The limits to growth - Straight from the Hip by J Mulraj

The limits to growth

1 MARCH 2014

The economic model of shareholder capitalism, to which these columns have alluded, requires growth, as it is through growth that the owners of capital, whose interests are prime under this model, get their return. But there are limits to economic growth, dictated by nature, on the one hand, and by political systems and governance, on the other.

True, technological solutions are yielding alternatives to some of the problems of shortage created by nature. For example, the use of the technology of hydraulic fracturing to recover pools of oil and gas trapped in tight formations of shale rock. This is not without throwing up other challenges, such as a shortage of water; the process of fracking requires, as well as contaminates, huge quantities of water. Water shortage could be due to a variety of reasons. California, for example, faces a 200 year drought, warns Berkeley Professor Ingram. The state supplies a log of the fruits and vegetables in the US.

Technology can be used properly or can be misused. Used properly, as it is in the case of Stress Field Detection, it can help cut costs of discovery of oil and gas by upto 90%, by saving time spent to discover reserves. (Petroleum Minister Moily should look into this). Used improperly, technology can be used to infiltrate privacy. The UK Government, with help from America's NSA, is capturing webcam conversations between individuals, unmindful of privacy laws or concerns

Thanks to technology, too, the job profiles are changing and the question of where new jobs will come from is uppermost in minds of all Governments. These columns had spoken about technologies such as driverless cars, which are already operational (dispensing the need for drivers), and of robots fulfilling orders placed on online sites such as Amazon (dispensing the need for humans to retrieve, pack and despatch them). We are moving towards other technologies such as 3D manufacture which uses machines to print almost anything by adding material layer upon layer, in an additive process that is far less wasteful than the subtractive process of manufacture now used. This will reduce manufacturing jobs.

Jobs which one feels cannot be under threat, are. Such as those of a pilot of an aircraft, or the captain of a ship. The US already uses drones for military purposes and their ability to fly and return has been tested. It is now being tested for commercial aircraft. We are now testing for workless ocean going freight ships

In agriculture too, which absorbs over half of India's workforce, machines are doing operations which were thought to be capable of being performed only by humans, such as weeding.

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So the issue of job creation is a serious one. McKinsey believes that the use of broadband internet, as is coming, will throw up job opportunities in both urban and, importantly, rural India. Kids will have access to these technologies and will be able to provide a range of services using them, to become gainfully employed. But countries like Greece, Spain and Portugal have youth unemployment rates now near 50% and this represents a lost generation and a scary portend.

Other than nature, it is the economic, and political system, and poor governance, that is acting as a limit to growth. The system of shareholder capitalism has resulted in distortions, and in TBTF (too big to fail) financial institutions. These TBTF institutions are harmfully focused on the short term, and want instant gratification. They thus prefer, and demand, increases in dividends, and often frown upon investment in long term growth. At a time when the US Government was pumping in money into its economy using quantitative easing, US companies declared total dividends of $ 1 trillion!

Even as corporate dividends hit an all time high of $ 1 trillion, 22 of the largest US corporations paid no federal tax from 2008, when the global financial crisis hit, to 2012

Bad politicians and bad governance, unfortunately, join forces in this trend of short termism. Venezuelan former President, Hugo Chavez, destroyed its oil giant by raiding its coffers. Until Chavez took over in 1999, Lius Guisti, an internationally renowned petroleum engineer, was heading PDVSA and the company had a high degree of achievement, technological capability and employee morale. It hit a production level of 3.2 m. barrels per day. Chavez hounded Guisti, and others, out, used PDVSA surpluses for his schemes, as a result of which production is down by 1 m bpd.

In India, a decade of decadent misrule by the UPA has similarly impacted Oil and Natural Gas Corporation Ltd. (ONGC). The Finance Minister has merrily dipped into ONGC coffers to not only compel it to bear part of a subsidy burden on petro products, but also to compel it to pay high dividends and to buy Government owned stock of Indian Oil Corporation (IOC), in order to reduce its fiscal deficit.

Back to the theme of shareholder capitalism, and its priority of securing the interest of capital over that of other stakeholders. JP Morgan is to cut 8,000 jobs. This is the bank that suffered huge losses ($6.2b) in trading losses in London, called the London whale scandal. If these trading bets had paid off, the top management of the bank, headed by Jamie Dimon, would have earned huge bonuses. But since the bank incurred huge losses instead, 8,000 workers lose their jobs.

