A tale of two economies

30 APRIL 2011

The economies of the developed world are stagnating; the US economy grew at an annual rate of 1.9% in the March quarter, compared to the 3.1% annual rate in the previous quarter. Japan has been a stagnant, and aging, economy, for decades now. Growth in most of Europe is moribund. Debt levels are untenable; debt/GDP in the US is 370% and in Japan much higher. The US Government has been pumping in money through quantitative easing. Inflation is rising and will continue to. Returns on assets held by funds, including State pension funds, are insufficient to meet their liabilities, thereby needing extra funding which the States don't have.

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In contrast, the economies of China and India, with younger populations, are growing faster. China has spent a lot on building its infrastructure but India needs to. The funding for this build up in India, estimated at $ 1 trillion, will partly come from the West - there will be a massive shift of funds over the next few decades. Returns from such funding of infrastructure will be higher than the funds now obtain, which will reduce the obligations of the State Governments to fund the gap.

The growth of emerging economies of BRIC countries is, however, throwing up a different set of challenges, as pointed out by Jeremy Grantham, in his excellent article "Time to wake up - days of abundant resources and falling prices are over forever".

For one, the rising prosperity in China and India, accounting for 40% of the world's population, is putting a strain on food production, which will become insufficient to feed them. Crop yields per acre are growing at just 1.2%, barely over the 1% growth in population, and there is not much extra land available to grow crops. Rising prosperity also means more consumption of meat, which requires far more water than grain to produce. So we are facing a potential shortage of water. The ADB says that if food prices rise by a further 10%, 64 m. people would be pushed below the poverty line.

The prices of commodities, according to Jeremy Grantham, are in an irreversible rising trend. Barring oil, commodity prices had been falling for 100 years, until 2002. Since 2002, the entire fall in the past century has been reversed. Rising energy prices will hit both developed and developing economies and will call for a dramatic change in lifestyle.

This would be exacerbated by the rising price of crude oil, which has already pushed up the price of gas (petrol) in the US to over $ 4/gallon. Most US cities have been built on the back of private transport, based upon cheap gas, and few have a public transport network. Auto sales in the US has peaked at 16 m. a year and the subsequent decline will cause further job losses.

In India one does not understand why the Government is encouraging more private transport and not doing enough to build up a public transport network. Fossil fuels are running out and when oil prices keep climbing, the inventory of cars on the road would become a disposal problem. We have to plan for that.

Sadly, the time of our Parliamentarians is wasted on debating over the propriety or otherwise of a PAC (Public Accounts Committee) report. The PAC, under the Chairmanship of BJP leader Murli Manohar Joshi, released its report, castigating both Prime Minister Manmohan Singh and Home Minister P Chidambaram (earlier Finance Minister when the telecom scam took place) for not doing enough to prevent it. The UPA members of the PAC, who are in majority, created a ruckus as their opinion was not taken, and the report leaked out to the press. There is little time left, after abuses, microphones and shoes are hurled at each other, to discuss strategies for the future such as how to create public transportation infrastructure or how to increase food production as also storage for it.

Some belated action seems to be taken to tackle rampant corruption. The CBI chargesheeted Ms Kanimozhi, daughter of Karunanidhi, in the telecom scam, as the head of Kalainagar TV, that received a Rs 200 crore payment from DB Realty, one of the accused companies, routed through intermediaries. It was later shown as an intercorporate loan and repaid, albeit at a lower rate of interest than paid by DB when it borrowed the money. Suresh Kalmadi, the erstwhile boss of the CWG (Commonwealth Games) Committee, was finally arrested for inflating bills for the games bigger than a hot air balloon.

One hopes that this time it results in some action, and is not merely a ruse to abide the time till public memory fades and the powerful accused can then be released on bail for 'lack of evidence due to improper investigation'. One of the features of the Jan Lokpal Bill is to bring the investigating authorities, such as the CBI or the CVC, under the ambit of the Lokpal instead of being under Government control. Being under Government control make their investigations arbitrarily suspect.

The Ministry of External Affairs has, ironically, intervened in the Cairn -ONGC dispute, and has stated that compelling Cairn to bear its share of royalty (as of now ONGC bears Cairn's share, even though it owns only 30% of the field) would be violative of the treaty with the UK and would amount to expropriation! It is ironic because other Governments do back their own companies in similar disputes. The MEA suggests leaving the dispute for courts to resolve. A good idea would be to give the Supreme Court a time frame to do so, say 3 months, until which approval for the Cairn-Vedanta deal would be granted but be held in abeyance. Now that the Royal wedding is over, let the Brits concentrate on the ONGC royalty issue.

In fact, another good feature of the Jan Lokpal bill is that it seeks to lay down a time frame for a) investigating a charge of corruption b) bringing it to trial and c) final judgement - within 6 months of the complaint. One of the biggest reasons for rampant corruption is the unacceptable delay in bringing legal proceedings to a conclusion; there are cases pending for over 200 years! Because of this, more than half the MPs have criminal records; for they can be elected so long as they are not convicted, and conviction can be stretched to beyond a lifetime.

The corporate results are a mixed bag. In cement, whilst Ultratech showed a healthy growth in Q4 profits after tax (partly due to a write back of provision) and better sales realisation, profits of both ACC and Ambuja fell. Bank of Baroda came out with good results, with net profits rising 42% and so did Sterlite, with a 35% increase in net profits.

The sensex fell last week by 466 points, to end at 19135 and the Nifty dropped 135 to close at 5949.

There is no major bullish news in the offing that could cause a sharp rally. The market would continue to drift, with a downward bias. Not yet time to buy.

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 "A tale of two economies"


May 5, 2011

nice to



May 1, 2011

"An MBA from IIM Kolkata, he has been a member of the BSE."

There is no IIM called "IIM Kolkata". The Indian Institute of Management situated in the city of Kolkata is named "Indian Institute of Management Calcutta", or in short, "IIM Calcutta". The word "Calcutta" is part of the name, and is not just an indicator of its location.

This is similar to "IIT Bombay" or "IIT Madras": they are not called "IIT Mumbai" or "IIM Chennai" despite the renaming of their respective cities.


Anupam Garg

May 1, 2011

The efforts of PAC shldn't b demeaned. I hope that the parties do fight among themselves & bring out more names in the process. Let all cheaters b pulled out & put bhind bars

The Cairn Vedanta deal is becoming an embarrassment now. Red tapism at its peak, no wonder India ranks low in best countries to do business rankings


MS Chauhan

Apr 30, 2011

It opens up the broader and larger look at the state of economy the world over and one would surely pick up the best. It does push the mind beyond the stagnating ideology.
well done and keep up.


Vivek Tripathi

Apr 30, 2011

I was just thinking of what really drives growth is it 1)strong Financial system 2)Good Political structure
3)Noble thinkers or 4)anything else
----The answer for me is in line with your article; it is nothing else but the NATURAL RESOURCE..which somehow no one is caring about!!!!!

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