Is the PM out of touch with reality? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is the PM out of touch with reality? 

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In this issue:
» GDP forecasts for US and Europe
» China warns against currency devaluation
» India Inc. raises foreign money in recent times
» Which oil price forecast should one go by?
» ...and more!

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Prime Minister Mr Manmohan Singh seems to be an optimistic man. No harm with that. But being a politician with a credible reputation as an economist, one expects him to be rational. However, that is not a trait the PM has bothered to display of late!

Despite growth slowing down considerably in the last 3 quarters, Mr Singh is confident that India will get back to the 7-8% GDP growth figures by 2015-16. Is the PM dreaming? Or can India's growth actually get back on track over the next couple of years?

Facing considerable criticism from all quarters, the PM in the Rajya Sabha took pains to highlight the UPA's stellar record post FY04. These were the years when India's economy grew at above 8% rates, at least until 2008. But one cannot deny that cheap liquidity facilitated super normal growth rates around the world during these years. Also, in government just as in business you are only as good as your last shift. So while there were indeed three years during the UPA's rule when the country grew by 8% plus, that cannot be the case forever. Most importantly those three years cannot be the yardstick by which the current government should judge itself. What is important is how effectively the government is dealing with the headwinds that the Indian economy is facing at present.

And here its record has been quite dismal. The issues are just too many. High consumer price inflation, high fiscal and current account deficit, mounting cases of corruption, the list seems endless. Further, too much of bickering and political fighting between the government and the opposition is only making matters worse. Doing business in the country has become a challenge, so much so that two prominent businessmen have already cited plans of shifting capital investments overseas.

Given the current state of affairs, the UPA's dream of achieving 7-8% GDP growth over the next 2-3 years may remain just a dream. And the PM can rest assured that investors and voters are unlikely to buy into such shallow promises for too long.

Do you think that PM is too optimistic in his remarks that the Indian GDP growth will revert to 7-8% in the next 2-3 years? Please share your comments or post them on our Facebook page / Google+ page

01:26  Chart of the day
Since 2008, growth for the developed economies has been shaky at best. Although governments desperately pumped in more and more money into the system so that citizens would be induced to spend, that strategy was a failure right from the start. So how does the outlook look for 2013 and 2014 appear? As per the forecasts made by the Economist, prospects do not look too bright. Although as the chart of the day shows, expectations are that growth will be better in 2014 than in 2013. If one were to look at the performance of the stock markets in these regions, however, you would be deceived. Indeed, stock markets have chosen to not mirror the reality and have surged upwards. But the economic indicators for both Europe and US are not that great. These countries are still grappling with unemployment, low consumer spending, low industrial activity and job growth among others. The only reason why markets have risen is on account of reckless money printing practices of central bankers. Hence, with the forecasts over the next two years not looking too good we believe that the stock markets in developed world will remain on steroids only as long as cheap money allows them to do so. The inevitable crash, however, could have a scathing effect on both developed and developing markets.

Data Source: The Economist

That's the problem with aggregate numbers like GDP. On the surface, they present a certain kind of reality. And once you start scratching in order to look deeper, a totally different scenario emerges. Exactly the point few reports are trying to make. It is being widely believed that the consumer sector is holding up pretty well in the US. After all, aggregate spending had gone up by 0.2% in 2012. However, break up the analysis and a grim picture emerges. Apparently, it is only the people in the top half of the income distribution that are doing fine. While the lower half struggles to make ends meet.

So what about all the claims that Bernanke and Co are making about how the US economy is on the recovery path? Well, it is only the stock markets that are growing wealthy with no real income generation happening on the ground. Little wonder, people who survive from payroll to payroll continue to suffer as ever. We believe this is yet another proof of the lunacy of money printing. There's no way it leads to wealth generation. All it does is wealth re-distribution which only benefits the insiders and leaves the poor worse off than before.

Ask any economist and he would say that the words 'unlimited' and 'currency' should never be used together. This means that the money printing presses should not be left to operate indefinitely. If they are then eventually disaster would follow. The current round of money printing has been triggered by the developed economies. Through their quantitative easing programs they are flooding the market with their currencies. In effect they are deliberately depreciating the value of their currencies. And naturally this has huge global implications. Particularly for economies like China which rely heavily on exports as well as imports. Since it relies on exports, devaluation of the developed economy currency makes China's exports unattractive. This hurts them on the export front. But even on the import front they take a hit. How? Well the flood of money leads to higher asset prices. This includes prices of natural resources like oil. And China is a huge importer of oil. Therefore it gets hit on both ends.

This is why the Chinese Premier has issued a warning against the devaluation of currencies by the rich countries. This is not to say that China has not played any role in the currency wars. The country has artificially kept the value of its currency down and has prevented it from appreciating. Therefore for China to cry foul is a little hard to digest. Nevertheless the global implications of the QE programs are huge. Sadly even the people of these rich countries are suffering the after effects of their loose monetary policies. But their governments have turned a deaf ear and a blind eye to these problems.

In such a situation, gold is the only real currency or preserve of value that is safe from the hands of central bankers. You cannot mint excessive gold the way you can print paper money. That is the reason we keep on advising our readers to hold a small percentage of their wealth in gold.

Cheap money is not just wooing investors in Western markets. But Fed chief Bernanke's strategy to keep cheap credit sloshing around seems to be working in India too. No doubt getting funds at cheap rates works well for businesses. Especially for ones that are looking to grow and need external funds for the same. But that is only to the extent that they do not lose sight of risk. If businesses start taking undue risk due to cheap availability of credit, the downsides could be immense. Rewind to the foreign currency convertible bond (FCCB) crisis and derivative crisis of 2008. Scores of profitable Indian companies saw not just their bottomline but also networth erode. Debt laden balance sheet and derivative losses wiped off whatever little profit the companies earned. Even in the years following the crisis, the companies struggled to make up for the loss of reputation. Thus there is hardly any risk bigger than very cheap money.

