Sunday, February 9, 2014

Waiting for Godot...

That is how the situation looks like. In a policy limbo for last three years, we have been waiting for the government to do something. Something decisive. The wait has become so elusive, it is almost pathetic.

When you start searching your memory when anything constructive was done last, you have to search really far and wide. The growth spurt that happened was either the result of easy money, or was riding on things that happened well before the last ten years. The telecom boost, the infra spurt started with golden quadrilateral and so on. The big thing that stands out is the nuclear deal. What else? The late 'surge' shown last year is also a mirage. FDI in retail will do exactly what? Large format retail needs large land pockets. Try buying land anywhere close to a large city in pockets like 20 acres, all the 'cost efficiency' goes down the tube right there. Who will drive 50 kilometers to save 5% on groceries? And what happened to WalMart when they tried opening a store? Unless a broad real estate reform is done, FDI in retail is DOA at best. What else has exactly been done in last ten years? Please drop me a line when you can recall what exactly has been done for the economy.

The irony is that everyone is just waiting now. Waiting for elections and waiting for deliverance of some sort. We are waiting for one saviour, one reformer, who has his / her policy thinking right, who can separate the populist stuff from economic substance. Hopes are being pinned on certain Mr. M. But when he speaks up on policy, the best that emerges is a muddle with no clarity. The party with a difference is proposing abolishing all taxes, and slapping a penalty (it is a penalty really) on those who are stupid or unfortunate enough to route their money through the formal banking system. Blessed are those who do everything in 1000 rupee notes, stuffed in large sacks. From now on, not only do they get away with paying nothing, but will be paragons of virtue also because paying no taxes will be fully legal. The Mr. G with a difference should also explain what he will do when everyone stops using the banking system and hundi and havala become the dominant 'economic channels'. What a path to prosperity.

On top of it all, we have found an 'alternative' to all the dirty politics. The great thing about this alternative is that the solution to all the problems is either a sting, or a vigilante law where the accuser and the investigator and the judge are just one person and that person can jail anyone on a whim, or a simple dharna. This is a great solution. No healthcare for the masses, not enough schools, no money to buy electricity, vegetables are too pricey; there is nothing a good dharna cannot solve.

So we are waiting for a policy messiah and for someone who can just decide. A lot of names will be thrown in the fray. With vehement denials, the dharna party has not only pressed ahead with everything populist but has also started radio ads touting the 'progress' made in one month. Sounds a little bit like 'char mahine banaam chaalis saal', the campaign slogan of the Chandra Shekhar government of 1991. I wish it doesn't become what became of that government; a nightmare that we will all like to forget. We have the regional kings and queens all vying for the national crown. With all the princes, kings, queens, chaiwallahs and jhadoowalas, there will be fair bit of choice for everyone. But will the messiah who will lift us out of this limbo of joblessness, crushing price increases, complete lack of movement on anything concerning the public (roads, bridges, power plants, water treatment facilities and so on, after all these are called 'public goods' for a reason) ever arrive?

The real nightmare is that it may turn out to be a wait like the one for Godot, when at the end of it all we don't even know whether the famed character, name it Godot or the messiah, even exists...

Saturday, February 8, 2014

Making sense of data...

A lot of times, we see that market participants display complete disregard to facts and data. We do it all the time when we look at information that has bearing on the economy and the stock markets. The latest one to come up is the CSO estimate on 2013-14 GDP growth for India. For the first three quarters, we have seen sub-5% growth. The Finance Minister still maintains that 5% growth is possible and CSO estimates 4.9%.

The tricky bit to remember is that these are either advance estimates or early estimates. Actual data takes some time to collect and is subject to revision. For instance, the last year GDP growth estimate got revised down to 4.5%.

It is not that the CSO would be releasing high estimates as a matter of habit and later revising it downwards as actual data flows in (though some would be cynical enough to say that). What really matters is the way data is collected and processed. Since a lot of estimates are just extrapolation, the quick estimates will overestimate information in a downcycle (as data points are trending down on a progressive basis, the extrapolation will overestimate compared to actuals) and underestimate information in an upcycle. Hence, estimates tend to get revised downwards in a downcycle and upwards in an upcycle as actual data flows in.

I am not arguing again on the data validity. Instead, my point is that the downward revision for the last year GDP means that we were in the middle of a downcycle as we entered this financial year. It also implies that the 1st and 2nd quarter GDP is likely to have been overestimated. Combined with the IMF estimate of 3.8% growth for calendar 2013, it means that 4.9% is very unlikely to be reported for the current year; not even in the quick estimates and certainly not in the revised estimates.

