Do it yourself

Global economy slowing

The RBI paper highlights some areas of concern for the global economy. In RBI’s assessment global growth has lost some speed in the first half of 2024 relative to the preceding semester, and momentum has slackened further in the third quarter.

The paper notes, “All around, indicators point increasingly to slowing global economic activity, more so on the eastern shores of the Atlantic, which vindicated the ECB’s September rate cut to secure a soft landing. In the US, the now famous remark – “The time has come for policy to adjust” – has built up expectations that the economy is gaining prominence in monetary policy discourse. In China, even though consumer inflation has picked up modestly due to supply constraints related to extreme weather, weakening producer prices are fueling concerns that deflationary forces are taking root. A rising number of manufacturing industries face lacklustre demand alongside a deep property market downturn now into its third year.” In particular—

Job growth is getting softer than initially anticipated as labour markets continue to slow down, unemployment rates are ticking up and wage growth is easing, although historically high immigration is providing some offset. Consumer confidence surveys show a deterioration in sentiment about jobs.

Equity prices are still stretched but the crash in Nvidia’s stock in early September wiped out about US$ 300 billion in market value, hinting that the artificial intelligence (AI) overhype may be tapering off and expectations are catching up with reality.

Parched returns are drying up the venture capital ecosystem. Record volumes of corporate debt are being issued to head off the volatility triggered by worsening macroeconomic data, and to benefit from falling borrowing and refinancing costs.

OPEC plus has decided to delay a planned output increase as crude prices slumped below US$ 70 per barrel briefly on September 10, but it still plans to revive 2.2 million barrels per day of idle supplies over the course of 2025. Meanwhile, non-OPEC supplies are rising faster, and as the International Energy Agency warns in its September 2024 report, global oil demand is slowing sharply – electric vehicles are already displacing 1.8 million barrels of oil every day – and this is fuelling the sell-off in oil markets. In metal markets, the copper-gold price ratio is closing on to 4 – a rising ratio indicates higher industrial demand and hence a positive growth outlook.

Although upside pressures have likely been seen off, the pace of disinflation remains sluggish, provoking caution among monetary policy authorities about the pace of easing. In fact, the Governing Council of the ECB noted in its September meeting that inflation is expected to rise again in the latter part of this year, partly because previous sharp falls in energy prices will drop out of the annual rates.

Defying gravity, global merchandise trade volume continued to recover in the third quarter of 2024, according to the latest World Trade Organization (WTO) Goods Trade Barometer, amidst rising geopolitical tensions, ongoing regional conflicts, shifting monetary policy in advanced economies (AEs) and weakening export orders. Barring the sub-par performance of electronics, other components of global trade such as automotive products, container shipping and air freight are all firmly above trend, but new export orders are turning down, and raw materials have declined – causes for concern going forward.

EMEs are building up a growth rate lead over AEs to levels not seen in 15 years. Projections suggest that the proportion of EMEs other than China in which per capita GDP is likely to rise faster than the US is on course to surge from 48 per cent over the past five years to 88 per cent in the next five years.

In the recent period, the US dollar has weakened; historically, this has led to greater capital flows to emerging markets.

The global supply chain pressures index (GSCPI) increased in August 2024, rising above its historical average for the first time since November 2023. Geopolitical risks remained high due to continued tensions in the Middle East, albeit with a sequential moderation in August 2024. Supply disruptions have kept container shipping costs elevated, although they recorded some moderation during August-September 2024 from the peak levels recorded in July.

Domestic economy

The RBI sounds quite sanguine about the domestic economic growth, regardless of the soft 1QFY25 data. The paper cautions, “more needs to be read into the slowing of India’s GDP in Q1:2024-25 than just disappointment.” It points out that “The seasonally adjusted momentum of Q1 GDP was strong. Gross value added (GVA) growth actually rose sequentially in Q1, but the increase in subsidies – 3.6 per cent by the Union government and 26 per cent by the states – offset the gains from showing up in GDP growth.”

