“…change is risky. But as India develops, not changing is
even riskier.”
Dr. Raghuram Rajan, RBI Governor
In his latest
note, famous analysts and economic forecaster Dr. A. Garry Shilling, in a
conspicuous shift from his long standing pessimistic outlook on US held for
past many years, highlighted the six core strengths of US economy that should
further reinforce the economic supremacy of US and therefore USD in the
following decades.
Shilling finds that US is much better placed than most peers in
the aspects of demographics, entrepreneurial activities, labor relations,
domestic debt vs. foreign debt financing, currency strength and energy
independence.
Shilling expects US savings rate to rise back to double digits
leading to slower consumption, a reverse of what occurred when the saving rate slid from 12% in the early 1980s to
1%.
For every 1% rise in
American consumer spending, U.S. imports—the rest of the world's exports—rise
2.8% on average. A rising savings rate will therefore substantially impact the
growth of export led economies and lead to narrowing of US trade deficit.
Shilling expects that at a
10% household saving rate, $1.2 trillion would be locally available to finance
federal deficits, now less than $1 trillion, as well as business net borrowing.
This will essentially means less number of USD in the hands of foreigners. It
may cause serious disturbances in many
Asian, Latin American and other import-led economies.
Energy independence of US coupled with slower growth in exporters
like China and Japan, would essentially mean global energy prices should
stabilize at relatively lower level.
In our view, should the scenario envisaged by Shilling actually
materialize, India may need to carry out many adjustments in the domestic
economy to keep herself out of trouble. For example:
(a)
In past decade India’s capital goods import have
contributed maximum to the trade deficit. We would need to substantially
improve our manufacturing capabilities, besides reducing non-essential imports
and augmenting USD reserves. Making bilateral trade agreement with key
suppliers could also save some dollars.
(b)
With US less dependent of foreign savings to
fund her deficit and other developed economies growing at a slower pace, the
availability of capital may improve, though at a higher cost. By building a
friendly investment environment, including stable and consistent taxation
policy and improvement in ease of doing business index we can improve FDI
inflows for investment in technology and capital intensive industries to
substitute imports.
(c)
While higher savings lead to lower consumption
demand, the US growth would largely be aided by productivity gains. The demand
for highly skilled workers shall rise accordingly. This could be both
opportunity (higher demand for Indian engineers) and threat (brain drain) for
India.
We continue to advise 10%
allocation in gold, and overweight ITeS exporters. The current market rally, in
our view, is completely based on latest bout of global optimism and not
sustainable beyond few weeks.
Thought for the day
“The length of this document defends it well against the risk of its being read.”
- Winston Churchill (England, 1874-1965)
- Winston Churchill (England, 1874-1965)
Word of the day
Disparate (adj)
Fundamentally different or distinct in quality or kind.
(Source: Dictionary.com)
Shri Nārada Uvāca
Will Modi baiters paint Akhilesh Yadav with the same brush?
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