Sensing a wide gap between borrowing rates in India and overseas, many Indian companies have raised foreign money in recent days. As per Business Standard, the money raised in 2013 alone is to the tune of Rs 218.5 bn. Many other companies, including PSUs are falling in line. There is nothing wrong in raising funds as far as the debt to equity limit is capped. Also companies need to be ultra careful in utilizing the funds, ensuring that they have the ability to repay well in time.

There was a time when US$ 90 - US$ 100 per barrel used to be a psychological barrier for crude. However, if five year forwards for crude are anything to go by, the range is a new normal for crude. Oil prices play a critical role in shaping macroeconomic policies. No wonder that we have a deluge of views and forecasts on the same. But what if two prestigious agencies come up with totally divergent forecasts for a commodity as critical as crude?

Well, this is exactly what has happened. The official forecaster International Energy Agency suggests a level of US$ 120 per barrel for crude by 2020. That implies a decline in real terms for crude. However, OECD has a different take on oil prices. It believes oil prices will see levels of US$ 190 per barrel. And as if that is not bothering enough, OECD suggests a possible level of US$ 270 per barrel.

At the base of OECD forecasts lies the historical movement in oil demand in response to GDP growth and oil prices. As per OECD studies, oil demand has grown almost one on one with income in the past 20 years in emerging economies. Unlike developed economies, the emerging ones like India and China have shown high intensity of oil usage. Since these are going to lead the global growth in the future, oil demand is likely to go up and so are the prices. However, we believe that such a scenario is unlikely. As emerging economies grow further, they are likely to improve energy efficiencies which will moderate the demand momentum. Also, with huge shale gas findings and investment, oil may not remain that critical in serving energy needs.

It was an eventful week for the global stock markets. Except for China all the markets ended the week on a positive note. Japan was the top performer followed by India.

The Indian stock markets also ended the week on a healthy note with gains of 4%. This was one the best week for the markets in the last two years. Finance Minister's assurance that the government will contain its borrowing to restrict inflation buoyed markets. Also, there are expectations that interest rates might be eased further in the policy review later this month. This further supported the rally.

Amongst the other markets, China (down by 1.7%) was the biggest loser. However, Singapore (up by 0.6%) and Hong Kong (up by 0.9%) ended the week on a flattish note.

Data Source: Yahoo Finance

04:56  Weekend investing mantra
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    19 Responses to "Is the PM out of touch with reality?"


    Mar 11, 2013

    An economist and the statesman of such repute making this statement is simply a pity. Because his political bosses still think that a with a stamp of clean man and as a PM, his words would be accepted. He is SIMPLY SPEAKING UNDER THE INSTRUCTIONS OF MADAM ! However, let us not forget that he is a politician first and economist later.....!
    Obeying the orders of HIGH COMMAND is not an offence....!!

    Mr.Shiv Khera had recently commented in his address that 'A person holding the ladder of thieves, can not be considered to be honest' !


    Manghat Narayanan

    Mar 10, 2013

    could not able


    Hemant Shah

    Mar 10, 2013

    PM is almost day dreaming.With OPTIMISTIC assumptions of Revenue targets they seems to be balancing the budget and boasting about 4.8% Fiscal deficit , ignoring current account deficit altogether.
    They do not seem to have studied Ruchir Sharmas' "Breakout nations" which is excellent study of emerging markets from various angles and numerous parameters.
    Unlike past HEAD WINDS and TAIL WINDS are not favourable to INDIA and Demographic dividend will turn into DUD cheque bound to bounce as Jairaj mentions in your article.Where do you go from here? Or is it too much pessimism all around which prompts to be negative.
    In which case WHAT ABOUT ALL CORRUPTION TALKS/? and all subsidised food,fertilizer and cash subsidies eaten away on its course.

    Like (1)


    Mar 10, 2013

    Mungerilal ke hasin sapane.

    Like (1)


    Mar 9, 2013

    The main problem is the MEGA-CORRUPTION of the M M Singh led Coalition.Mega-corruption will DESTROY the Nation.Growth ,is NOT possible with,THE mega-corruption of the ruling Coalition.

    Like (1)


    Mar 9, 2013

    You can not fool all the people all the time.

    Like (1)


    Mar 9, 2013

    We cannot say or judge any thing as that may be far from the truth & reality. Mr.Prime Minister should write his BIOGRAPHY stating each and every thing(may be wrong) after his retirement as the PM in the interest of the NATION. The PM should show the COURAGE to mention wrongs without fearing any one for sake of the NATION.

    Like (1)

    Umesh Sharma

    Mar 9, 2013

    achieving 7-8% growth in GDP is certainly not impossible if the Government really wants to have it and make concerted efforts in that direction.It has to get rid of its red tape which makes it almost impossible for the economy to move forward.The corruption angle needs a fresh look.Similarly the government expenditure needs realistic approach so that funds are available for productive purposes.Inflation is to be dealt with on priority by clearing supply bottle necks and stern warning to profiteers.The government must give out signals that it means business Foreign investment will readily follow if there is an atmosphere of confidence and positive activity going on.National interest must rule supreme when negotiating with foreign investors wanting to invest in sunrise industries in India.

    Like (1)


    Mar 9, 2013


    Like (1)


    Mar 9, 2013

    He is daydreaming no doubt on instructions.Let him first control run away food prices and bring some succour to the poor and middle classes.Talking is easy but doing it is more difficult.With all the scams facing the UPA govt ,where is the time to think of GNP growth.First thing he should do is to bring back the money stashed in foreign banks and shoot the culprits.Alas ! his hands are tied.

    Like (1)
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