Productivity, jobs, inflation and morals - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Productivity, jobs, inflation and morals A  A  A

18 JANUARY 2014

What we have been witnessing in recent years is global GDP jobless growth. The key word is jobless. Unemployment has risen, and even in reporting this, the figures are deliberately fudged (those who have been unable to find one for a certain length of time are removed from the list of applicants, thus bringing down the jobless rate). The growth depends on productivity growth.

To add to the litany of concerns is the fact that, as per this article in Financial Times, 'Productivity crisis haunts global economy'. The Chief Economist of Conference Board, a private membership and research organisation, Bart van Ark, states that global total factor productivity dipped 0.1% in 2013, on the back of a sharp decline in labour productivity to 1.7% in 2013, down from 3.9% in 2010. A continuation of such a trend may call for another Noah's Ark.

These columns have spoken about the trend of loss of jobs to machines, via new technologies such as 3D printing, driverless cars and robots. A week after department chain Macy's fired 2,500 persons and shut 5 stores, J C Penney sacked 2,000, closing 33 stores. Australia saw job losses of 22,000 in December. Unemployment figures are high in Eurozone, which is witnessing no economic growth and youth unemployment figures in some countries such as Greece and Spain are over 50%. This has disastrous social connotations. Imagine more than half the youth growing up without jobs. It leads to demoralisation and, ultimately, crime.

Countries such as Greece and Cyprus, which have become economically very weak, are susceptible to global bullying by richer countries that lend to them. The coast off both have become dumping grounds for the chemical weapons of Syria.

The whole experiment with quantitative easing to put money into the hands of industry, to invest, and consumers, to spend, is not working. Industry is unwilling to invest and consumers unwilling to spend. Enormous liquidity is sitting on the books of large banks and corporations, and not being circulated. This reduces the velocity of money and helps in keeping inflation under check. Given the massive amount of quantitative easing, one would have expected hyper inflation.

Whenever confidence returns, and the idle money is put into circulation, global inflation would rear its ugly head. Interest rates would rise, in an attempt to tame it, which, in turn, would add an unbearable load to bankrupt pension funds.

The macro picture, thus, is not pretty. One has no clarity on where jobs will come from. Productivity gains will come from increased mechanisation, and labour productivity gains will come from extracting more work from fewer people.
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For India, the absence of jobs is particularly worrisome. The India story is predicated largely upon the expected demographic dividend, on the assumption that a youthful population, on finding employment, will spend, and drive economic growth. But if jobs are not being created, which is happening at the moment, for various reasons, then the demographic dividend cheque would bounce.

Projects by manufacturing companies are being held up for various reasons including lack of clarity in policy, flip flops in policy, environmental clearances, inflexibility of labour laws and varied opinion on the desirability of foreign investment.

Arvind Kejriwal's AAP has withdrawn permission given by Delhi to allow multi brand foreign retailers to set shop, on the ground that this would adversely affect jobs. But the whole idea was that this would create jobs! Such policy flip flops add to uncertainty and certainly do not encourage foreign investors, who have a global playing field, to come to India.

Thus the economic growth of the world's largest economy, USA, is constrained by low consumer and investment spending, a high debt burden, the Damocles' sword of pension obligations that are impossible to meet and excess liquidity, thanks to QE, now lying dormant, but which, when activated, will cause inflation to shoot up.

The economic growth of China is being constrained by pollution levels in major cities that are 25 times more than danger levels. The excess liquidity China has generated through its own QE programmes, has gone into financing a real estate bubble. It is only a matter of time before the bubble bursts. Ironically, it has been the explosive economic growth in the past that has caused the pollution levels to be beyond dangerous.

Japan's economic growth will be constrained by Fukushima. The cost of cleaning up this nuclear plant, which exploded two years ago and still has enough radioactive spent fuel to become a threat to humanity, would be over $ 500b. There is a 1 million tonne island of floating debris, with radioactive waste, that was washed into the sea by the tsunami, and is now about to hit the west coast of America. If the US could compel Exxon to pay over $ 10b to clean up an oil spill off thinly populated Alaska, what would it compel Japan to pay for thickly populated California, should the debris hit there?