Household consumption is poised to grow faster in Q2 as headline inflation eases, with a revival of rural demand already taking hold.

The widening trade deficit and a spurt in overseas travel by Indians is likely to swing the current account balance from a small surplus in January-March 2024 to a deficit of 1-1.2 per cent of GDP in the first half of 2024-25. Capital flows in the form of portfolio debt flows, net FDI and non-resident deposits are providing comfortable financing.

Merger and acquisitions deals have been on the decline in the Asia-Pacific region in 2024, but India has emerged as a bright spot with an increase in volumes.

Agriculture suffered in Q1:2024-25 as India experienced the highest number of heatwave days in the summer of 2024, surpassing the previous high in 2010.

The underperformance of agriculture in Q1 was compensated for by a buoyant manufacturing sector and resilient services.

Global funds have been investing heavily in the Indian debt market for the fifth month in a row since May 2024. On the other hand, corporate debt issuances remained low during the financial year so far despite easing yields as issuers awaited the US rate cut.

In the credit market, with deposit mobilization becoming a challenge, banks continue to rely heavily on certificates of deposit to meet funding needs so that lagging deposit growth does not constrain credit. Banks are also offering higher interest rates on deposits, with more than two-thirds of term deposits earning 7 per cent and above. The gap between credit and deposit growth is, however, beginning to narrow. Non-banking financial companies are increasingly turning to offshore bonds. Microfinance institutions are facing some asset quality issues, warranting slowing down the pace of loan growth.

Headline CPI inflation came in below the Reserve Bank’s target for the second consecutive month in its August reading. This is a positive development, especially as the index has remained flat between July and August.

Surplus liquidity in the banking system moderated in the latter half of August, driven by build-up of government cash balances due to GST payments. In early September, however, a pickup in government spending led to the return of liquidity to the banking system. Overall, the average daily net absorption under the liquidity adjustment facility (LAF) decreased to ₹1.45 lakh crore during August 16 to September 17, 2024, from ₹1.52 lakh crore during July 16 and August 15, 2024.

I find many events, besides rate cuts and elections, that are occurring on the sidelines that need to be noted by the investors. Considered individually, these events may not look like triggering a meaningful move in global markets. However, if we take a collective cognizance of these events, the probability of global market shock would certainly rise by a few points.

The following events, for example, have drawn my attention in the recent months.

Central banks loading on gold

Post the global financial crisis 2008-2009, the central banks have significantly increased their gold accumulation. In 2023, central banks added 1,037 tonnes of gold – the second highest annual purchase in history – following a record high of 1,082 tonnes in 2022. The trend is continuing in 2024 also. (see here)

The notable thing in this trend is the sharp rise in gold accumulation by the Russian and Chinese central banks. President Xi and President Putin, along with Iran and North Korea (CRIK) are seen as an informal anti-NATO alliance. (see here)

Biden provides fresh impetus to the Sino-US tariff war

The Biden administration has provided significant impetus to the Sino-US tariff war started by the Trump administration. Despite strong objections from the domestic industry, the US has not only retained the tariffs imposed on the Chinese imports by the Trump administration in 2018, but made some material additions to the list. The new tariff list includes a 100% duty on Chinese EVs, 50% on solar cells and 25% on steel, aluminum, EV batteries and key minerals.

Besides, the Biden administration announced new measures aimed at Chinese e-commerce platforms to minimize the low-value imports eligible for duty and tax exemptions. (See here)

Putin mediating thaw between India and China

The rhetorical aggression between China and India has decelerated materially in the recent weeks. It is reported that China is retracing from its advanced positions in the Indian territories and willing to disengage completely. Apparently, it has occurred after the recent visit of PM Modi to Russia and Ukraine. (see here) This is obviously an important geopolitical development after the coup in Bangladesh, allegedly with support of the US. (see here)

Hedge Fund piling on short positions

In the past few weeks hedge funds have been piling on their short positions. They have now been net sellers for the five consecutive weeks, not a normal situation when the benchmark indices are making all-time highs.

