Dec 15, 2006|
Its introspection time!
Phew! How eventful the last few days have been! The stock market that had already reached dizzying heights got a further leg up when the Indian economy grew a strong 9.2% during 2QFY07, but concerns of inflation loomed large. Earlier, when the RBI's warning of the same kind fell on deaf years and credit offtake continued unabated, the central bank decided that enough is enough and took upon itself, the task of reigning in the excesses of the Indian banking system. On a weekend, when the markets are shut, it announced a two-stage hike in CRR, the number that decides how much money, the Indian banks will park with Reserve Bank of India (RBI). The bourses, which were already on tenterhooks reacted rather nervously and in two trading days, tumbled by nearly 800 points, losing billions of investor wealth in the process.
Falls like these, although steep and abrupt, are in a sense essential as they help shrug off our overdose of optimism and time and again let us confront the reality. While the GDP growth will be tom-tommed about in the times to come, we sincerely believe that the time has yet not come for us to aim for a 9%+ growth consistently over the long-term. This observation arises from the fact that if we compare ourselves with China, the country that has been able to sustain similar levels of growth for long, we will come to know the kind of capacity constraints we are under, as opposed to our neighbouring nation. When we talk of capacity constraints, we are talking not about the capacities at the individual company level, but the capacity that is in the hands of the government i.e. our ports, railways, roads, power etc.
As far as roads, railways, ports and other similar infrastructure bottlenecks are concerned, while their sorry state of affairs is not likely to completely derail the economy, because congestion in these areas might be gotten away with a little bit of a delay, it is severe shortfall in the power sector that seems to be worrying us. In case of power, you either have it or you don't. In other words, while poor roads and railways can slow the economic growth, power failure can bring it to a complete standstill. Still, the regulations are flowing in this sector at a snail's pace. While the policymakers can talk of adding 5,000 - 7,000 MW per year for the next 5-6 years, the huge malls that are being built in the country would alone consume something to the extent of 5,000 MW over the next few years, thus highlighting the dangers that stare us in the face if something is not done quickly on this front.
While we don't deny some of the other inherent advantages that India as an economy has, it can also be not denied that the existence of a world-class infrastructure is of the essence if one has to consistently achieve a higher GDP growth rate. No developed country has been able to reach where it is without the existence of top class infrastructure facilities and it holds true for India as well. Hence, taking into account these factors, while we support the 6%-7%+ GDP growth logic, we don't think barring a couple of exceptions like the current one, the 9% growth era is upon us. Worse still, if the capacity constraints are not taken care of in the near future, even the 6%+ era would be in jeopardy.
Hence, if the RBI's reaction to the current economic growth is an indication that even the central bank seems to be of the view that the growth of the current magnitude seems to be rather unsustainable and before the issue threatens to snowball into something big, liquidity needs to be curbed.
To conclude, don't get us wrong! While we are not bears on the Indian economy, we certainly don't feel that the current growth momentum is sustainable and hence expectations from the economy as well as from the Indian stock markets need to be toned down a bit. Every now and then, it is important for you to pinch yourself to wake you out of your dreams. And the bears have indeed pinched and pinched hard!
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