Austerity versus economic growth - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
Austerity versus economic growth A  A  A

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16 MARCH 2013

After the 2008 collapse, the steps taken by various countries in managing their economies were vastly different. The US followed pump priming, with the Government printing , and pumping the economy in order to partially replace lower consumer spending. It could do so because the US is the world's largest financial markets, and the US $ is the global currency; hence the Government had buyers for its bonds.

Not so the bankrupt European Governments of Greece, Spain and Italy. To pump more money into their economies, they needed funds. The troika, of the IMF, the ECB and the European Commission, refused to lend more funds unless the Governments agreed to strict austerity measures. The leaders of these impoverished countries had to sign the agreements, agreeing to austerity measures, with one hand tied behind their backs.

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Well the US approach has, for now, proven to be the more effective response to the financial crisis. The US economy is coming out of recession much faster than the European ones and, in February, the economy added 236,000 jobs, far higher than the 160,000 most economists had predicted. Its unemployment rate is at 7.7%, the lowest since December 2008. Wall Street cheered, the Dow Jones Industrial Average hitting an all time high . Note, however, that the February report came in before the expected cuts in jobs after sequestration kicks in. The US has hit the debt ceiling mandated by the Congress, which has legally compelled the Government to cut expenditure (called sequestration). One would need to await the March report to find out the impact of sequestration and whether new job creation exceeds job losses due to it.

The rally is prompted by both excess liquidity (used to pump prime the economy but flowing, as money always does, into various asset classes) as well as expectations for an industrial revival based on the technologies that the US can bring out. The technology of fracking has allowed it to boost production of oil and gas from shale, and the US is expected to overtake Saudi Arabia as the world's largest producer of crude oil within this decade. This source of cheap energy will encourage a lot of industries which guzzle it, to invest again in the US, providing jobs and growth. These include plastics, petrochemicals, metals and others.

Other technologies like 3D printing and robotics will also aid a re-emergence of manufacturing in the US. These factors are boosting investor sentiment and have led to the Dow hitting a new all time high.

Sometimes, however, good technologies alone do not work. An Israeli whiz kid, Shai Agassi, forsook his job as CEO of SAP, convinced by the plea of Shimon Peres, the President of his country, Israel. He set up an electric car manufacturing company, Better Place, outlining his thoughts in this brilliant, must see, Ted talk. .

There were two fundamental drawbacks to making an electric vehicle popular. One was the high upfront cost of the battery, which could add $ 10,000 to the cost. The second was the need to recharge the battery for long drives, a process that was painfully slow. Agassi solved both. The electric car owner could buy the car and rent the battery, thus bringing down initial cost. He could then, when the need arose to recharge it, drive into one of several thousand battery replacement stations set up for the purpose, and have the battery replaced in 5 minutes, the same time as it would take him to fill a gas tank.

Had this idea worked, and I believe it will, over time and with some tweaking, it would have a huge impact on the traditional auto industry. As the Ted talk mentions, the cost per mile in an electric vehicle is significantly lower than in a petrol car, and declining. It also emits no carbon. So it is a societal need which will be met with an EV under the rent-a-battery model.

Sadly, the experiment has, so far, failed and the company sold only 750 cars, ratcheting up losses of $ 500 m.

India is setting up several new smart cities, including in the DMIC (Delhi Mumbai Industrial Corridor) project. These cities are being well planned, with a 'walk to work' concept, personal rapid systems, (small automated vehicles moving on a track, which can be called up by the user to transport him to his destination), renewable energy systems including solar photovoltaics and solar thermal plants, with other renewable sources supplying to a smart grid, smart buildings and so on. Perhaps they could also look at the model of Better Place. The electric vehicles used in Better Place were produced by Renault, and called Fluence EV. Renault has introduced Fluence in India, but in petrol and diesel versions, not as EV (electric vehicle). Provided the infrastructure of gas stations is built in these cities, one feels that such EVs with the Better Place model of replacement batteries, are an option to be considered. In a survey of EV owners in Japan, two thirds said they would consider it as their next car. Japan has been able to extract gas from undersea deposits of methane hydrate. .