Chinese economy imploding, govt puts a tight leash on investment professionals

All the recent data about the Chinese economy indicates that the Chinese economy is slowing much faster than previously estimated. As per the current estimates, China is most likely to miss even a modest 5% growth target. (see here) By all indications the Japanification of the Chinese economy is happening against the wishes of all. The Chinese economy has been the engine pulling the global economy in the past two decades. If this engine falters, it cannot be good news for the global economy and therefore markets.

The Chinese authorities have been taking action against the entrepreneurs, like Jack Ma of Alibaba, failing to adhere to the strict regulatory norms. Recently, the authorities cracked down on financiers – impounding passports of 8700 investment bankers and restricting their overseas travel. (see here)

This could be seen by some as a precursor to a massive shift in the economic development followed in the past two decades. (see here)

Traders incurring losses despite market rally

On 12^th September 2024 (weekly F&O expiry day), many option traders in India experienced exceptional losses due to sharp surge in the benchmark indices in the last hour of trading. It happened again last Friday. This has happened when sharp underperformance of the broader markets and popular stocks is already bothering the non-institutional (retail) investors. In the technical analysis parlance, these are conspicuous signs of a large-scale distribution taking place. Empirical evidence suggests that this phase of the market is usually followed by a dull period in the market, marked by poor returns.

It's still the month of September and on my morning walks, I can feel the chill in the air. This is not usual weather in Delhi NCR. I am getting the same sense in markets. If you are also feeling this chilling sensation, please do share your views.

No panic in the boardroom

Unlike the previous two rate cycles that started with a rather aggressive 50bps rate cut – first October 2008 post the Lehman collapse and second March 2020 post Covid-19 break out – this cut is apparently not a panic cut.

The Fed chairman sounded confident about growth and employment level. He emphasized that the central bank is not in a hurry to ease policy, as he sees no likelihood of an elevated downturn in the economy. He mentioned, “There’s nothing in the SEP (Summary of Economic Projections) that suggests the committee is in a rush to get this done.”

The Chairman categorically advised the markets to not take this 50bps cut as “new pace”. He said, “we’re going to go carefully meeting by meeting, and make our decisions as we go”.

The decision to cut was however not unanimous. In a rare dissent, one member (Michelle Bowman) voted for a 25bps. This could be seen as yet another sign of “no panic” in the Fed board room.

Committed to price stability without pain in labor market

Announcing a victory over inflation, Mr. Powell announced, “The U.S. economy is in good shape. It is growing at a solid pace. Inflation is coming down.”

As per the latest economic data release, the US GDP expanded at 3% annual rate in 2Q2024 with 4.2% unemployment rate (considered near full employment), and inflation at 2.2% in August 2024.

Outlining the latest policy objectives, he commented, “We’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with disinflation”. Guiding the markets, he emphasized that investors should take the Fed’s 50bps rate cut as a sign of its “strong commitment” toward achieving that goal.

Neutral rate seen close to 3%

The FOMC members see cuts of 25bps each in November and December FOMC meetings; 100bps cut in 2025 and 25bps cut in 2026 – implying that the latest easing cycle may end with the Fed rate range of 2.75-3.00%.

The Fed Chairman also mentioned in the post FOMC press meet that the neutral rate is likely significantly higher than it was on the previous occasions.

Markets ended lower

Markets – equity, bonds and commodities – ended the day with marginal cuts post the Fed announcement; while the USD was marginally stronger. This could be an outcome of either (i) sell on news; or (ii) traders’ disbelief in what Fed says about the strength of the economy.

What now

In my view, this aggressive 50bps cut is more of a correction than an aberration. Perhaps the Fed realized that they are running slightly behind the curve and hence tried to catch up. I do not see it as a panic move and would not like to indulge in “there is more to it than what meets the eye” debate.

Unlike 2008, there is no corporate balance sheet crisis, no risk of global markets freezing, and unlike 2020 there is no shutdown necessitating fiscal and monetary profligacy. It is a normal rate cycle change in response to a normalizing economic cycle. Therefore, expecting a market reaction like 2008 (sharply down) or 2020 (sharply higher) may not be appropriate.

