart shows the vanguards of this feature - China and India - have been pushing the envelope of a GDP growth higher than developed countries for far longer than just the last few years. Sure this is easier for them as they are starting out from a lower base. But the western world doesn't seem too happy at their much higher base either!

Data Source: The Wall Street Journal

When an ordinary investor wants an opinion on investments, he looks towards the experts. The regulators recognize this. Hence, initial public offerings (IPOs) have to be rated by credit rating agencies. Of course, much of the creditability of the credit rating agencies is under question after the global financial meltdown. But that's another matter. As per a leading business daily, IPOs will now be graded by rating agencies without any comment from them on the issue price.

The logic - it is 'neither desirable nor feasible' to link the issue price to grading. Apparently, that pricing decision should be taken by the investor depending on his risk appetite. We agree that the risk appetite can vary with investors. But removing the price element from the investment equation makes no sense to us. Irrespective of the type of investor.

Even a great business can be a bad investment at a sufficiently high price. This is a common pitfall for investors which we fear will only end up being entrenched by this decision.

Americans are too used to buy goods with the 'Made in China' label. But soon the Chinese may be buying goods with 'Made in America' tags. Yes, the oriental economy is doing its best to take over Uncle Sam. So much so that, as per Fortune, China's investments in the US rose a sterling 360% in first half of 2010. America itself is worried about the Chinese capturing their markets.

However, there is little that they can do. The Chinese companies promise jobs to Americans in smaller towns. And that is something the US cannot do without given the perilous state the economy is in. While the US has levied heavy duties on Chinese exports, it is unlikely to dissuade Chinese manufacturers to set up shops there. China on its part has announced investment of US$ 5 bn in the US this year as against an average of US$ 500 m in earlier years. The US literally seems at China's mercy.

Saving and spending have to go hand in hand if economies have to grow. If an economy decides to save more then another economy needs to buy what it is selling. This means the other has to spend more. What happens when the spending economy stops spending and the saving economy refuses to spend more to compensate? The whole balance goes for a toss and the world heads towards a recession.

As per economist Nouriel Roubini the balance is lost and the much feared double dip recession is already here. The spending economies like US, UK, Greece and others have borrowed too much. They are de-leveraging their economies and in turn are cutting back their spending. The saving economies like China, Japan, Germany and others are not spending more to compensate this fall in spending. The result- the global demand will weaken hence pushing the global growth to lower digits.

In recent times a lot of attention has been given to FIIs and the extent to which their inflows or outflows have impacted the stockmarkets. But if India has to sustain its high level of growth and see more development, what it really needs is FDI. Foreign direct investment that is. And in this regard, there are some positive developments. The United Nations Conference on Trade and Development (UNCTAD) believes that India would emerge as the third largest recipient of FDI for the three-year period ending 2012.

Infact, the country did very well in 2009 too. The FDI that it received last year totaled to US$ 34.6 bn. This catapulted it to the list of top 10 countries to have the highest FDIs. Indeed, India has been growing at a strong pace in the last few years. But there is scope for more growth. Infrastructure has to be ramped up and developments in many areas need to take place. And so, FDIs are certainly welcome. After all it is not 'hot money' prone to the whims of market movements. But is long term in nature with the potential to do the country some good.

After opening in the green, markets lost most of their gains in the afternoon session. However, markets have now gained some momentum. The BSE-Sensex was trading 32 points higher at the time of writing this. Stocks from the consumer durables and consumer goods space were trading positive while metal and realty stocks saw some declines. Sentiments were positive in Asia, with Japan being the biggest gainer.

 Today's investing mantra
"Charlie and I decided long ago that in an investment lifetime it's too hard to make hundreds of smart decisions. That judgment became ever more compelling as Berkshire's capital mushroomed and the universe of investments that could significantly affect our results shrank dramatically. Therefore, we adopted a strategy that required our being smart - and not too smart at that - only a very few times. Indeed, we'll now settle for one good idea a year." - Warren Buffett

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9 Responses to "Forget 10%. It's now time for 100% GDP growth"

narender kumar sharma

Jul 25, 2010



SL Narasimha Rao

Jul 25, 2010

I totally agree with Mr Sathyamurthy that it is the utilisation of resources and our system in the country is very much flawed that both Public & Private sector spend unearned money.

In this context, I would like to highlight another related issue, that is of corruption. Corruption at all levels of Government and more particularly of Politicians is not only promoting blck money, but is also hurting growth of the economy, by slowing down investment. It is common knolwedge that you have to pay crores of rupees first to politicians (not only to ministers, but also to local MPs, MLAs and other leaders of all political parties), and then to pressure groups such as 'Save the environment', '--- society to save --- community'. The problem is so acute that the local Sarpanch is demanding lakhs of rupees for giving routine permissions for a project in the name of Panchayat rules & local Govt. Also different caste groups have taken to extortion and black mail and said that if you don't pay me I will bring my community people and create nuisance. Some of the Acts created for protecting certain castes and communities are being blatantly misused to extort money.

I am sure if corruption is rteduced by atleast 50% than what it is now, the increase in GDP would be to the tune of 1.5% to 2% by speeding up investment. So you can imagine the extent to which the corruption is hurting the economy.


Pushpendra Shenoy

Jul 24, 2010

Chinese buying American goods,in simple words, America taking over China, one can only dream for another 100 years and can only keep dreaming with nothing ever happening



Jul 24, 2010

Undoubtedly, Govt. spends money less productively & who knows it better than us. I mean the scams worth millions & billions doesn't raise an eyebrow anymore. In fact, if Govt. decides to spend money productively & monitor private sector effectively, there is slightest possibility that the private sector can brush the dirt under the carpet.

The dragon nation, China, is all set to occupy the seat of world super power in future. What differ them from us is that their leaders are able & willing to work for the advancement of China, unlike ours who are busy fighting over the most trivial issues.


vivek khosla

Jul 24, 2010




Jul 23, 2010

Funny you should ask a question about who would spend money more productively, Government or Private Sector. Who hasnít heard of umbrellas for pet dogs, $250 million marriages for daughters, billions spent on fads of CEO's when everyone around knows it is a failed idea, and unknown amounts siphoned out of companies for personal benefits. It is all about marginal utilities of resources. Weather it is Governments or private sector, when they get unearned money, they spend it wastefully. And in our country, system is rigged so that both get it easily.
In 50s and 60s, I used to hear from plans, things like 500 schools will be opened using 50 crores, 5000 kms roads made using 200 crores etc, Now we only know 10000 crores will be spent on schools, 40000 crores on roads etc. It may be on a single school and for a couple of inches of road.
We really need differet metricies for measurement of performance of Governments and private sector. Somewhere I feel ethics should have some small score at least.


Hari Asrani

Jul 23, 2010

It is good reading, simple and informative.



Jul 23, 2010

very informative and helpful,,,,,,,


R. Balakrishnan

Jul 23, 2010

China setting up manufacturing plant in US is analogous to Japan was setting up Automobile assembly lines in US in seventies / eighties. It is good for US in long run in the point of view of reducing balance of payment and getting employment to local people.

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