What price economic growth? - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
What price economic growth? A  A  A

28 DECEMBER 2013

These columns have spoken about the preponderance of money as a factor of production, and how its dominance is affecting global trends. The global pool of financial assets is several times global GDP, and, in its quest for higher returns, it pushes for economic growth. Given that over 70% of US GDP comes from consumption, this means that policies (shaped by this pool of money) are geared towards ensuring higher consumption. Hence things like quantitative easing and low interest rates, which encourage people to spend more. But what price economic growth?

Economic growth requires sources of energy, whose supply is finite. To surmount this, Governments depend on new technologies, such as nuclear power, discovered earlier, and, more recently, the increase in shale oil/gas production using the technology of horizontal fracking. These come with a cost, and, probably, an unaffordable one.

China's GDP growth, which the investment community cheers, of over 8%, comes with the cost of unclean air. As this blog points out, the cost of cleaning China's pollution is estimated at US$ 290 bn. This does not include the increased healthcare costs borne by citizens breathing in the polluted air. Nor does it include the cost of the damage to the ozone layer, and of the havoc caused by climate change (tsunamis in Japan, hurricanes in the Philipines and, lately, floods in Britain).

But even worse is the threat, not only to Japan but perhaps to humanity, of the aftermath of Fukushima nuclear power plant. Readers ought to listen to this video clip where 'experts discuss state of fukushima daiichi'. A global disaster can be triggered by another earthquake, which can topple the 1500 fuel rods perched 50 feet above the ground. If only one of these cracks, it spreads enough radiation to compel the evacuation of Tokyo. The operation to remove the 1500 rods to safety has been left to a private company, TEPCO, which, being a private company, (a) is trying to save money in the construction of the shelters into which the rods are to be safely stored for 40 years, (b) does not have the expertise for conducting the operation. Why is the Government of Japan not stepping in, as did the Russian Government, which used the military to entomb the Chernobyl plant in concrete?

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Can we pay the price of growth predicated on such nuclear disasters?

And yet the UPA Government is signing deals with the Japanese Government to use the latter's technology for setting up nuclear power plants in India!

The cost to Japan for cleaning up Fukushima is estimated at US$ 500bn.

Now, the Governments of the developed world are depending on technology to give them productivity gains to drive their economies. The US, for example, is claiming energy independence, thanks to increased output of shale oil/gas. This, though, is not a given. Extracting shale oil/gas requires capex in the form of new wells to be dug and it is estimated that the US would need to spend US$30bn annually on capex alone, to maintain production. This, in turn, would require the price of crude oil, which is the benchmark, to be above US$ 100 per barrel, to give an adequate return to the suppliers of capital for the capex. Else shale production will not be high enough to achieve energy independence.

Readers ought to listen to this interview of Gail Tverberg by Chris Mortenson. She says that, because of jobless growth, and slower growth in wages, the assumption that consumers will drive economic growth would not necessarily come true.

There are several technologies that are emerging which will lead to productivity led growth, albeit at the cost of jobs.

3D Printing is one of these. This is where the object being produced is done through an additive process, layer upon layer, instead of the normal, subtractive process of manufacture. 3D printing machines will thus replace almost any manufacturing, assembly line, job.

Another technology that has emerged is driverless cars. Google already has developed these, and a few cities in the US have approved their use. The cars use technologies to avert collisions, and these are so refined that they are probably safer than cars with drivers. Widespread use of driverless cars will make drivers redundant but will result in benefits and in productivity gains (imagine not needing to drop kids to school; the car will do it, and you can use the time productively). Driverless cars can free up parking space on roads; they can be parked at a distance, and summoned using a cellphone. This technology is planned to be used for driverless trucks, which would imperil a half million trucking jobs in the US, as also the services, such as diners, where they stop to eat, enroute.

Where, then, will jobs come from?

Countries are already facing this problem. David Cameron, PM of Britain, had set up 24 enterprise zones, hoping that these will attract enterprise and lead to job growth. As this article in Financial Times points out (registration required, is free), only 11% of the jobs targeted for 2015 are likely to be created.

One of the key attraction for investing in India is its demographic profile. India has a young population, and when these youth enter the income stream, their consumption will drive growth. This, of course, presupposes that they would have jobs. That is going to be a challenge, not merely because of the technologies emerging, some of which have been explained above, but also because of the conflicts which we cannot seem to deal with.

For example, the conflict of growth versus environment. The headlines of Economic Times of December 23, 2013 screamed that projects involving a capex of Rs 10 lac crores were held up by former Environment Minister, Jayanti Natarajan, now replaced by V Moily. Moily has assured a faster clearance of them. Some of these were supposed to have been fast tracked by the special committee appointed by the PMO for this purpose.