I feel the US markets will adjust to the new policy trajectory in a couple of weeks and move accordingly. The lower rates shall help arrest the decline in the US housing markets and consumer spending. The bond yields may come down and the hedge trade in gold may begin to unwind. The corporate discretionary spend may also normalize as the cost of borrowing eases. This could be a relief for the Indian IT services companies.

For India, I am not sure if the RBI will rush to cut in October meeting, but would not rule it out completely. Financials and commodities are two sectors that need to be watched closely, in my view.

In the next couple of months, the markets in India will be driven by the 2QFY25 earnings. Any disappointment could lead to a decent correction in the markets. For now, I do not see a need to make any change in my investment strategy. (More on this next week)

The major risk to the markets comes from geopolitics now. The situation in the Middle East is worsening by the hour. NATO and CRIK (China, Russia, Iran and North Korea) alliances are hardening their positions, both on trade and war, making the situation explosive. (More on this next week)

I have been observing men making these deliveries closely for the past five years. I have noticed a gradual but definite shift taking place in the profile of the deliveryman visiting my house.

In the earlier days, these were usually young semi-skilled boys, who were doing this part-time job while acquiring some skill that would get them a regular job. For most of them this was their first or second job. None of them would like it to be their regular job in the next 2-3 years. They were working 6-8 hours a day.

Now-a-days, however, it is common to find middle aged, educated, skilled men making deliveries. Many of these people have experience of working in the organized sectors. I have even met some delivery men who have worked as accounting clerks, mechanics, salesmen etc. They lost their jobs due to downsizing or closure of businesses they were working for. In some cases, they had to take a break due to health reasons but could not find a job while recovery.

A Large proportion of the ‘deliverymen’ seems to have accepted this as their regular occupation. They work 10-14 hours a day. Only last week my domestic help asked “if I know some ‘contractor’ who provides deliverymen to various platforms?” She wants her 18yr old son to join the occupation. I am scared to think whether this occupation is already becoming aspirational for several poor households. Add the “carless drivers” of the app-based taxis to this universe of ‘deliverymen’ and you would find the problem to be much larger.

This trend of hiring “part-time” or “contract workers” is not limited to unskilled jobs like making deliveries. It is becoming more commonplace in skilled and even high-skilled white-collar jobs; and even public administrative jobs. Many public departments are preferring to hire contract workers in place of regular employees. Cost optimization and flexibility are the two primary reasons offered for this practice.

The latest Periodic Labor Force Survey (PLFS), released on 16 August 2024 by the National Statistical office (NSO), only 47.4% of the workforce in India comprises regular wage/salaried employees. The rest were classified as own account workers, self-employed, helper in household enterprise and casual labour.

Reportedly, in the US also, “full-time employment dropped by 1 million workers in August on a year-over year basis, marking the 7th consecutive monthly decline. Since the June 2023 peak, full-time job count in the US has fallen by a whopping 1.5 million. Meanwhile, part-time employment rose by 1 million year-over-year in August. Additionally, the number of permanent job losers jumped by 324,000 year-over-year, to 2.5 million, the highest since November 2021. This was the 16th straight month of part-time job gains, the longest streak since the 2008 Financial Crisis.”

In my discussions with my several contacts, I noticed that almost everyone has taken note of this trend. However, the acceptance for the fact that we are fast becoming a ‘non-salaried” economy is still very low. Even at the policymaker level recognition for the changing paradigm is far below the desired level.

In my view, there needs to be an urgent and accelerated acceptance of this trend and preparation to deal with the consequences. While it may be already little late for the policymakers, the investors and businesses might still have 5-7 years to adapt to the new paradigm.

Some of the consequences of the emerging employment status paradigm could be as follows:

·         The demand for rented accommodation may rise much faster than the owned accommodation, as the contract or part time workers refuse to commit to a place or city.

