Friday, June 29, 2012

E.U. Plan : More hot air ?

Notwithstanding the reactions from the markets to the Euro deal, the reactions from some Euro trackers and economists are pretty pessimistic.

Looking at some of these reactions, it seems that the current Euro deal is another example of kicking the can down the road.

Here’s what Nouriel Roubni says in his Tweets:

“The EU agreement is much less than needed. Markets delusional in cheering this half baked agreement that has little details in it.”

“ESM is senior to private claims. So how can loans to Spanish gov 2 recap banks be pari passu with bonds? By using the to-be-phased-out EFSF?”

“Only 2 pieces of a banking union in EU deal: joint supervision; direct ESM bank recap. Missing 2 key parts: EZ-wide depst ins; insolv regime”

And here is Tyler Durden  on ZeroHedge:

“The early Friday morning release of an entirely conditional 'plan' for a 'plan' that will likely require the ESM contracts to be torn up and a new contract to be re-ratified (by ALL members - including Finland and Germany), due to the stripping of the ESM seniority via the EFSF 'workaround', was high-fived by any and all EU leaders still standing. Is it any wonder (given the conditionality and ratifications required) that the best the market could manage, on what is now obviously nothing but yet another watered-down talking-point ridden 'promise-of-more-to-come' plan (as opposed to the impossible becoming possible as Ireland's Kenny so eloquently described it), is a 1% pop in US equity futures”

After some 20 euro summits and some three years of the Euro crisis, this one too seems to be just another promise of a plan, rather than concrete action.

Rainfall shortage : Even if there’s a drought, the impact is likely to be minimal

With 25% season shortfall in rainfall to date, there are drought-like conditions prevailing in many parts of the country. However, even if there is full-fledged drought in the country this year, my analysis shows that the impact on GDP growth would be minimal.

Season rainfall to date as per the Indian Metrological Department (IMD) is around 23% less than the long period average as of 27th June 2012. Furthermore, the long range forecast update of 22nd June 2012 from IMD does not sound too encouraging. For the month of July there is just a 41% probability of normal monsoons and a huge 36% probability for below normal monsoons. Very similar probabilities for the month of August 2012 are also predicted. That does sound very depressing.

Keep in mind, however, that the IMD is still sticking to a normal monsoon forecast for now.  “Rainfall over the country as a  whole for the 2012 southwest monsoon season (June to September) is most likely to be normal (96-104% of LPA)” says IMD in its press release.

So, what next?

Even assuming a full-fledged drought like the one in 2009,the impact on GDP growth would be minimal, even though the agricultural population could face some hardships. The reason for this is that agriculture now comprises only around 15% of GDP. Even though agriculture employs nearly half of the country’s population, there is enough money in rural areas due to the good harvests of the past two years and the government’s job guarantee schemes to help mitigate the impact on the rural population.

The drought of 2009 was supposed to be the worst in 37 years, but that same year was the year of recovery in the Indian economy, with a GDP growth of around 8.3% , up from 6.8% the previous year !

I came across a very nice  analysis in mydigitalfc.com of Aug 2009, which said “Corporate India remains quietly confident of weathering the drought this year…impact is expected to be limited and would not be felt immediately”.

There was another great analysis from Niranjan Rajadhyaksha in Livemint.com in August 2009, the summary of which is: “The record suggests that India’s economy began decoupling from its farm sector at least two decades ago”

Of course if the Industrial recovery that is currently underway loses steam, the story could be very different this time. But as of now there are no signs that the recovery is being hindered. And of course there is no doubt that, just like in 2009, there would be a  rise in sugar prices. But food grain prices might not rise too much due to adequate stocks of food grains within the country.

In summary, since India posted a GDP recovery in 2009, the year the worst drought of 37 years stuck, I doubt there would be significant negative impact this year even if there were drought conditions.

Pranab & Mamata out, Mulayan in – Reforms On !