The IMF has brought out a paper, in which, foreseeing the crisis of high unemployment, low economic growth and high pension and other liabilities, it seeks, as one solution, compelling savers to pay interest on their savings with banks!. It is also likely that the Governments of developed countries will force a haircut on bank deposits of its citizens. Cyprus did that, forcing an initial haircut of 40% on deposits kept in banks.

Such a move, to penalise the populace for sins committed by politicians, can create panic and, worse, social revolution. The own funds of the well connected are, obviously, stashed away in secret offshore bank accounts. It is believed that the biggest losers in the Cypriot haircut were Russian mafia.

Fearing such social unrest, there is some thinking on inserting RFID chips into humans, as a 'security measure'. We have seen how the US Government has trampled upon personal privacy in the name of security. It has the ability to, and has used it, to snoop on telephonic and electronic conversations of world leaders. RFID chips are already in use for pets, in order to track down missing ones. This would be an Orwellian nightmare.

A reading of daily news reveals how economic stress and joblessness are eroding morals. The daily stories of rapes and murders paint a distressing picture of what India, once the most enlightened and progressive of civilisations, has become. Corruption, and the absence of justice (witness the lethargy in pursuing criminals) has eaten into the moral fabric.

For India one of our biggest concerns is energy security; the bill for import of crude oil creates a huge current account deficit and leads to a weakening Indian Rupee. In order to encourage discovery of our own oil/gas resources, the Government has, recently, doubled the price of gas, in advance of the forthcoming NELP Xth round of auctions of oil and gas blocks. But, as T N Ninan points out the NELP X is bound to fail. Primarily because we do not have a single point clearance, and entrepreneurs are not wanting to run from pillar to post, with potfuls of grease, to obtain them from multiple agencies, any of which have the power to stall the project (witness the decadal delay in granting permission to POSCO for the largest FDI investment ever).

So the sweetner of doubling the gas price may yet not help in selling the blocks. The doubling of gas prices, however, adds to the fiscal deficit. Producers of fertilisers, who got gas at lower rates, would be badly hit. The likely additional burden on urea subsidy would be Rs 9,000-9,500 crores.

Investors, both foreign and domestic, are also unenthused when they see how the system protects fraudsters and not their victims. In the NSEL case, the Commissioner of Police has publicly stated that Jignesh Shah was involved upto his ears. Now it is disclosed that the parent company, Financial Technologies, was also in the know of the shenanigans at NSEL and, in fact, had advanced money to a defaulting borrower!. Why, then, are they yet free, and are being treated with kid gloves? Does the UPA want to send a message that it is in cohoots with fraudsters and does not care about the victims? Does it hope, given its track record in other scam cases in coal, telecom, CWG etc., that its citizens, who are all savers, would forgive and forget?

In corporate news of interest, the Government is trying to reduce its fiscal deficit by sale of its shareholding in companies. Its holding in Indian Oil Corporation is being dumped on to ONGC and OIL, who, being majority owned by GOI, are forced to accept it. Examples of bad corporate governance. Coal India has been compelled to declare a generous dividend which benefits its majority owner, the GOI. This leaves less money in the hands of Oil and Natural Gas Corporation Ltd. (ONGC), OIL, and Coal India, to invest in furthering India's energy security and more in the hands of the UPA, to fritter away in wasteful expenditure.

The foreign investors continue to have faith in the India story, and to pump in money. Last week the BSE-Sensex rose 305 points, to end at 21,063, and the NSE-Nifty gained 90, to close at 6,261.

The investors are banking on a new Government that will get things moving. A lot, thus, depends on the shape the new Government will take. Would it be a coalition, which seems likely, and if so, will it be able to get things moving? Or would one party be able to muster enough votes to chalk out its economic agenda? Share your views on the Equitymaster Club.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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1 Responses to "Productivity, jobs, inflation and morals"
Jan 19, 2014
Regarding Europe,please note that Ireland is forcing it's young graduates to find work overseas as there are no jobs at home.Noticed the scam here to bring the unemployment numbers down?
Also, we all know that NPLs have been re-christened NPAs-another accounting FRAUD.
All the excess liquidity in the form of fiat dollars is sloshing around the world inflating stock and real-estate pries.It won't be long before the bubble pops!
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