·         The tendency to marry and have a stable family life may weaken. The population growth rates may fall much faster than presently anticipated. The businesses created around children (healthcare, drinks, toys, books, education, stationary, clothes, footwear etc.) may witness marked slowdown.

·         The demand for public services, like transport, health and education may rise faster as affordability of workers diminishes.

·         The credit worthiness of part-time workers may be lower; and the tendency to default may witness a rise. The household savings may decline further. The business models and lending practices of banks and NBFCs may need a substantial change.

·         Workers’ mobility may rise. This may cause frequent law & order problems as conflicts between the local and outside workers increase.

·         The working age of Indian youth may reduce drastically. The ‘deliverymen’ - working 10-14 hours a day; 365 days a year; carrying heavy bags on their shoulders; - will wear out much sooner than a normal worker. They will retire hurt and sick in their 40s rather than 60s, having no skill, savings, family or social security. Managing these retired force could be a much tougher task than solving the issue of pension for the retired government employees and soldiers.

I will be grateful to receive any feedback from readers relating to the policy endeavor made in this regards, besides according legal recognition to the gig workers in The Code on Social Security, 2020, (CSS2020) and recruiting temporary workers in the armed forces (Agniveer scheme)

But this is not the point here. For the past many decades, I have been used to referring to the modern consumer credit ecosystem as ‘plastic money’. My wallet and table drawer are full with a variety of plastic cards- credit, loyalty, identity, membership, insurance, travel, etc. I considered myself privileged with so much “plastic” in my possession. Suddenly, one phone call from a 28-year-old bank executive shattered my ‘illusion’, and apprised me how underprivileged I am for being part of ‘plastic’ economy, when the elites have already moved to the stronger ‘metal’ one.

This episode also made me accept that plastic money is now becoming an integral part of the lower middle class Indian consumers, just like their peers in the western developed economies. Owning a credit card, H&M loyalty card, Metro Travel Card, Driving License, health insurance card, etc., is no longer a privilege.

To recover from this dis-illusionment experience, I tried to assess what other transitions in my life have gone mostly unnoticed. I discovered many things. Let me share some of the transitions in my investment portfolio which went largely unnoticed.

1.    My consumer sector allocation is now dominated by modern retail, telecom and ecommerce, instead of traditional FMCG.

2.    My industrial allocation is now predominantly deployed in the engineering design, manufacturing technology solutions and contract manufacturing companies.

3.    Fintech and non-lending businesses form a substantial part of the allocation to the financial sector. Even for the traditional financial businesses (Banks and NBFCs), a strong technology platform to deliver services has been the primary selection criteria for the tradition.

4.    My pharma portfolio is now dominated by healthcare solution providers (hospitals, health insurance, devices), contract research, API and domestic formulations. The traditional generic players and exporters are negligible.

5.    Value added product portfolio is my primary criteria for investing in commodities like cement, steel, industrial metals, agriculture produce & dairy etc.

6.    Import substitution gets substantially more importance in the selection process, as compared to the export potential.

7.    EPC companies (Infra builders) dominate the construction sector as compared to the asset owners.

8.    Top 100 companies are part of my passive portfolio only. The news of some company being included in MSCI indices (or exclusion) does not excite me any longer. I am spending more time discovering the companies that have the potential to migrate from the SME segment to the main board and from the smallcap to the midcap segment.

The graph depicts that the number of Chinese companies in the Fortune Global 500 list have grown from 10 in 2000 to 121 in 2020, a 12.1x rise in two decades. Three Chinese companies now figure in the list of top 10 global companies. The new 111 Chinese entrants in the coveted list mostly replaced the companies from the US (55) and Japan (54). Besides the US and Japan, companies from the major European economies (Britain, Germany and France) have also fallen in their global rankings.

