1991 to 2012: Has India come full circle?

In this issue:
» India's GDP growth at 9 year low
» This new development is likely to set gold soaring
» 2013 will be worse than 2012!
» The global monetary system is on the verge of breaking!
» ...and more!

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00:00

Back in 1991, India saw itself battling its most critical economic and currency crisis ever. The government then did not have many options but to take up some tough reforms. Many barriers and restrictions were taken off. The new economic policy of 1991 was characterised by liberalisation, globalisation and privatisation. What followed these radical changes is now history.

Two decades have passed since then. And the ghosts of 1991 have come again to haunt us. Take the twin deficits during both these period. The fiscal deficit was at 5.39% of GDP in 1991-92. In 2011-12 it was at 6.9%. Similarly, the current account deficit was at 3% of GDP in 1991. The same stood tall at 4.3% in March 2012. Short term external debt has shot up from 10% of GDP in 1991 to 22% currently.

Of course, it would be an overstatement to liken the current scenario to the 1991 crisis. The Indian economy has indeed come a long way since then. Back in 1991, India had foreign exchange that wouldn't last beyond two weeks. With current reserves of about US$ 290 bn, the economy can meet its import requirements of about 7 months. India's domestic savings rate has gone up from 20% of GDP to 31.6% during this intervening period. Even Indian companies are in much better financial health today than in 1991.

But there are also several new challenges now that didn't exist back then. One very major difference is the state of the global economy. Back in 1991, the overall economic environment in the global arena was favourable. Major economies were growing at a brisk pace. They were in a position to positively impact India's growth prospects. That is not the case anymore. All major developed economies are reeling under the burden of high debt and dwindling growth. Moreover, in 1991 India's economy was largely closed. Today we are quite integrated with the global economy. This has tremendously increased our vulnerability to external shocks.

It is important to understand that an interdependent global economy creates its own opportunities and challenges. Policymakers need to reciprocate effectively in a timely manner to the demands of the changing times. The slew of external shocks over the last couple of years has caught Indian policymakers unawares. The sad truth is that the Indian political establishment is accustomed to inaction. Unless, of course, it is forced to the brink of absolute disaster.

Do you think India is heading towards a 1991-like crisis? Share your comments with us or post your views on our Facebook page / Google+ page.

01:20		Chart of the day

The Indian economy finally gave a numerical evidence of the slowdown. During the January-March quarter, the gross domestic product (GDP) is estimated to have grown at a meagre rate of 5.3%. This is the lowest growth rate in the last nine years. Today's chart of the day shows the quarterly GDP growth rate over the last two fiscals. Some of the main reasons for the slowing economic growth are high inflation, a declining rupee, messy government finances and policy paralysis, among others. It is high times the government gets out of its denial-mode and stops putting the blame on the eurozone crisis and other external factors.

Data source: The Economic Times

01:40

Forget the arguments that challenge the possibility of meteoric rise in gold prices. A regulatory compulsion in the global financial system is set to make up for the yellow metal's lack of industrial utility. As per an article on Sharps Pixley, banking capital adequacy ratios (CAR) are set to become centre stage for the gold market. In response to the global banking crisis, the rules are to be tightened in terms of the assets that banks must hold. And the bankers are in favour of gold in the Tier I capital. This is given its inflation hedging properties as being a store of value for centuries. What this means that banks globally will shed securities like government bonds etc to buy more of the precious metal. This is certainly a good move for economies like the US where Treasury papers lose value every time the central bank eases liquidity. But more importantly, this cements the logic of gold prices moving up. At least as long as the global economic crises does not show signs of easing.

02:10

How do we humans predict the future? Well, quite simply by analyzing historical data and being constantly on the lookout for certain patterns. As far as the financial markets are concerned, there is a pattern which famous investor Jim Rogers firmly believes in. In fact, it is this very pattern that leads him to a prediction that we may have a severe recession in the next year or maybe the year after that. These patterns are nothing but the frequency with which slowdowns or recessions have occurred.

As per Rogers, slowdowns have happened every four to six years. And since the last one happened in 2008, we could well be witnessing another one in either 2013 or 2014. This is not all. Since the debt is so staggeringly high right now, the coming recession would be far worse than the one in 2002 or 2008 for that matter.

We can't help but agree with Rogers. Although the timing cannot be predicted with certainty, we do believe a big slowdown could be staring us in the face. And if Governments continue to intervene by printing more money, it will only make matters worse and set us up for an even bigger catastrophe down the line. We just hope Governments leave the market forces alone.

02:50

That the world economy is in a mess is a fact well known. And Bill Gross, manager of the world's largest bond fund Pimco, believes that we could see a 'potential breaking point' in the global economy. This is on account of the debt crisis and the central bank policy responses. Both of which have degraded the quality and value of the debt markets. Indeed, most central banks have responded to the crisis by pumping more money into the economies. In doing so, they have probably avoided a substantial erosion of US$ 200 trillion or so of financial assets. But in the process they have only increased the risk and lowered the return of sovereign securities. Thus, lower quality and lower yields of debt which was otherwise sacrosanct means that the 40-year old global monetary system will be on the verge of breaking. This is already after developing many cracks. Gross is especially bearish on US bonds. He opines that their quality will prompt global investors to opt for other investments such as commodities or real assets. Indeed, we believe that the US Fed and European central bank's measure to reduce debt by borrowing more is a recipe for disaster. And will only exacerbate the problems of the developed world in the longer term.

03:30

The Boston Consulting Group (BCG) released its global wealth report recently. As per the report, India had 162,000 millionaire households in 2011. This figure is minute, especially when compared to those of the US (5.1 m), Japan (1.6 m) and China (1.4 m). India in fact, ranked thirteen in the list of countries with the highest number of millionaire households. However, what is remarkable is that the number of such households increased by a sharp 21% year-on-year (YoY) when compared to the preceding year 2010. In fact, this is the fastest rise amongst the top 13 countries.

03:50

Germany may be the strongest country in the troubled euro zone. But it has a whole host of its own problems. So far though, the Germans had a rollicking time. Favourable conversion exchange rates on the creation of the euro and a fall in interest rates caused weaker nations to lap up cheap credit. German exports saw tremendous growth on the back of debt fueled consumption.

But the country's erstwhile strengths have now become its major weaknesses. Exports currently form over 40% of its GDP. In Japan this amounts to 20% and just 13% in the US. Austerity or default by the country's weak neighbours could force many European economies into a prolonged recession. German exports will thus be affected as Europe forms about 60% of its market. A Greek default by itself would result in direct losses to Germany of about £ 90 bn. These potential losses would increase rapidly as more countries default or leave the eurozone. Germany's debt levels are also high, at about 81% of GDP. This is expected to remain above 60% for many years, and slowing GDP growth will not help matters much. With even the king-pin of the Euro zone in hot soup, we don't have much hope for the rest of the region.

04:30

In the meanwhile, the Indian equity markets opened lower and lost further ground as the day progressed. At the time of writing, the BSE-Sensex was down by 132 points (0.8%). Barring FMCG, all sectoral indices were trading weak. Stock markets in both Asia and Europe represented mixed investor sentiments.

04:50

Today's investing mantra

"There are all kinds of businesses that Charlie and I don't understand, but that doesn't cause us to stay up at night. It just means we go on to the next one, and that's what the individual investor should do." - Warren Buffett

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