That and information from other indicators (IIP, etc.) and the information collected anecdotally indicates that we need to prepare for a much worse number to be printed than 4.9% or 5%. Those who insist that the Indian economy has turned the corner are in for a rude shock. For one, the local and global cycles are aligning again. While Europe is staring at deflation (and will pump in more money to revive the economy, we will know in June whether ECB will do QE), both the housing markets and the equity markets are overly exuberant. It is not only the Indian market that is running ahead of itself, it is now a global phenomenon.

On the whole, it is not a good combination. As we head into perhaps the most crucial elections in last 17 years, fissures are appearing elsewhere too (the frequency of hiccups from China is also growing). This may be the set up for a major correction and further downtrend on the GDP. India has never bottomed out at 5% GDP growth in a downturn. And this time, it looks even more unlikely.

Tuesday, February 4, 2014

Back after a long hiatus...

The last series that I intended to post was supposed to be a commentary on the fiscal mess India was getting into and how markets have been deceptively benign to India. I wanted to show that markets can be very cruel and what happened to Spain in 2012 could happen to India any time. As it happened, I lost my notes for all 21 chapters, and just lost the will to recreate the train of thought.

But the issue is as relevant today as it was then. We are nowhere out of the precarious situation, though people are more cautious post the shock we got in July and August, 2013. At the same time, the macro trends that were set in motion over past five years are still in full play and the consequences will be there for all to see. Make no mistake about it, we are still headed for a lot of pain unless there is some serious intervention.

There are a few positives that have happened in past one year. We have a central bank governor whose policy action is based on some understanding of macro economics; who is willing to base decision on sound economics rather than banking traditions (question: what created the global bubble and financial crisis to begin with?). This means the RBI will be better prepared to deal with the mess as things unfold. There is also a belated realization that gross economic mismanagement is a sure fire way to lose elections, populist gimmickry notwithstanding. Still, the populists have a lot going for them, a shrill voice, faux concern for the poor / middle class / name what you like here, and some spineless resistance by people who are supposed to know better but choose to step out of line of fire.

The big question of how markets will behave still remains. I cannot predict where they will go. I can only point to what can happen. What can happen is that markets can be incredibly cruel and unforgiving, that they can stay negative far longer than fundamentals warrant (the flip side is true and is already happening, the markets have been quite positive despite fundamentals being in complete mess), that once the markets get in a punishing mood, they can bring any economy to its knees. I wanted to show that comparison in relation to Spain; an economy that was roughly the same size as India in 2012, is an EU member, is a developed economy and so on. But the country stayed literally under siege till ECB came to its rescue.

We carry the same risk and I think part of that risk will materialize in 2014. The developed world is growing again, though markets are running ahead of themselves there too. QE is unwinding, though it seems likely that ECB will now need to start doing some QE of its own too. Still, the rest of the world is becoming more attractive, and that takes the wind from under the sails of the argument 'India is still growing at X%, which is much better than the rest of the world'. Fact is that there is a complete neglect of economic history in this country. And if you look back, the fact will emerge that India has recorded negative GDP growth, both on quarterly and annual basis. Also, the fact will emerge that India has never bottomed out quarterly growth rates like 4.5%.

The above statistics are based on old paradigm. Guess what? The new paradigm is scarier than old paradigm. Prior to 2005, India maintained a decent manufacturing infrastructure. Industry was shielded by non-tariff barriers and also a perennially depreciating currency. Since 2005, we have seen both openness and an appreciating currency happening simultaneously. The result has been decimation of the industrial sector, which does not bode well for a recovery. For the very first time, we are also seeing declines in the services sector too. That leaves agriculture, which provides a feeble defense to a prolonged slowdown or a relatively high rate of growth in a 'bottoming out' quarter.

The prognosis is nowhere close to clear. The real risk lies in our policy responses. None of the warning signs have been used for setting our house in order. Pressure comes, and knee jerk reaction happens (reduce gold imports, jack up interest rates to bolster the currency, and so on). Then something else happens (Abenomics, ECB action, delayed tapering) and we go back to the 'good old days' of merrymaking.

To come up with any conclusions, a lot of things need to be watched. Like the rise of AAP, there is too much that is unprecedented, throwing away all old calculations out of the window. We are in for some interesting times, to use a cliche.
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