Within just a few days of Finance Minister (FM) Pranab Mukherjee having resigned, the Prime Minister, (PM) Manmohan Singh, has started to reverse some of the regressive tax policies being pushed by the erstwhile FM.

Venky Vembu in his fantastic story on Firstpost.com says” Let’s be very clear about it: there is nothing wrong with plugging tax loopholes……But where Pranab-da erred was in going overboard with his exertions to knock the stuffing out of Vodafone….”

The messaging from the Prime Minister’s Office is clear : Reforms are On !

When the PM of a country reverses the decisions of its FM and provides pro-reforms clarifications within one day of the FM resigning, the messaging there cannot be ignored. The PM did not wait for a month, he did not even wait for a week - he started acting even "before the body got cold".

No doubt the fact of PM Manmohan Singh’s responsibility for the slowdown in the reforms process, and the large scale corruption going on right under his nose, cannot be denied. But possibly, he might still have a chance to redeem himself and set right the wrong that has happened.

As for the numbers game in Parliament, Manmohan Singh’s government is well placed with Mulayam in its fold and Mamata being sidelined.

There was a great story on First Post: With Mulayam on its side, UPA won’t need Mamata anymore , which had correctly identified the changing political equations in the country. To quote from the story:

“ Indicatively, the Samajwadi Party has 21 MPs in the Lok Sabha and eight in the Rajya Sabha; the Trinamool Congress, on the other hand, has 20 MPs in the Lok Sabha and nine in the Rajya Sabha. But it’s not just about the numbers. As The Telegraph reported, citing Congress sources, having Mulayam Singh by its side gives the Congress much more elbow room on policy matters: for all the “samajwadi” economic philosophy that his party embraces, Mulayam Singh is perceived to be “more flexible” than Mamata when it comes to economic reforms.”

So what does that mean now for some of the major reforms and other governance measures that have been on the backburner?

Many of those measures are likely to go through. However, Karuna can still play the spoilsport, but only to a limited extent. CBI (Congress) has cases pending against his daughter and Raja, one of his key lieutenants.

Mulayam is expected to be flexible. But why is that so? For the same reason that Lalu Prasad is flexible … all the CBI cases pending against him, his relatives and his friends, cases ranging from murder to bribery. Congress has done this kind of deal with Mulayam before, withdrawing a CBI case in return for support. That’s the kind of deal they must have worked out this time.

All in all, with Mamata sidelined, Mulayam in its fold and Pranab as President, Congress has not had it so good in many years.

Wednesday, June 27, 2012

JP Morgan India: Courageous leader

JP Morgan India upgraded Indian equities to “overweight” from “neutral” last week. This was despite acknowledging the risk factors facing the economy, and demonstrated that they were encouraged by what they called a number of more positive factors including historic valuations.

I don’t usually give much credence to reports from agencies like S&P, Moody’s, Goldman Sachs, Morgan Stanley and most others.

However, JP Morgan India, under Kalpana Morparia, seems to have got the long-term trend right, even as far back as October 2008 when the markets were making a capitulation bottom. In September 2011, they had the courage to call the IIP numbers misleading and take a stand stating that economic growth is not collapsing.

Among the major global financial firms, JP Morgan is not just the first out of the blocks in acknowledging the strengths of the India story, but it has also made a bullish call when pretty much every other major firm has made a bearish call. That takes a lot of courage in the murky world of large and influential financial firms.

Moody’s had followed immediately with a “stable” outlook for India sovereign rating. That’s again courageous given that S&P and Fitch have scaled down their outlook to “negative” with a threat of downgrading the sovereign rating to below investment grade / junk status.

In fact, it now seems that every other brokerage firm is starting to come out of its slumber in trying to rate India “overweight”, “stable” etc.

The question to ask is that when the signs of recovery and an upcoming bull market were apparent as long ago as back in Dec 2011 (Dec '11: Macro-Technicals point to a possible bottom) why are these agencies (except maybe JP Morgan) only waking up now?

