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Tuesday, July 30, 2013

The return of the devil…

I am writing after more than 2 years. This was because of various regulatory constraints due to my last job.

Let me cover the macro picture today.
 
It would be apt to term it as macro “puncture” of the economy. We are in complete disarray and the government in office is making every last minute efforts to avoid the ‘big’ crisis that we are heading towards.

Generally, I am a very optimistic person but considering the current state of affairs, I have turned completely pessimistic. The road towards the recovery is very patchy and without predicting or speculating the outcome of the next loksabha elections, I am of the firm opinion that the current self-made economy woes will be hitting us hard.

We are now almost fighting a losing battle. We are unable to control the inflation despite having tighter monetary policies running in for almost two years. I warned multiple times earlier that inflation will come back. These articles are dated November 4, 2008, December 23, 2010 and January 30, 2009 (Click here for details: 1st article, 2ndarticle and 3rdarticle).

According to people from the opposite camp, the time has come for RBI to ease monetary policies. They argue that the core inflation is at its lowest levels. For novice like me and to keep it simple, the core inflation is something that excludes items like energy, food products etc. The people from opposite camp forget that the retail inflation, which forced RBI to take stringent monetary policies, has not moved by an inch. Retail inflation is something that hurts middle and poor class the most when food prices go up. Now with the depreciation of rupee, we are having a bigger risk of retail inflation (and also core inflation) moving up again at an unabated speed.

The approach to control the inflation was grossly wrong. The inflation was visible before the last loksabha elections. So in a way, we are in the inflationary economy for last more than 5 years now. The government before the elections committed that it will control the inflation in flat 100 days if it comes to the power. It could have been done, had the government focused on fiscal disciple. This is where the government went wrong. They tried to cure the inflation which was because of fiscal issues by using tighter monetary policies of the RBI. This has broken the backbone of the corporate world esp. with high debt. The fiscal deficit was because of mindless spending on various so-called social schemes. Most of these schemes are unproductive and marred with corruption. The real beneficiaries do not get the most of out of it and the society at large is deprived of the scared resources.

The second problem which emerged was because we were importing (mainly crude, gold-silver, consumer goods/electronic items etc.) more than we were exporting (IT services, agriculture products, manufactured products etc.). This led to the Current Account Deficit (commonly called CAD) which means shortage of dollars. Now we needed more dollars to fill the gap created by CAD. There were two options: either we increase our exports or we get dollars through investment. The first one is a long process and with current situation world-over, we were left with only second option of going behind investments. Here, to get investment we had two options again. One was through Foreign Direct Investment (FDI) which is a time consuming process and would have required many fundamental changes in the economy. So we went behind the second option which was getting dollars mainly through Foreign Institutional Investors (FIIs). In technical language, we were filling in the gap created by Current Account through Capital Account. The money from Capital Account is easy money and has a risk of fleeing away quickly. If FIIs start pulling out money, you are heading for a situation similar to what Asian countries witnessed in late 90s.

The best would have been control CAD and that too much before. Our forefathers have argued to spend based on our means. But we conveniently forgot and stretched ourselves too thin and too long. The government has shown some signs of the courage by initiating policy actions. But it seems to be a case of too late and too little with seemingly little political backup due to looming elections.

My heart says that we are going to come out of this mess but my mind disagrees. I only wish that post elections; we get a stable government at center which takes constructive and firm decision on economy front. Till then I sign off and wish happy investing to all of you.

Look forward to receiving your response/feedback/criticism/praise.

Regards,
Niteen S Dharmawat


IMPORTANT DISCLAIMER: Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective. The information contained herein is based on analysis and up on sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above. I sincerely request you to do your homework before you take any position whatsoever. I, my relatives or friends may have position in this company.
 

24 comments:

supernaut said...

Good article, and nice to see you back in action again!

Keep it up.

Krutank said...

Nice article Niteen. Complex components explained very simply. Good to see you back in action

Shraddha said...

Hi Niteen,
Good to see you back.
very nice article. I just want to ask one thing what is the future of share market and what is your suggestion.should we stay away?

