Some food for thought
"Not everyone grows to
be old, but everyone has been younger than he is now."
—Evelyn Waugh (British
Author, 1903-1966)
Word for the day
Diablerie (n)
The domain or realm of devils.
First random thought this morning
It is often seen that cricketers highlight the evening dew as an
external factor in determining the outcome of a day-night cricket match. Why?
Isn't dew a key factor that is known to all the stakeholders
well in advance? Shouldn't the game strategy take care of it? Why is it cited
as an external factor that helped in changing the outcome of the match?
The same thing applies to the politics also.
Aam Aadmi Party (AAP) knew very well, before preparing its
manifesto for Delhi elections, the power, accountability and limitations of the
Delhi administration, as per the constitutional provisions. Nowhere in the
manifesto of AAP it's mentioned that their promises are contingent upon Delhi
Administration getting more power or Delhi getting the status of full state.
Then why AAP is taking refuge under this excuse for its failure to fulfill the
promises made in the manifesto?
Similarly, BJP came to power fully knowing the state of economy,
treasury and politics. In fact one of its primary election plank was poor state
of economy (10year of policy paralysis), and treasury (stimulus post GFC,
MNREGA, food security, pay commission, OROP etc.) BJP was also fully aware
about its political limitation (lack of adequate numbers in Rajya Sabha, etc.)
BJP did also adequately highlight the poor state of infrastructure, employment,
corruption, inequality, institutional inadequacies etc. allegedly due to 70yr
misrule of Congress.
Fully cognizant of all these facts, BJP made promises in its
election manifesto. Nowhere did it mention that all these promises are subject
to Congress cooperation in Rajya Sabha, or correction in the circumstances that
are prevailing due to Congress misrule. The promises were made unconditionally
for a 5yr term. It has to answer accordingly. The platitudes like "we have
done more in 4.5yr than what Congress did in 70yrs" are not acceptable.
It is high time that the Election Manifesto of parties is made a
statutory document, and all parties are accountable for what they promise. A
delivery percentage of less than 50% should lead to ban on contesting elections
for one term.
Chart of the day
Check for signs of Investment cycle turning up
A recent study conducted by RBI staff (India's
Investment Cycle: An Empirical Investigations by Raj, Sahoo & Shankar)
highlighted some encouraging signs for Indian economy. The study highlighted
that the Indian investment cycle that was struggling for some years, has shown
some signs of turning the corner. Though, it is yet to be seen whether this
turnaround is sustainable or not. However, if the current trend sustains, we
may be at the cusp of bull market that may sustain for 5year.
It is therefore important to assimilate the findings of this
study and keep a close watch on the variety of factors to find if the
turnaround in investment cycle in India is sustainable. The investment strategy
shall according be modified suitably.
The following are some of the key findings of the said study
that an investor may want to note:
1 The real
investment rate in India generally trended upwards to peak at 36.7 per cent in
2007-08, before declining to 30.3 per cent by 2015- 16 due to a variety of
factors such as the adverse impact of the global financial crisis, the twin
balance sheet problem – high leverage by the corporate sector and high
nonperforming assets (NPAs) of the banking sector, and subdued domestic capital
market conditions.
The slowdown in the investment rate was one of the major
factors, which pulled down India’s growth rate from a high of 9.3 per cent in
2007-08 to a low of 6.7 per cent in 2017-18.
Though the investment rate has picked up since 2016-17, there is
uncertainty about the sustainability of the recent upturn in investment
activity and its role in stepping up India’s growth rate – both in the near-
and the medium-term.
2. One percentage point
fall in investment rate dents growth by 0.4-0.7 percentage points. Investment
rate is also highly correlated with the non-agriculture GDP growth rate,
particularly in recent years.
3. Interest rate is
one of the major factors in investment decisions, as user cost of capital,
plays an important role in capital formation. The negative relationship between
real interest rate3 and investment rate in India is also evident after the
1990s when interest rates were deregulated.
.
4. Apart from the
cost of capital, availability of financial resources/funds is another important
factor that is expected to drive investment, especially because India has a
bank-dominated financial system. Non-food credit growth of commercial banks is
closely related with the investment rate.
5. The private
sector is the biggest contributor to gross capital formation and it has played
a crucial role in driving India’s investment activity. However, the fiscal
deficit in India appears to have crowded out private investment as is evident
from the negative relationship between the GFD and the investment rate.
6. Global growth is
also observed to have an important bearing on India’s investment activity
through exports. For instance, the GFC during the second half of the 2000s
impacted the Indian economy through trade and finance channels. The global GDP
growth turned negative in 2008 and 2009. Sluggish global economic activity
dampened India’s export demand and led to a slowdown in investment activity.
Signs of Investment cycle turning up
7. In the
post-liberalisation period, four major downturns in the investment cycle have
been witnessed. The first phase of severe downturn was in the first half of the
1990s, when the Indian economy was hit hard by the balance of payments crisis,
leading to import compression and a deceleration in domestic economic activity.
The next phase of downturn in the investment cycle occurred in the early 2000s
due to an adverse impact of the bursting of the information technology bubble.
The third phase of downturn during 2008-10 reflected knock on impact on the
Indian economy through the trade, finance and confidence channels, resulting
from the global financial crisis and seizure of the international capital
market.
The last phase of downturn in the investment cycle occurred from
2011-12 to 2015-16, reflecting a combination of global and domestic factors.
During this phase, world GDP growth fell from 4.3 per cent in 2011 to 3.2 per
cent in 2016; average domestic inflation was around eight per cent; real
interest rate was high at around five per cent; the combined GFD of the Centre
and states was on an average of 7.1 per cent; and the average current account
deficit was 2.6 per cent. Bank credit growth collapsed as domestic commercial
banks became risk averse due to large gross NPAs and the corporate sector
focused on deleveraging rather than fresh investments.
8. The investment
rate began to turn around from 2016-17. This is also reflected in several other
high frequency indicators such as industrial production which has picked up
since the H2:2017-18. Capital goods production, in particular, has increased
sharply, reflecting strengthening of capital formation.
9. Bank credit
growth (y-o-y) of scheduled commercial banks (SCBs), which decelerated from
21.3 per cent in March 2011 to 4.5 per cent in February 2017, has also shown a
gradual pick-up from Q3:2017-18. The recent improvement in credit growth is
also becoming increasingly broad-based. Credit flows to industry, which
contracted during October 2016 to October 2017, has turned positive since
November 2017.
10. Resource
mobilisation through initial public offerings (IPOs), which has been picking up
since 2015-16, rose sharply in 2017-18.
11. Capacity
utilisation in the manufacturing sector, which plays a significant role in
promoting fresh investment activity, has also picked up since H2:2017-18 and
has reached the long-term average level in Q4:2017-18.