Related Analyses:

Tuesday, June 26, 2012

Rupee Fall: No capital flight, only speculation (Corrected)

The current fall in the Rupee is purely speculative as there are no signs of flight of capital.

This is very similar to the situation in April 2009 – when the Rupee was making new lows even as inflation was coming down, corporate profitability was improving and stock markets had just broken out of bear market lows.

Consider this:

  • The foreign exchange (Forex) reserves as of June 15, 2012 were around $289 Bn, just around $ 20 Bn lower than a year ago, and about $ 2 Bn higher than a week prior. The Forex situation has been fairly stable for the past year, with only minor and ‘routine’ fluctuations.
  • FII remains long-term bullish based on equity inflows, with massive net inflows of around Rs 36,000 Cr so far during 2012. Though there were net outflows in April and May of Rs 1,600 Cr and Rs 3,100Cr, respectively, the amounts are minor. In the current month to date, there have been minor net inflows of around Rs 500 Cr.” (to June 26th).

So what next?

The fall might continue a bit longer; however I don’t expect it to either to fall significantly more, or to have any significant negative impact on corporate profitability. The reasons for this are:

  • At some point, the RBI and the government will crack down hard on speculators and that would be the end of the Rupee fall. The RBI has already issued a veiled warning to speculative interests. The next set of measures would be far harsher. Those who seem to underestimate the absolute power that a state commands, do so at their own peril. Ask Vodafone.
  • Oil and all major commodities are down more than 25% from about a year ago and are on a sharp downtrend. That will cushion the impact of the rising rupee.
  • With corporate India posting a robust 20% growth in bottom-line for the March 2012 quarter, a robust economic recovery is well underway. With improving economic fundamentals, it would be just a matter of time before the speculative positions in the Rupee start to unwind.

The situation today bears an uncanny resemblance to the one two years ago, around April 2009. Even during that time, the rupee was making new lows, even as a recovery was well underway and stock markets had broken off the lows.

With the short term economic slowdown over, and a robust recovery underway, it’s very likely that the Rupee fall would get arrested and stock markets make new highs.

Flog me, I made basic data interpretation mistakes

I have just realized that I made two horrible and very embarrassing data interpretation mistakes in one of my prior posts. These are the type of mistake about which I have been ruthless with folks like S&P, and the Morgan Stanleys and Goldman Sachs of the world. I now too deserve to be accorded the same treatment, i.e. public flogging on the internet.

Refer to my analysis Rupee Fall: No capital flight, only speculation–II , where I say:

“The foreign exchange (Forex) reserves as of June 15, 2012 were around Rs 16000 Cr, around Rs 2000 Cr higher than a year ago, and Rs 200 Cr more than a week prior. Not only is the Forex situation comfortable; in fact India’s Forex reserves have been on a slow uptrend over the past year.”      

Here’s what I should have said:

“The foreign exchange (Forex) reserves as of June 15, 2012 were around $289 Bn, just around $ 20 Bn lower than a year ago, and about $ 2 Bn higher than a week prior. The Forex situation has been fairly stable for the past year, with only minor and ‘routine’ fluctuations”.

The mistake I made was in using the Rupee amount in Forex instead of using the Dollar amount. That’s a very basic kind of error to make. It happened because I was in a rush to post my analysis. The conclusion of my story was that that there is no flight of capital out of India. Though there is no change in this conclusion, nevertheless this kind of error is simply unacceptable.

I then go on to make a second mistake in the same post ! This time around FII numbers.

Here’s what I said

“FII remains long-term bullish based on equity inflows, with massive net inflows of Rs 17,000 Cr so far during 2012. Though there were net outflows in April and May of Rs 900 Cr and Rs 2,200 Cr, respectively, the amounts are minor. In the current month to date, there have been minor net inflows of Rs 1,500 Cr”

Here’s what I should have said :

“ FII remains long-term bullish based on equity inflows, with massive net inflows of around Rs 36,000 Cr so far during 2012. Though there were net outflows in April and May of Rs 1,600 Cr and Rs 3,100Cr, respectively, the amounts are minor. In the current month to date, there have been minor net inflows of around Rs 400 Cr.”