The top 10 ranked global companies are an interesting mix. The list is topped by two retailers (Walmart, 1, USA; Amazon, 2, USA). Besides, it comprises – one utility (State Grid, 3, China); three petrochemical giants (Saudi Aramco, 4, Saudi Arab; Sinopec Group, 5, China; China National Petroleum, 6, China) one consumer electronics (Apple, 7, USA), two healthcare solution providers (UnitedHealth Group, 8, USA; CVS Health, 10, USA) and one investment company (Berkshire Hathway, 9, USA).

Insofar as India is concerned, only 9 companies figure in this list of top 500 global companies. Out of these nine, five are public sector enterprises (LIC, IOC, SBI, ONGC and BPCL) and four are private companies (RIL, Tata Motors, HDFC Bank and Rajesh Exports). RIL (ranked 86), is the top-ranked Indian company in the list of 500.

Since this data is published every year, and I have been observing this evolution of Chinese companies for more than a decade, prima facie I did not find anything exciting in this graph. On a second thought, however, a forceful inquisition perplexed me.

I wondered if the Indian economy has risen to find a place in the top five economies of the world, and is well on the course to enter into the top 3 club in the next few years, why not many Indian corporations have scaled up to the global scale!

I find it worth examining if it is a massive opportunity for the Indian investors or a potent threat.

It could be an opportunity, if we find that there are several Indian companies that are in a position to displace the legacy European and Japanese companies from their leadership position. These large sized companies could offer a material upside to the investors, as these transcend to become global corporations, exponentially growing their revenue and profitability.

It may also be a threat, if we find that the Indian companies are failing to match the global standards of innovation, scale, competitiveness and financial strength. In this case, many of the large companies might be at a risk of losing their respective domestic position as well to the global corporation, as the Indian economy is opened up further to sustain its global standing.

The amount of global foreign direct investment (FDI) has been on decline since peaking at US$2.05trn in 2015. In fact, a percentage of world GDP, FDI peaked at 4% of global GDP in the year 2000 and has been on decline since then. In the year 2023, global FDI fell to US$1.3trn or 1.27% of global GDP.

As per a recent Moody’s report, “Global foreign direct investment flows have shrunk in recent years. The COVID-19 pandemic, supply-chain chaos, surging inflation, and tighter funding conditions have taken a toll on global FDI. Investment flows are also being reshaped by economic fragmentation, trade and geopolitical tensions, industrial policies, and supply-chain diversification. But many of the ups and downs in FDI in recent years are due to tighter regulations to thwart the usage of tax havens. These have curbed the flow of investment through conduit economies, especially in Europe. While retreating inflation and easing monetary policy settings might offer some relief, economic fragmentation will hinder the smooth flow of FDI. Climate change will increasingly shape FDI flows in longer term.”

UNCTAD report emphasizes that “Tight financing conditions in 2023 led to a 26% downturn in international project finance, which is crucial for infrastructure investment in areas such as power and renewable energy. As a result, investment in sectors linked to the Sustainable Development Goals (SDGs) fell by more than 10%. The report highlights that agrifood systems and water and sanitation registered fewer internationally financed projects in 2023 than in 2015, when the goals were adopted.”

FDI in China and India shrinking, despite India’s manufacturing push

The Moody’s report highlights that “The drop in FDI flows to developing economies was largely because of shrinking investment in China and India. The world’s second-largest recipient of FDI, China, saw a downturn in 2023. Inflows turned negative in the third quarter as withdrawals and downsizing outpaced new investments. More recent data showed a fresh decline in the second quarter of 2024. FDI into India has also seen better days, falling in recent years despite the country’s push into manufacturing and notable investments from tech giants such as Apple Inc. On the bright side, FDI into Southeast Asia has held at a high level.”

Most renewable energy funds allocated to the developed economies

Although renewable energy investments have nearly tripled since the adoption of the Paris Agreement in 2015, most of the money has gone to developed countries. While developing countries need about $1.7 trillion each year in renewable energy investments – including for power grids, transmission lines and storage – they only attracted about $544 billion in 2022.

The report shows that more than 30 developing countries still haven’t registered a large international investment project in renewables.

And in most of the 10 developing countries with the highest levels of international investment in renewable energy, investment in renewables represents between one tenth and one third of total FDI.

