Tuesday, September 5, 2017

Red flags - 2

"Old age comes suddenly, and not gradually as is thought."
—Emily Dickinson (American, 1830-1886)
Word for the day
Narcotize (v)
To make dull. Stupefy
Malice towards none
When will our studio experts accept that predicting Modi's actions is not their domain!
First random thought this morning
In fact, I do not find anything worth bothering, losing sleep or being elated about the recent cabinet reshuffle. But there is so much of analysis and commentary over it that I almost feel compelled to have a publically stated view on it. So here it is:
I find the portfolio allocation inappropriate. For example, Coal is perhaps the largest customer of railway. Same person holding both the portfolio is a clear conflict of interest. Similarly, energy is a key sector for growth, and neither we have an integrated ministry, nor a full time minister for Petroleum & gas, coal or renewables.

Red flags - 2

One of the primary arguments in favor of underlying strength and resilience of Indian economy is the structural change in inflation trajectory.
The most popular argument is that in past decade or so, the supply side constraints that historically hindered the growth cycles of Indian economy have mostly dissipated.
In most of the previous growth cycles, the rising demand was almost immediately met by high inflation (due to supply constrained) and therefore higher rates. The growth cycles were thus curtailed to 3-4yrs in most cases. The popular argument is that huge capacity addition in past decade or so has obliterated this phenomenon structurally. Large capacities built in core sectors like cement, steel, power, roads, refining, etc., which mostly lie unutilized presently, shall make sure that inflation and therefore higher rates, do not kick in early in the growth cycle; and therefore the next cycle could be longer, steeper and more resilient.
By this popular argument, the prevalent high real rates are not justified and should ease materially - leading to a sustained demand growth cycle over next many years.
 
 
 
To me, broadly the argument sounds valid, but not very exciting; that is If we factor in other structural and cyclical changes also. For example consider the following—
(a)   The benefits of capacity addition in manufacturing might get materially neutralized by some structural adjustments in the cost structure of the producers. Rise in cost of compliance, labor, natural resources, etc. may add materially to the pricing pressures.
(b)   The efforts made by the global central bankers in past one decade to ease disinflationary pressure seems to have begun yielding results. The inflation thus created shall be imported into India, especially if lower rates force depreciation of currency.
(c)    Capacity addition in agriculture is still quite inadequate. Rising urban wage structure and farm subsidy rationalization shall also eventually reflect in farm prices. Volatility apart, we may see a structural upmove in farm produce prices.....to continue tomorrow.
 

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