I used the combined FII and DII numbers instead of just the FII numbers. Again, a totally unacceptable kind of mistake.

I pull no punches when I criticize folks like S&P, Morgan Stanley, Fitch, Goldman Sachs and others when they make basic data interpretation errors. I believe that it’s only fair that I too subject myself to getting flogged publicly on the internet, when I make a similar mistake.

What am I planning to do about this going forward? Two things:

I usually do a data audit before posting a story. I have been a bit negligent in that regard in the past few weeks; in future I plan to become more rigorous about this.

I am also considering working with an experienced market analyst who will review my analyses before I post them, so that such issues and other errors are caught well in time.

These types of mistakes are shameful and totally unacceptable and I am deeply embarrassed. I sincerely apologize to my readers and promise that I am going to take the greatest care to ensure that something like this never happens again. I also promise to be ruthless with other market professionals, and even more ruthless with myself, whenever I come across a basic data interpretation issue like this.

Related Analyses
When Moody’s Downgrades, Markets Rise!
Interpreting IIP Numbers the Right Way
Be wary of S&P ratings
Interpreting macro numbers the right way   
Be wary of research house estimates   
Be wary of Marc Faber’s public forecasts

Friday, June 22, 2012

Rupee Fall: No capital flight, only speculation - II

The current fall in the Rupee is purely speculative as there are no signs of flight of capital.

This is very similar to the situation in April 2009 – when the Rupee was making new lows even as inflation was coming down, corporate profitability was improving and stock markets had just broken out of bear market lows.

Consider this:

  • The foreign exchange (Forex) reserves as of June 15, 2012 were around Rs 16000 Cr, around Rs 2000 Cr higher than a year ago, and Rs 200 Cr more than a week prior. Not only is the Forex situation comfortable; in fact India’s Forex reserves have been on a slow uptrend over the past year.
  • FII remains long-term bullish based on equity inflows, with massive net inflows of Rs 17,000 Cr so far during 2012. Though there were net outflows in April and May of Rs 900 Cr and Rs 2,200 Cr, respectively, the amounts are minor. In the current month to date, there have been minor net inflows of Rs 1,500 Cr.

So what next?

The fall might continue a bit longer; however I don’t expect it to either fall significantly more, or have any significant negative impact on corporate profitability. The reasons for this are:

  • At some point, the RBI and the government will crack down hard on speculators and that would be the end of the Rupee fall. The RBI has already issued a veiled warning to speculative interests. The next set of measures would be far harsher. Those who seem to underestimate the absolute power that a state commands, do so at their own peril. Ask Vodafone.
  • Oil and all major commodities are down more than 25% from about a year ago and are on a sharp downtrend. That will cushion the impact of the rising rupee.
  • With corporate India posting a robust 20% growth in bottom-line for the March 2012 quarter, a robust economic recovery is well underway. With improving economic fundamentals, it would be just a matter of time before the speculative positions in the Rupee start to unwind.

The situation today bears an uncanny resemblance to the one two years ago, around April 2009. Even during that time, the rupee was making new lows, even as a recovery was well underway and stock markets had broken off the lows.

With the short term economic slowdown over, and a robust recovery underway, it’s very likely that the Rupee fall would get arrested and stock markets make new highs.

Related Analyses
India’s Growth Story Intact: Interpreting macro numbers and trends the right way
Party Time Again: Time to buy panic for the Sensex ride to 80,000
Rupee Fall: No flight of capital – only speculation

Thursday, June 21, 2012

Oil, Commodities Down 25%: Recovery to pick up pace

The fact that oil and all major commodities are down more than 25% from about a year ago is an indicator that the recovery in the Indian economy is set to pick up the pace.

My previous analysis suggested the Indian long-term growth story is intact and that a recovery is now underway from a short-term slowdown.

