Thought for the day
“The human being is in the most literal sense a political animal,
not merely a gregarious animal, but an animal which can individuate itself only
in the midst of society.”
—Karl Marx (German, 1818-1883)
Word for the day
Gregarious (adj)
Fond of the company of others; sociable.
(Source: Dictionary.com)
Teaser for the day
If BJP takes UP and Bihar as some polls are suggesting,
will National politics revert to pre 1980 era of great North-South divide with
North dominating and south sulking?
Or will it be different this time?
Nothing secular or fundamental about it
The recent report of CRISIL on Indian economy is a good realty
check for the market participants who are placing their bets on basis of
improving macroeconomic fundamentals. The report broadly confirms our
hypothesis that the growth potential of Indian economy has shifted down
structurally towards 6% GDP growth level and it is extremely difficult to
sustain a 7%+ growth without material structural reforms that would lead to
substantially higher private saving and investment.
In Crisil’s view “there is a natural limit to any upside beyond
6.5%”. And all of this, Crisil points out, assumes there is a stable and
decisive government in place — else, “our bets on growth are off”.
As we have been highlighting that the rather optimistic growth
scenario of 5.5-6.5% would only increase the structural imbalances of the
economy especially income inequalities, food inflation, poor infrastructure and
regional imbalances. This growth will primarily come from better capacity
utilization and higher resource arbitrage opportunities; would not create many
new jobs; will not help private savings and consumption and would be
concentrated in few regions.
In CRISIL’s words “the real problem is that the various factors
that caused an upsurge in India’s growth in the FY04-11 period are no longer
present, and getting them back will take time, and a lot of effort. In the
high-growth phase, the contribution of capital stock rose from 2.1% in FY05-03
to 3.2% in FY04-11, but this is projected to grow by just 2.5% in FY15-19.
Productivity, or what economists call incremental capital output
ratio (ICOR), improved the most in the high-growth years, and though this is
projected to grow — ICOR will fall from 7.4 right now to 5.5 over the next five
years — this will still not be as good as it was during FY04-11.
CISIL believes that “The other driver of growth, exports, are
also not looking as good as they did a few months ago despite global growth
picking up. One reason, of course, is that the rupee is not looking as weak as
it was before. The larger structural issue, though, is of India’s failure to
address the fundamental flaws in its economic model — that means rising wage
costs, poor economies of scale and high domestic inflation.”
Substantially high leverage on corporate balance sheet as
compared to 2003-04 or even 2008-09; much lower capacity utilization; and
deeply stressed financial system where banks are in no position to grow their
loan assets (to the contrary we might see material unwinding); are some major
blocks in the way of high growth path.
The improvement in CAD and fiscal
account could prove to be short lived, as the suppressed import demand is
restored and accounting practices are corrected.
To the chagrin of some of my readers and
many of those who believe “all is well”, I would reiterate for the N+1st
time that we are in the midst of a massive trading up move, nothing secular or
fundamental about it.
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