Thought for the day
”Death and life have their determined appointments; riches and
honors depend upon heaven."
-
Confucius (Chinese,551-479BC)
Word for the day
Accidence (n)
The rudiments or essentials of a subject.
(Source:
Dictionary.com)
Teaser for the day
List names of 21 politicians whose political career will end
on 19th October 2014!
Devil's advocate
The IIP growth data for August 2014 mandates a reality check on
Indian economy. It validates our premise that investment led growth is not a
valid theme as yet.
In my view the IIP growth data for September may not be
substantially better than August . Given the sub-optimal monsoon this year and slow service sector
growth, 2QFY15 GDP growth may not meet rather optimist expectations.
Though I do not see a material let down in the optimism over new
government in immediate term, the GDP growth forecasts may likely see some
downward revision.
In this context the precipitated fall in global energy prices in
past six months is critical. Lower energy prices are providing strong support to
economic optimism in the country. This single factor is catalyzing optimism
over Balance of Payment, inflationary and therefore rate expectations,
improvement in domestic power production through cheaper import of coal and
gas, improvement in financial stress levels as the struck infra and power
sector projects become viable due to lower rates and higher availability of
fuel.
When I try to build in a rising energy price scenario in my
investment portfolio, the likely outcome is rather unpleasant.
Hypothetically, a 20% rise in crude and international coal
prices from here will make macro situation look much more precarious than even
2011-12. The diesel deregulation plans will be deferred again. Electricity
prices will go up by another 20-25%. Global demand will take a further hit
impacting exports. CAD will worsen. INR will depreciate further and faster.
Inflationary expectations will rise materially forcing RBI to break the pause
on rates. Savers will be crushed as real rates take a further dip, leading to
sharper decline in already receding savings rate. Financial stress will rise as
more projects become unviable due to higher rates, lower demand, waning pricing
power.
In short we will have a serious problem of stagflation at a time
when global money markets will be tighter and investment climate seriously
clouded.
Remember that post Lehman collapse decline in global energy
prices, we had seen a sharp reversal from mid 2009. This occurred without any
material improvement in global economic conditions. Therefore, a 20% rise in
energy price scenario may not be entirely hypothetical.
It is therefore critical to examine the global energy market
trends and make a realistic assessment about how sustainable could the current
energy prices be.
Another factor that needs to be evaluated is whether global
deflationary conditions are really good for Indian economy or these just
provide a temporary feel good in terms of lower import bill.
Many commentators and analysts are relying on the
"luck" of PM Narendra Modi for continuous improvement in economic
conditions. I see their point. But my astrologer suggests that PM is likely to
hit a rough patch in 2015.
...more on this tomorrow
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