This technology, alongwith fracking to recover oil and gas from shale, would also increase supply of oil, and help contain the cost of crude oil.

Meanwhile what's happening in countries, mostly European, which are clamping down on Government spending, in pursuit of austerity?

More than 1,000 businesses closed down every day in Italy, in 2012 .

The dangers of prolonged austerity measures are societal. As this analysis by Stratfor, a think tank, says, Greece, which has an untenably high youth unemployment rate of over 50%, is moving far left or far right. right .

In interesting news from India, as per this news report, only 68 (and not the 30 million claimed by the group) people are found to have valid addresses and are judged to be genuine investors in the Sahara group's fully convertible bonds. This suggests that the bulk of the funds could be unaccounted for. The situation is likely to turn messy.

However, a sting operation by a website called Cobrapost, on middle level managers of 3 of the most reputed private sector banks, viz. ICICI, HDFC Bank and Axis Bank, has revealed the willingness of these managers to accept deposits of money in unaccounted cash (black money) and they suggest ways in which to launder it. This raises several questions.

The sting was made possible simply on the averment that the funds belonged to a politician. So perverse has our society become, and so in awe are we of political muscle, that the mid level managers were willing to accept this at face value, and be rather helpful, instead of obstructive, in their treatment of them. This situation has prevailed at least since 1971, in the famous Nagarwala case in which Nagarwala was able to withdraw Rs 60 lacs in cash from a bank simply on the pretence of instructions from the PMO. Even after 42 years, our systems and procedures have not been strengthened enough. This episode may, perhaps, cause the RBI to go slow on new bank licensing.

The BSE-Sensex last week fell 181 points, to close at 19,427, and the NSE-Nifty lost 66 to end at 5,872.

The market is hoping for an interest rate cut by the Reserve Bank of India (RBI) on March 19th. It was encouraged by the rising IIP number but disappointed in the rising rate of inflation. However, the market is still hopeful as core inflation has come down.

RBI's major concern should now shift from trying to control inflation, to trying to kick start growth, and, with it, employment. It has only to see the situation in Italy, where businesses are closing down at a prodigious rate, or in Greece, where disgruntled youth are joining extremist parties. This bodes ill for the country's future. India, with the largest youth population in the world, cannot afford, for a moment, to deny them job opportunities.

Hopefully RBI will see that it is growth, and jobs, and the future of the country, that is its prime responsibility, and take inflation as a concomitant risk. Should it concur, and cut interest rates , which is what is expected, there would be a rally.

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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5 Responses to "Austerity versus economic growth"
rj
Mar 18, 2013
Marc Faber who appears on financial networks often in the US said last year..." take all your money out of the US stock market, buy gold and put the gold safely in some other country..."
So much for the confidence in the US stock markets. A bubble waiting to burst. Or the recently hyped US housing market. Hyped thanks to the media and skewed unverified statistics.
The recession in the US is not over. The Obama govt. is doing all in its power to influence and read the news to its convenience.

Watch the video:

