Getting our Priorities Right - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 9 February 2013
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- By Asad Dossani, Author, The Lucrative Derivative Report


Asad Dossani
Earlier this week, the Indian government reduced its forecast for 2012-13 economic growth to 5%. This is down from the 6.2% earlier forecasted. A growth rate of 5% would be the lowest level in the last 10 years. There are numerous reasons why growth has fallen so low, and no doubt that some of these could have been avoided.

First off, there are global factors that impact growth, which are mostly beyond our control. The Indian economy was modestly impacted after the global financial crisis in 2008, but growth rebounded quickly by 2010. However, in the last year, growth has been consistently below 6%, even though the global economy is beginning to recover. This is a clear sign that the causes of our low growth rate lie at home.

Why is growth so important? Is there a huge difference between growing at 5% a year versus growing at 8% a year? In a single year, the difference is not significant. But if we compound this over many years, it matters a lot. If we grow at 5% per year from now on, it would take around 14 years to double our income. However, if we grow at 8% a year, it would take just 9 years to double our income.

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Our current per capita income (in purchasing power terms) is around one-eighth of what it is in Europe, and around one-tenth of what it is in the US. One of the primary reasons is the significant percentage of poor people. Around 1/3 of the population lives under the poverty line, defined as earning less than $1.25 per day. Furthermore, about 2/3 of the population earns than $2 per day.

If our ultimate goal is to improve economic prosperity, we need to make growth priority number one. It is by far the biggest determinant of our standard of living. Growth is more important than inflation, budget deficits, exchange rates, or any other economic variable we hear about. Of course, growth is related to these factors, so we should certainly not ignore them.

When it comes to economic reforms, investment in infrastructure, and other policies designed to boost growth, we should support and encourage them. Ultimately, our standard of living in the long run will be determined by how fast the economy grows over that time; so we must do what we can to increase growth this year, next year, and in the years ahead.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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7 Responses to "Getting our Priorities Right"

Manoj

Feb 15, 2013

No, I think you got it wrong. Economic expansion (growth) can be done multiple ways - most destructive can be print more money, because there is no capital account convertibility, you can maintain exchange rates. Would that be a good thing? What is most helpful for a country is increase in purchasing power and Gini index. India is constrained on supply side, and if we address these, we wont see much GDP growth, yet be happy-truckers, all without needing to keep half the country on doles.

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K.Madhavan

Feb 12, 2013

We should try to reduce persons below poverty line, not by doles but by creating more employment opportunities for unskilled and providing basic education free to all, to add to our to our skilled force.It should not be by trying to increase no. of rich persons

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M K DUBEY

Feb 10, 2013

this article suggests growth is iportant for raising per capita income, reducing the time to double the money and raising standard of living of BELOW POVERTY LINE POPULATION.but the matter of fact is even when india was growing with 8-10% our per capita income was abysmal and a poor fraction of that of europeans and americans. Secondly today when growth rate of USA and european countries are even less than that of india how come the ratio of per capita income has not improved in favor of indians.so apart from index of growth There must be another factor, like proper distribution of wealth which is necessary to affect standard and quality of living of BPL population.

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B.Baskaran

Feb 10, 2013

India per capita income is much more than what is officially stated.Most of the self employed professionals do not disclose full income.Traders are another group who diclose not even a third of their income.As far as the poor are concerned,they terribly understate their income hoping to get some benefits from the Govt.Agricultural labourers,construction workers,domestic help,etc earn much more than 4 US dollar a day.Factor all these and you will agree with what I have said. Even those who claim to be unemployed are only under employed. B.Baskaran

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Ramamurthy

Feb 10, 2013

What is this GDP Growth? How is it compiled? What is the data source?I have not got answers to these questions.
Central Statistical org says it is 5% for 2012-2013.Our Finance minister says it is 5.5%.Somebody else says it is 4.8%.The same org gives out a different figure after 2 months for the same period.
As far as I, a resident of Bangalore, am concerned whenever I step out of my house I see a lot of activity,road full of traffic,shops and eateries busy,feverish construction activity,people rushing.I consider this as GROWTH and it certainly is increasing day by day. Even the corporate profits are growing and this growth exceeds the inflation rate increase.
I do not know about the rural side of this but I am quite sure this urban growth I see is perculating down too to rural areas.
So why all this hype and hysteria about 5%?

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Srivatsan

Feb 10, 2013

While growth in absolute terms is important,it is imperative that we should ensure that the growth results upgrades the downtrodden by proper reach of resources. It is a curse in democracy that rich are getting richer and the poorer are getting nowhere.

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SIVARAMAKRISHNAN

Feb 10, 2013

Yes, growth is more important than inflation, deficits and exchange rates, but, what determines growth? It is the substantial increase in the number of employment at various levels and specifically at the bottom level. There is an advt along with this article where one sees a simple pyramid as a symbol of investment advice from financial experts and so also manpower employment opportunities should be like this simple pyramid wherein the people need not have to worry about inflation, to overcome subsidies given by the government to reduce deficits and the third one exchange rate will automatically take care of to strengthen the rupee against dollar if the first two i.e., inflation and deficits are under control.

As of now I seriously doubt if the present inflation is sustainable in the long run as the fact sheet of employment growth is negative in 2012 compared to 1972 as per Business Standard article with respect to the population growth in the last 40 years and all that we see is liquidity of cash in the market thro' Quantitative Easing by all the governments and not real employment growth in terms of percentage.

Now, it's a matter of how long this liquidity of cash in the hands of people can sustain thro' this money printing exercise without proper employment guarantee or growth in real terms.

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