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.