www nationalreview com corner 3 42591 what do you think about obama pardoning sequester and sending it portugal andrew johns
Like 
Prof. N K Jain
Mar 17, 2013
My comments are for the later part of this article.
The systems in most of the banks are sound. It is possible to beat the systems only with proactive involvement of bank staff. I am not surprised with the money laundering in these banks and I do not believe the top management of these banks were ignorant. They must have turned a blind eye so long as you are not questioned or caught.
We talk about growth in the economy as if the lowering of interest rate is the only solution. A lower interest rate of 25 basis point is not going to be a growth stimulant for economy but if banks were to pass the lower interest rate to depositors, millions of old and retired people will feel the pinch of lower income. This would have an adverse impact on the demand of consumer goods from this section of consumers.
Like 
Prof. N K Jain
Mar 17, 2013
My comments are for the later part of this article.
The systems in most of the banks are sound. It is possible to beat the systems only with proactive involvement of bank staff. I am not surprised with the money laundering in these banks and I do not believe the top management of these banks were ignorant. They must have turned a blind eye so long as you are not questioned or caught.
We talk about growth in the economy as if the lowering of interest rate is the only solution. A lower interest rate of 25 basis point is not going to be a growth stimulant for economy but if banks were to pass the lower interest rate to depositors, millions of old and retired people will feel the pinch of lower income. This would have an adverse impact on the demand of consumer goods from this section of consumers.
Like 
THIRUMURTHY R
Mar 17, 2013
One of the many good reads from Jawahir Mulraj.
Sort of covers a lot of ground.
What do you think of the US eventually helping the EU and other economies in distress if it continues to recover fast, having had the advantage of the dollar being the Global Reserve Currency and their pump priming their economy through QE's, untramelled by want of funds in sharp contrast to the EU and other economies? Isn't there some kind of a moral responsibility for the US to help the rest? Of course, the US does not appear to be as keen as in the past to charge into problem areas. It is appearing to be taking a nuanced and well informed stand in many conflict areas, trying more to empower the local players to evolve their own solutions to their problems under the Obama administration. However in the area of economic recovery of the rest of the world, maybe the US,in tandem with China, can do a lot indeed for equitable global economic growth. What do you think of the US-China partnership for a better overall global dispensation? What do you think are the chances of puerile political hawkishness in geopolitical maneuvers spoiling economic growth and eradication of poverty and suffering by large masses of people across countries?
As regards austerity cramping growth in many economies, I think growth by itself has not taken care of the economic inequities as fully as it should have done due to corruption and consequent inequitable distribution of the fruits of economic growth the world over. A better approach would be to continue to implement austerity with finesse and careful monitoring and taming of inflation and corruption on the one hand and pushing for growth on the other hand without panicking about the rate of growth not climbing to the levels in the years before 2008. Simultaneously social security nets and welfare economics tools as a whole should become open to greater scrutiny and debate by people across countries. Hopefully entrepreneurs would kick the habits of developing business models covertly underpinned by corruption, sleaze and influence- seeking from political patrons.
Participation of people from grass roots level upwards in governance has been demonstrated by Iceland which has more or less completed rewriting its Constitution with remarkable levels of citizens' involvement through the marvels of modern IT tools. They threw open the exercise to the public, constituted editorial boards to scan and select citizens' inputs after a lot of public debate, and have more or less finalized the exercise.
Something similar can be done with regards to consumers' participation in many areas of economic activity. Take the case of the Mumbai-Delhi corridor mentioned in the article. How much have the people who live in its area and its hinterland and the other stake holders across the country have participated in the planning process? The greater the involvement of people in economic planning, the greater will be the success of equitable economic growth. Admittedly, there are problems in doing all this but the sooner we start exploring this path the greater will be the chances of durable, equitable and sustainable economic growth. It calls for a lot of patience and diligent work but it will be rewarding in the long run. Technology is very much on our side in all this. Fear of the unknown will have to be overcome, that is all.
The Governments, Central and State, have indeed started the process of using technology and citizens' participation. Local service centres for delivery of social sector welfare schemes have started functioning in one of the Northern Sates, bringing in transparency and cutting down red tape. (Bihar, if I am not mistaken.) The Adhaar card will eventually enable plugging leakages and eventually reducing the subsidy burden, though many teething problems need to be fixed. When the whole exercise of technology being harnessed for transparency, citizens' participation in governance and shutting down the avenues for corruption takes off in say five to ten years' time, austerity will become the given and growth will be equitable and durable.
As regards electric vehicles I am glad you have brought up Shai Agassi's attempts. I am convinced the future is in EV's. I am also convinced that solar energy in all its avatars will usher in a whole new paradigm of affordable and clean power. We are indeed moving into exciting times.
Like 
Kuldeep Nayar
Mar 16, 2013
Re the Cobrapost scam. The Aam Aadmi is harassed to reconfirm the KYC norms again and again by these banks with threats of deactivating the account for non- compliance of repeating the submission of same documents, I.e., ID proof and address proof and photo even though the customer has not changed these for decades. But for chosen few they flout all norms. Saare Jahaan Se Achha!!! Like 
  
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