A small correction in the market and time is for Doomsday analysts…they are here all the time. Almost all of a sudden everybody is shouting for a big correction in the Indian market. Nobody knows the basis of their calls most of the times and but some of these Doomsayers are expecting a big crash for long time (I remember Marc faber). But as we all know even a broken clock is right twice in a day. Crashes are imminent in stock market. They are an inbuilt part of the system. Economies and stock markets are like liquids…they can take any shape any time. It depends upon the situation and circumstances which are almost impossible for anyone to predict at least for current interconnected globe where things are very complex as thousands of variable forces are interacting and affecting each other.
But the most complex thing about the economies is not these variable forces but the notion that man, material, money and technology are the most important forces driving the economies. But this is not true. Actually economies are just like a big truck. But which part of the truck bears the maximum weight of the cargo/truck? I ask this question so many times and every time I get answers like axle, wheel etc. But this is not correct as it is the humble AIR in the tyres which bears the maximum weight. So the most insignificant, subtle and least-physical part holds together the most significant. On the same lines, Confidence of the people in the economy and the Government is the most important factor driving the investments and thus growth. Opposite is true for fear. Businessmen invest when they are optimistic, general public consumes when they are hopeful. The moment there is environment of fear; fear of war, government frauds, incapability and everybody is cautious…spending stops, investments blocked. There is another fear…fear created by Doomsayers especially when people have faith in them…this is catastrophic. But still before fear or optimism gets any role to play, first requirement is the existence of wheel.
That’s why I always feel the main objective of a government is to maintain an environment of positivity and faith among general public. Here I remember recent policies of RBI where they are trying to control inflation for years. RBI thinks that by keeping interest rates high they can control the inflation. They owe this to the Great Milton Friedman’s quantity theory of money as per which excess money supply (provided other things being equal) is the only cause of Inflation. Friedman was dead right but this is true under certain conditions. Our inflation is not due to excess money supply (due to Govt policies) but it is due to demand-supply mismatches. Our agriculture production is not under our control, agro supply chain/irrigation is not under our control, Oil is not under our control…and these comprise the major part of price index. We take loans for housing, cars…not for food. So when so many things are not under our control…how can we control prices just by lowering the interest rates? But yes, there is one way…high interest rates means low investments, low employment, low demand and so low (Comparatively) inflation but then from where the growth will come, employment will come.
So we can see here there are always two segment of an economy…demand side and supply side. You focus on one side and everything will be in mess. That is why even after the hard policies of RBI, inflation is never under control. Although high interest rates have created another mess in the form of bank NPA’s. So we can impose high taxes on earners and distribute that hard earned money as freebies (like MGNREGA) but this will only affect the demand side of the economy in the form of food, dairy etc which is the supply side about which we haven’t done anything. So no doubt inflation will spike. Another way of doing the same mistake is to build temples in villages so that people will get employment but again they are creating the demand. China is doing the same thing by making unnecessary roads, bridges. We are unable to comprehend the other side of the coin which restricts our ability to take the balancing course of action.
Same thing happens when there is almost perfect employment in an economy and it is in good shape but we need more growth. So we create excess supply (factories of cars, housing, junk food) and try to create more demand by offering cheap money. The same is happening in USA and developed world although they first of all should have looked out of USA for creating the demand. But this cheap money backfired as things went out of control as people were not that fool as huge money was invested in housing/stocks (Old houses mainly) instead of consumption resulted in asset bubble which got punctured just by a small pinch of fear.
Still I always feel we are too obsessed with this GDP growth thing and I also feel that it may have inflicted the worst possible damage to the mother earth and on real future growth prospectus. GDP has made us to count for coal mined and power produced but it hasn’t taught us to deduct the loss inflicted on forests and adjoining water resources due to coal mining and power generation. So we can see we have forgotten even the basic mathematics. I have already explained the fallacy of our GDP thing in detail in an earlier post (click here for earlier post on GDP).
Actually we have become infatuated by this GDP growth phenomenon and can’t even comprehend a stage of stability and peace. We are running after a nonsensical race of producing and consuming more and more and in the process brought havoc in our lives and of Mother earth’s. We are blind to a state of economic culmination which doesn’t necessitate more production related growth but it is a state of peace and calmness and we should take rest and relax after reaching the destination.
Here I want to mention the tiny Himalayan country, Bhutan, which has developed its own index for measuring the real growth called Gross National Happiness Index (GNH). Bhutan developed GNH as an alternative for GDP to measure the real progress. So they have provided space for various material and non-material but more relevant factors in measuring the growth. It is based on measuring the nine domains related to factors like Income levels, Psychological well-being, health, culture, environment diversity and resilience, cultural well-being etc. Bhutan has put environmental conservation and sustainability at the heart of its political agenda. In the last 20 years Bhutan has doubled life expectancy, enrolled almost 100% of its children in primary school and overhauled its infrastructure. Environmental protection and GNH is built into the constitution of Bhutan and it has vowed to remain carbon neutral and to ensure that at least 60% of its landmass will remain under forest cover in perpetuity. In Bhutan, one day in a month is all pedestrian day and all the vehicles are off the roads for that day. It has included the GNH principles of conservation and care for the environment in the education system and students are taught basic agriculture, conservation and waste management.