Or, for example, the conflict of public health versus new technology. There is a divided opinion, globally, of the risks versus benefits of GM, or genetically modified, foods. The technology can be used to boost production of grains and vegetables, but, simultaneously, not enough is known about the side effects of GM foods, or of the medical risks posed by ingesting them.

Just as in the case of nuclear power, where the risks of building nuclear plants, post Fukushima and Chernobyl, outweigh the benefits of the power spurring economic growth, each country needs to assess whether the benefits of GM foods, of boosting production to feed a growing population, outweigh or not the unknown risks. The previous Ministers were going slow on this, pending more information, but Moily has decided to permit field trials.

Michael Panzner, in his blog 'Stagflation Ahead', says much the same thing, that 'Repeating a familiar pattern, U.S. nonfarm productivity surged in the fourth quarter as unit labor costs fell, indicating that businesses are making the most of a weak jobs market and squeezing more profit out of each worker.'

The increased money supply (QE) is resulting in asset bubbles, with only a small part of the new money created going to finance consumption or investment. House prices in the USA are now at 6.7 times average salary, making them unaffordable.

Yet another conflict in India is that of governance, in the case of the UPA. That is the conflict of self interest versus public interest. This is the root of the various corruption scandals that have broken out. And the attempt to cover up, for example, the Adarsh Housing scandal, by the Maharashtra Government, is brazen. This was a housing society ostensibly given various exemptions, for the ostensible benefits of war widows. The flats in the society were, however, allocated to the well connected politicians and bureaucrats. And the report indicting this allocation was recently brushed aside by the State Government, against which Rahul Gandhi has spoken.

Similarly, for favouring certain coalition partners with whom it has shared power, the UPA is favouring fraudster Jignesh Shah and has not taken serious action against him despite evidence of the fraud and of mismanagement in NSEL, the exchange promoted by FTIL.

The cover up is brought out by this article.

The NSEL did not maintain proper accounts (admitted by its auditor), did not check inventories of commodities in godowns, did not accredit the godowns as legally obliged to, did not scrutinise borrowers, permitting wives of employees to trade far beyond capacity, without adequate margins, and defaulting on each of the payouts as per its own schedule. Yet it took nearly six months to declare him not fit and proper to run exchanges, a declaration he has been allowed to contest, on grounds of natural justice. But hey, what about natural justice to the victims?

No responsible Government can sleep over such frauds. It does so at its own peril. Recent election results have revealed this.

Last week the BSE-Sensex rose 113 points, to close at 21,193, and the NSE-Nifty gained 39, to end at 6,313.

The tapering of the QE programme is to commence in January, with a US$ 10 bn cut. The US has had better economic growth than much of the developed world, including EU and Japan; led by productivity gains. There are, however, not enough jobs being created, a trend which will worsen. Will the GDP growth of an economy relying on consumption for 70% of its growth, continue, if joblessness increases?

Will China, the leading growth engine of the world, falter with the twin problems of pollution (would it need to cut back on coal fired power plants supplying its energy needs) and of asset bubbles (ghost towns that are unoccupied, posing NPA problems for its banks).

Will Japan be able to afford the US$500bn price tag of Fukushima?

As against these negatives, the positive in India is that public governance is slated to improve after the next general elections. If the new Government can encourage the creation of jobs and reap the demographic dividend, the economy and the market will improve. Can it? Will it?

I take this opportunity to wish my readers a Happy New Year!

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 "What price economic growth?"
Kirandeep Atwal
Dec 30, 2013
In USA, the real wages of middle class is almost stagnant. After financial crises, US government spent lot of money to save big institutions and ran huge fiscal deficit. Eventually, the government will reduce national debt at the expense of middle class by reducing social programs for eg. social security. Therefore, it seems unlikely that there will be huge growth in consumption.

There will be excellent productivity gains in USA. But, the workers will not able to reap the benefits due to weak labor market. The only exception to this will be the professions in which employees are able to start their own companies for eg. finance and medicine. In these profession employers will be compelled to pay the wages according to the value these professional add.
Like (2)
Dec 28, 2013
As pointed by Jawahirbhai. One of the key attraction for investing in India is its demographic profile. India has a young population, and when these youth enter the income stream, their consumption will drive growth. This, of course, presupposes that they would have jobs.
After the Lok Sabha elections the new govt will be well aware about it.
its time to build good brands as the India Youth will be looking at Brands and quality with the kind of disposable income happening with Husband and Wife working and Children exposed to Best of things at young age.Manufacturers be aware Consumer is King.
Like (2)
surajit som
Dec 28, 2013
the culture of easy life is bad. this has lead to neglect of agriculture ,rural life. job in an A/C office is limited. this leads to all sorts of problems including unemployment.

our growth will never pick up if we neglect agriculture and manufacturing. that in turn requires bijli-sadak-pani-school-hospital.
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