Thanks

Niteen S Dharmawat said...

Thanks Supernaut. Your blog is very interesting. :-)

Niteen S Dharmawat said...

Thanks Krutank. With your comments, my objective of writing this article met. It was to make things simple.

Niteen S Dharmawat said...

Hi Shraddha, the future of the share market has always been good and bright.

I have analyzed few months ago that the market will not go down. The Sensex was around 18000 that time. It bounced back and touched 20,000+. There are various reasons given by me. Though I am not happy with the current state of affairs the market may still hold. The current situation is an opportunity and you may consider investing through index funds by putting money over a period of time.

ketanthacker said...

Good to see your article after a long long time. You have nicely articulated your thoughts and i fully agree on your analysis.

Niteen S Dharmawat said...

Thanks Ketan. You have always been motivating me to take up new assignments and achieve more than what I think I could. :-)

VivekD said...

Hey Niteen,
Great to see you back, you have, as always explained the things very well and has given new perspective.
Who will come and lead the new government is a big question. When you say that you wish the new government taking concrete steps to control CAD, what could be such steps? Would that be
1. "TRULY" deregulate the petrol and gas cylinders?
2. Apart from CAD, work towards Labor reforms, more FDI?

VivekD said...

Hey Niteen,
Great to see you back, you have, as always explained the things very well and has given new perspective.
Who will come and lead the new government is a big question. When you say that you wish the new government taking concrete steps to control CAD, what could be such steps? Would that be
1. "TRULY" deregulate the petrol and gas cylinders?
2. Apart from CAD, work towards Labor reforms, more FDI?

Bala Dengale said...

Really good article... !!

Niteen S Dharmawat said...

Thanks Vivek. We are not required to do too many complex things to improve from here. It is only simple but concrete and constructive steps which are needed e.g. we need to supply coal to the power companies. But there has to be a decision taken regarding this. If the government is entangled in scams and unable to take decisions, it makes things worse. Someone should put his/her head high and say ok we are taking this decision in national interest. Everyone will follow. But if you have your personal interest coming in between you will never be able to keep your head high and take those decisions. The same applies to all the areas. People did not make much of noise when the petrol prices went up. Everyone knows that these are required. What was sad to note that we did not follow with same rigor in implementing some other fundamental steps. That is where the courage / intention is missing.

Niteen S Dharmawat said...

Thanks Bala.

Farida Syeda said...

Hi Niteen,

Nice article. Our economists and policy makers are clueless as to what can be done to revive the economy. Its pity to see all the burdens are shifted to the consumers, who end up paying huge tax. There seems to be no way to curb inflation. I hope there will be something constructive soon.


Thanks....

cool_cool said...

Excellent article Niteen. Fully agree with your view. Happy to see you back. I wonder why so called leaders couldn't foresee and have taken steps? May be this is what they want?

Niteen S Dharmawat said...

Thanks Farida for sharing your views. Yes something should happen soon. The best part with our country is that we are still a democracy, whatever may be the circumstances and situations. That helps us. We have the power to bring change in our hands. I am sure that the governments/ politicians understand this and will be more focused towards outcome based approach.

Niteen S Dharmawat said...

Thanks cool_cool for your updates. I will try to be more frequent in posting my views on the blog.

Maverick said...

Nice article and concepts explained in a simple fashion.

Maverick said...

Nice article. Some concepts explained in a simple fashion. Good luck.

Niteen S Dharmawat said...

Thanks Maverick for your comments.

vk said...

good to see you back.you have style that i can understand well.

Rajesh Javalagi said...

You have put the macro economic perspective in a very simple to understand language. Yes, there is a large CAD looming large and the inflation is killing the common man. Let's wait to see what new policy measures Mr. Raghuram Rajan brings to tide over the situation.

Thanks.
Rajesh

Rajesh Javalagi said...

Thanks for a very good article on the looming CAD and the inflation.
Let's see how the new RBI Governor shapes up the things in coming months.

Raj P. said...

Good one sir.. only about the last para : lets keep our fingers crossed to have stable government but mind says that we need to be ready for another election in a short while. Till then all the best to all of us!