"Meeting people unlike
oneself does not enlarge one's outlook; it only confirms one's idea that one is
unique."
—Elizabeth Bowen (Irish,
1899-1973)
Word for the day
Scrutator (n)
A person who investigates
Malice towards none
Nirav Modi has reportedly
taken shelter in UK!
Would be interesting to know
how far behind is UK from Pakistan in harboring people wanted by Indian police?
First random thought this morning
The biggest fake news doing round on social media is about how the
quota for SC/ST/OBC is undermining the merit in professional courses like engineering,
medical and law.
As a recent TOI article highlighted (see
here) it is the money power and feudal dynastic tendencies that are harming
the merit more than anything else. Successful doctors make sure that their
heirs get medical degrees (regardless of merit) so that they can inherit their
Clinics and Patients. It is true for successful and famous lawyers and architects
also. CAs have no quota or reservation system. Can anyone speak confidently
about supremacy of merit in accounting profession? The merit is totally
compromised in case of temple priesthood,
In my view, the potential growth
of India under current circumstances is not more than 8%. Growing at 6.5-7.5%
in the current direction would not lead to enough employment opportunities.
Agriculture, as we have seen in past few years, is still “God” driven. Basing
an investment strategy on God’s alone is not advisable in my view.
The consensus growth estimates
indicates that the recovery seen in past couple of quarters may sustain and
gather some momentum. From sub 7% in FY18, the growth may recover to ~7.5% in
FY19 and FY20.
As per a recent report by CRISIL,
"We expect the Indian economy to expand at 7.5% next fiscal. After two
consecutive years of deceleration, this looks like a strong recovery. But
here’s the sobering thought: that would still be below the average growth of
7.6% seen over the past 13 years. To boot, it would come on a weak base of this
fiscal.
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However, much more than the quantity of the growth, it is qualitative aspects of the growth which are matter of serious concern. The structure of the growth as partly manifested in direction and constitution of growth remains weak and is expected to remain so for better part of next five years (More on this later)
The current estimates of the
modest recovery in growth are overwhelmingly dependent on the steady global
growth environment, continued high public expenditure and favorable weather
conditions.
For a structural improvement in
the economy we need our manufacturing and construction sectors to grow at a
much faster rate. The current estimates of industrial growth service sector
growth of cannot and will not lead to any material improvement in the
structural weaknesses of the economy, e.g., high level of
unemployment/underemployment, poor physical and social infrastructure, low tax
to GDP ratio, declining private sector investment, etc.
All the indicators are
highlighting that the modest recovery in growth will probably come from higher
public expenditure and micro adjustments like correction in inventory levels,
higher capacity utilization, higher exports, & improvement in project
execution etc, .
This may not lead to any material
improvement in employment conditions. On the contrary there are sufficient
indications that many employers may actually further rationalize their work
force to protect their margins. Historically, the work force rationalization in
India, especially in manufacturing and construction sectors, has been more
permanent in nature. Household savings and investment may therefore remain
constrained in next few years at least.
The investment environment is not likely
to improve in any substantive measures. Higher inflationary expectations shall
keep rates at elevated level; producers are not likely to gain much pricing
power as the demand domestic environment continues to remain weak; balance
sheet stress that has eased in some pockets, may begin to show up again.
Insofar as the current medium to
long term growth trend in India is concerned, in my view, the trend growth
decline that began from FY09 may not bottom in FY19, even if we accept the
rather bullish estimates of government agencies.
If we examine the extant bull
market in Indian equities in this context of lower growth, and diminished
growth potential, we get a feeling that the current market bear more
similarities to 1998-1999 dotcom bubble rather than the 2004-2008 credit led
infra building episode.
As could be seen from the
following chart, the long term growth (5yr rolling GDP CAGR %) has shown little
improvement in 1997-2000, but Nifty had still returned its second best yearly
return of 67% during 1999.
Similarly, the long term growth
has been largely flat during the current bull market since August 2013
(FY14-FY18).
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The picture get more clear, if we
compare the bull markets of 1998-1999, 2003-2008 and 2013-2018, juxtaposed with
the long term economic growth.
1999 bull markets coincided with
declining growth trend, and hence did not sustain much. Subsequent losses were
huge and mostly irrecoverable.
2003-2008 bull market occurred
when the growth was witnessing massive jump. The market lasted longer, and
despite global contagion, losses were recovered in no time.
In the current bull market, so far
we have not seen any material change in long term growth trend.
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The point is how long and how far this market could continue to stand on fragile "green shoots" of economic recovery?
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