OECD rules impacted FDI

Changes in taxes and regulatory requirements appear to have materially impacted the FDI flows – amount as well as direction. Moody’s report mentions that OECD members “have strengthened regulations to make it harder for companies to locate profits in zero-tax jurisdictions. Also, a revised corporate tax rule in the U.S. in 2018reduced the incentive for U.S. multinationals to reinvest earnings and hold intangible assets abroad, leading to a significant drop in outward FDI that year. These efforts, later bolstered by laws to establish a global minimum tax, have dampened FDI flows to and from low-tax jurisdictions in Europe.

This appears to be macro trend. Nonetheless, it may have implications for the investment portfolios of several investors, especially those investors who are overweight in capital intensive businesses relying on foreign capital for growth. If the decline in FDI flows sustains the current trend, we may see downward revision in growth projections and hence valuation multiples. It is therefore advisable to watch this trend closely over the next couple of years.

Sustainability has emerged as one of the major investment themes in the post Covid-19 period. Businesses engaged in the activities related to renewable energy and electric mobility have received substantial massive investments and have seen massive rise in capacity building. Nonetheless, the astronomical rise in the stock prices of companies engaged in basic manufacturing like solar PV cells, EV battery modules, electric scooters, etc., may not be sustainable.

This reminds me of my favorite instance from the Hindu mythology. I have narrated this instance many times before. Let me do it again.

“Once the forces of good (gods) and evil (demons) had a protracted battle. The battle lasted so long that both the groups exhausted all their resources and valor. Completely tired, wounded, frustrated and exhausted, they approached the Savior, Lord Vishnu. The Savior advised them to go and explore the great ocean (Sagar Manthan) to find new resources and vigor to make a fresh beginning.

Following the advice, both the groups went to the great ocean and explored it extensively. During their exploration they discovered a huge amount of wealth and resources that included the Amruta (nectar of the gods) that would immortalize its consumer and Vish (venom) that would destroy whoever consumes it.

Realizing that if demons get the access to Amruta and other resources found during the exploration, it would seriously jeopardize the interest of gods, Lord Vishnu tricked demons and appropriated the entire nectar for consumption of gods.

Lord Vishnu also requested Mahadev, Lord Shiva, to absorb the venom so that it does not harm anyone and the balance of the universe is maintained. Obliging, Lord Shiva drank the entire venom and preserved it in his throat.

Post this, gods became more powerful. But whenever they deviated from the path of common good, they were overpowered by demons and dethroned. Each time only after a great deal of repentance they would be rehabilitated with the help of Lord Vishnu, Lord Shiva or the Mother Supreme.

Over the years I have realized that it is not just a mythological story, emphasizing the victory of good over evil, to be heard during religious ceremonies and forgotten immediately thereafter. It is much more. This applies to all aspects of life, even economics.

The ocean exploration mission (Sagar Manthan) is basically a collaborative research effort to find solution to a problem that afflicts all alike, e.g., a prolonged war like World War, a pandemic like plague, smallpox, HIV AIDS or COVID-19, or a major economic crisis like great depression. The experts collaborate to find solutions like vaccines, hygiene products, UNO, Nuclear deterrents, globalized markets, etc. to mitigate the losses and prevent recurrence of such problems.

In modern economic parlance, ocean exploration is akin to the period of recessions followed by irrational exuberance, fiscal and monetary profligacy, and household extravagance.

When all the participants get tired, frustrated and exhausted from a significant economic weakness, collaborative efforts are needed to stimulate the economic activity. At this time all the stakeholders muster courage, and supported by the 'authority', they do things they would not do in normal times. Invariably, this effort involves excessive and seemingly irrational borrowing, investing and spending. Capacities are built to the scale which are unfathomable during normal times. Usually this drives the asset prices to levels that cannot be explained or justified by conventional methods. These unexplained phenomena are generally described as “bubble” in market parlance. The nectar or the good that emerges from these bubbles is shared by all. However, the venom is consumed only by the financial investors who invariably end up poorer after these bubbles burst.