Bhutan has low population of around 8 lac only, around 70% land mass is under forest cover, its major export is renewable energy. In order to save the forests it provides free electricity to its citizens in winter so that they won’t cut the forests for wood for fire. I feel Bhutan is a real heaven to live and it resonates with me so well.
Coming back to stock market fears; any stock market Guru can test the situation with a narrow microscopic view and predict the hell. But things are never so simple in today’s surficial growth monger economies otherwise there should be no economic catastrophe. But at least Indian growth story is simple…our growth is natural as it is based on natural demand. We (at least 40-50 cr among us) badly need food, healthcare, housing, electricity, dairy…we need so much and we barely eat quality food. So we have huge demand side leverage…for supply side we can repair our agriculture (the foundation) for more production with better management of resources, can save around 2 lac crore of agro/dairy/meat waste by strengthening and creating efficient supply chains, we can build infra with local resources, can substitute imports like Electric vehicles for oil.
We are nowhere close to the edge of the growth to take resort to push factors…to push the economy into growth. Just like USA is trying…China is trying it for long time but high on debt. USA is trying to force consumption for long….so people have 5 cars, 4 houses, wearing another underwear over pants (superman), mixing chilled coke into Starbucks cappuccino…they have everything in excess for long but consumption has a limit. China has a strange growth model…build a road, destroy it, then rebuild it and thus create jobs…GDP grows. But all this with low cost debt. China has and still is creating unnecessary roads, bridges all the time to create false employment. But it has never tried to create a self-sustaining economic model. So far it has managed the show with huge foreign trade surplus which it has accumulated with over exploitation of its resources although it also creates massive value addition by re-exporting the imported raw material.
But this is not natural as resources are not being allocated for best use. China has massive over capacity in everything…so they have wasted resources all the way…all they have is massive quantity of dollars which is now shrinking fast. China forgot to create an internally-dependent economy…instead they focused too much on exports. So China may get a hard landing any time. Some fear for the Indian war with China…but I think China just can’t afford a war for at least 8-10 years or may be forever. Actually China is a business man….it is a mercantile country…it lives by selling to other countries so the survival of those others is very essential for its own survival. China has huge trade deficit with India just like it has with USA and almost all of the countries of the world.
Here I want to add something on export based economic model. If I am a Potato farmer then in an ideal situation, I would like to produce and exchange extra potatoes only if I need the eggs from Mr. X. If I am happy with my potatoes then there is no need for me to put extra efforts and resources in producing more potatoes as the same will limit my future productive capacity. I would like to conserve my production. So common sense says that if I have limited drinking water then I would exchange it with medicines only in case of need. I shouldn’t just sell my water and accumulate unnecessary things in exchange and thus putting my future survival in danger. It is always give and take thing but countries are exporting scarce natural resources just to accumulate excess dollars and then they have to scratch their heads to use these for something. China has created havoc with its ecosystem in its mad race to accumulate more and more dollars now it is near an environmental catastrophe. Now it is running around the globe to find the use of its massive paper dollars and excess factory output but all the other countries are looking for ways to stop the inflow of cheap Chinese goods into their territories to save their economies. So China is in a very difficult situation.
It is just like India providing scarce water for free to farmers to produce more rice and wheat and then exporting the same to import more Gold. We can see it is a sheer wastage of valuable resource in exchange for nothing. We are wasting money in farm loan wavers when we can use the same money for repairing the agro supply chain.
But still India is really in a sweet position. Commodity prices are low, china wages are rising fast because if you want most of your citizens to own an Apple iPhone, they need high wages. So India can take the baton for global manufacturing from China. But India needs to sort out its agriculture mess first of all. Bank NPA issue is serious but RBI is very strict and I think this will be sorted out. Govt has accumulated huge funds from taxes on OIL after the fall in oil prices so it can use this for bailing out the banks.
Also most of our infra assets (turned NPA) are not due to over capacity…in fact we badly need them just like power plants. People say we are surplus in power but we are not although we failed in creating the demand for these new power plants. We couldn’t bring the electricity to remote villages but still we could have used these power plants for electric vehicles, cold chains and warehouses. So our Infra assets are not a waste. There will be takers for these. But still some pain is imminent in banking but these things are expected in a growing economy and these corrective steps are just a re-allocation of scarce resources for most productive use.
So coming 2-3 quarters are very important but there are very high chances that we’ll taste the success. Stock markets always try to guess the probability of future growth…and if chances are high it discounts them into the valuation…but nothing is fixed here. Stock markets are actually like a Glass…neither liquid nor solid…but you paint the other side with fear or optimism…and it’ll reflect the same to you.