These are the limits to growth.

Bad governance and outdated ideology is limiting growth of Indian banks. The Government owned public sector banks are not constrained from growing simply because the Government insists on owning at least 51% in them. The Government does not have the money to take up its share of rights issues to be made by the banks, to give the banks enough money to allow for a loan growth of 15-18%. P Chidambaram had provided $1.8b. in his interim budget, for PSU banks. Moody's estimates that they will need $4.1 - 5.8b. from Government, to fund their loan growth as well as Basel III norms for capital adequacy

Nor is the Government acting against loan defaulters, protecting their cronies. Vijay Mallya, e.g. who has not paid Kingfisher Airlines' employees salaries for 3 years, nor paid his bank dues, is still able to buy cricketers in IPL matches or racehorses for a stud farm. This is shareholder capitalism gone awry, and aided and abetted by crooked politicians gone immoral. Wherever one of their partners is involved, politicians do not act to bring fraudsters to task.

It is only after the Supreme Court intervened strongly, albeit giving a lot of unnecessary leeway to, that Subrato Roy, the head of Sahara, has been remanded to police custody, pending appearance before the court on March 4. He has been asked to repay over Rs 22,000 crores that he had not been authorised to collect from the public, but did, nonetheless. Such was the apathetic attitude of the Government that they did nothing to prevent the companies from raising the money in the first place.

It is a similar apathy that is cause for the Government's inaction in another scandal, that of NSEL. The Bombay High Court has dismissed Jignesh Shah's plea to stay an order of the regulator, FMC, declaring him a person unfit and improper to run exchanges and requiring him to bring down shareholding in any exchange to 2%. Other investigating agencies have found him guilty of breaching company law, of havala transactions, of audit fraud, of not meeting a single payment obligation by NSEL, and of others, but yet the inept (I shall refrain from using the term Mr Khurshid has used) Government fails to take action.

It is such bad governance, combined with an economic model that has gone awry, that constrains growth.

Surprisingly, the stock market is remaining stickily high! Last week the BSE-Sensex gained 419 points to end at 21,120, and the NSE-Nifty added 121 to close at 6,206.

Indian stockmarkets are riding on the belief by FIIs of the impending change in Government, which will be in place by end May. Any Government would be an improvement on the current one, which has been riddled with corruption scandals and a policy paralysis.

As Akash Prakash has pointed out, India is vulnerable to any withdrawal by FIIs, if their hopes in the efficacy of the new Government are unmet. This is because we have not built up domestic institutions that are capable of standing up to an exit by foreign institutional investors (FIIs). FIIs hold some $ 250b. of Indian stock. The assets under management in the mutual fund industry are $ 25b. and in the insurance industry around $ 60b. Out of the $ 150b. invested, the share of India dedicated funds is only 11%. The balance 89% has come from allocation to India from global funds, which, by definition, can exit at any moment if it sees alternative and better investment opportunities.

There is no doubt that better governance, an end to crony capitalism of the sort that has eroded banks, and punishment for wrongdoing are essential ingredients to restore growth. One hopes that the next Government provides it.

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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3 Responses to "The limits to growth"


Mar 3, 2014

Some months back you sang unending praises of the 3 d printing technology and found no faults with it.
Now you say its going to take away jobs !
fyi 3d printing for the time being is going to be limited to manufacture of rare items and custom designed items.
As for corrupt politicians, people get the govt they deserve and that is being held true all over the world.
Peoples' apathy and "power grabs" by the politicians everywhere couple together and leave the populace impotent and open to exploitation.


Purnima Toolsidass

Mar 2, 2014

While politicians play their games and economists/corporate sectors play theirs, the danger of serious water shortage, globally, increases steadily. There is an urgent need to create awareness among people at all levels that it is urgently important that we do everything possible to avoid wastage of water. Switching from chemical fertilizers to bio fertilizers will be a great step foreward!


Satish S Dabholkar

Mar 1, 2014

Please find out, we as public-Indian national,can file suit against finance Minister Mr Chidambaram and his party for wrong doing and non fulfilments of their duties towards the citizen.Some punishment should be levied on the ministers for puposely doing wrong act to save some culprits.

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