The financial assets' prices correct upon bursting of bubbles but the productive capacities built during the bubble phase stay for long, supporting and promoting growth and development.

If you are not able to correlate to what I am saying - imagine would India be a ITeS superpower without Y2K or technology bubble during late 1990s! Had we built so many houses, roads, malls, power plants, cement plants etc. during the decade of 2000s but for a subprime credit bubble! Would capital be so easily and cheaply available to Indian entrepreneurs without a QE bubble in the west! The capacities built during these bubbles shall continue to support India's growth and development for long, even though the financial investors lost significant fortunes during 2001-02 and 2008-09 burst periods. Most of the entrepreneurs who built large capacities (power plants, roads, ports, airports, mines, steel plants, housing, etc.) ended up bankrupt or financially weaker, but the capacities they created are benefiting the society.

The global shut down due to Covid-19 in 2020 necessitated the latest round of Sagar Manthan (Ocean Exploration). Sustainability became the key theme of development, attracting massive investment, disregarding the sustainability of the investment itself. A bubble-like situation is developing in the sector.

Like the earlier instances, the renewable energy and electric mobility capacities built in this decade will benefit society for long. However, the financial investors who are investing in the companies building these capacities at valuations driven mostly by ‘hope’ and ‘euphoria’ might suffer for long. Mahadev of economy (financial investors) must prepare to absorb vemon, once again.

Most medium sized farmers had a good standing crop of paddy and sugarcane. Most of them were, however, circumspect about the final yield, in view of the IMD’s forecast of excess rains in September.

Many small and marginal farmers had lost their pulses and vegetable crops due to heavy rains accompanied by strong winds. They were dismayed and worried about their ability to manage the resources to plant Rabi crops, mostly potato and wheat.

Some of them, who had taken advance from the traders, were also worried about the repayment. None of the small and marginal farmers mentioned the terms like crop insurance, bank loan, Kisan credit card, etc. Thankfully, there is an abundance of fodder for their cattle this time.

After a discussion of 10-12hrs with these farmers, NGO workers helping them with farming & other issues, and village leaders I gathered that the inflation debates in Delhi (in the Parliament & outside) and Mumbai (at the RBI and brokerage offices) may not be relevant for these farmers and common men like me, because—

·            Policymakers and analysts may be oversimplifying a very complex problem. Food inflation in India maybe influenced by a myriad of factors, e.g., (i) farm input prices, which are also affected by terms of trade, INR exchange rates, availability of subsidy, etc,; (ii) energy inflation as many farmers use electric or diesel pumps to water their farms, and motor vehicles to transport their produce to markets; (iii) farm labor wages, which in turn is also a function of multiple factors like food and energy inflation, availability of MNREGA wages, & other government cash payouts, demand from construction sector, etc.; (iv) weather condition affecting the volume of production; (v) productivity, which depends on the quality of soil and inputs, farming methods used and availability of equipment; (vi) cost of funds borrowed by the farmers, which also depends on access to institutional finance; and (vii) distance from the market, etc.

Bringing down food prices or slowing down food inflation may adversely impact about 60% of the Indian population that depends (directly or indirectly) on agriculture for their livelihood. The solution may therefore lie in enhancing productivity, market access, access to institutional finance, energy efficiency & renewable energy, land reforms and crop rationalization. Someone may argue that all this is already being done. True, there are government programs and policies for all these solutions but execution is seriously lacking.

·            Presently, the primary problem for a majority of the Indian household could be “price affordability” rather than “price inflation”. They may need either a substantial rise in their real wages or a material deflation in the prices of their consumption basket to maintain their regular lifestyle.

·            Statistical inflation being debated and analyzed by the policymakers and analysts may be entirely different from what a common household or investor faces (more on this later).

Reading minutes of the MPC’s previous few meetings, it appears that the policymakers might be waiting for a divine intervention to change their policy stance, as hardly any effective step has been taken by them to make life of people easier.