Here are some of the latest news and data that reinforce my hypothesis:

  • Corporate India has posted a robust top-line and bottom-line growth of around 20% for the March 2012 quarter. It would be ridiculous, nay insane, to consider a 20% bottom-line growth as a slowdown!
  • FII remain long-term bullish based on equity inflows, with massive net inflows of Rs 17,000 Cr so far during 2012. There were net outflows in April and May of Rs 900 Cr and Rs 2,200 Cr, respectively, but the amounts are minuscule. In the current month to date, there have been net inflows of Rs 1,500 Cr.
  • Here’s a PTI report from a few days back, on what India’s top bankers had to say:  “Amid a growing number of industry leaders expressing anguish over policy paralysis, top banker Chanda Kochhar has said that people are talking more about challenges while taking the positives for granted. Kochhar’s mentor and ICICI Bank Chairman K V Kamath has also sounded an optimistic note. In his latest letter to ICICI Bank shareholders, Kamath said he is confident about a ‘robust and sustained (economic) growth over the medium to long term.’ ”
  • J.P. Morgan upgraded Indian equities to “overweight” from “neutral,” despite acknowledging the risk factors facing the economy, encouraged by what it called a number of more positive factors including historic valuations. I usually don’t give much credence to reports from agencies like S&P, Moody’s, Goldman Sachs, Morgan Stanley and most others. However, J.P. Morgan India, under Kalpana Morparia, seems to have got the long-term trend right, even as far back as October 2008 when the markets were making a capitulation bottom. In September 2011, they had the courage to call the IIP numbers misleading and take a stand that economic growth is not collapsing. Among the major global financial firms, J.P. Morgan is not just the first out of the blocks in acknowledging the strengths of the India story, but it has also made a bullish call when pretty much every other major firm has made a bearish call. That takes a lot of courage in the murky world of large and influential financial firms.

As regards some of the negative news items, here are my thoughts:

  • The news about Infosys delaying joining dates of freshers does sound disconcerting, but I won’t give too much importance to it for the time being. That’s because there could be reasons around timing and short-term bottom-line management behind staggering the dates. Furthermore, the fresher hirings at other top IT companies display no signs of a slowdown or staggering.
  • The rupee’s fall is not driven by any capital flight but by speculative selling. The fall might continue a bit longer. However, I don’t expect it to have any significant impact on corporate profitability.
  • The apparently poor year-over-year growth numbers for IIP and GDP are not a cause of worry. First, the numbers are not being interpreted correctly, surprisingly, even by senior analysts and economists. Second, given the government’s record around credibility of these numbers, they really can’t be relied upon too much.

As suggested in my analysis last month Greece Paranoia: A blessing in disguise for India and other analyses, here’s how I expect the next few quarters to play out:

  • Inflation likely to keep falling.
  • In a scenario where India’s consumption story is intact, falling inflation is likely to drive up real demand even further.
  • A combination of rising demand and falling prices will result in Indian corporations continuing to post strong quarterly sales and profitability growth.

The bottom line is that India’s long-term story is very well intact. Although we did go through a temporary slowdown, that also shows all signs of having ended with the recovery cycle well underway.

Related Analyses
India’s Growth Story Intact: Interpreting macro numbers and trends the right way
GDP Downgrades: Be wary of research house estimates; India’s growth story intact
Party Time Again: Time to buy panic for the Sensex ride to 80,000
Hiring and Salaries Going Up: Where’s the slowdown?

When Moody’s Downgrades, Markets Rise!

What are the implications of the rating cuts of 15 banks by Moody’s on Thursday?

Given the credibility and timing of Moody’s past forecasts, what the downgrades imply is that the U.S. economy is bottoming out and stock markets are likely to start on a bull run within the next few months in anticipation of a recovery!

Take a look at Moody’s performance during the 2008 crisis.

Moody’s downgraded Citibank by two notches in December 2008 and Bank of America and Wells Fargo by a notch each in March 2009. That was right at the bottom of the cycle, as Citigroup started posting positive results immediately after the downgrade and the U.S. markets started on a bull run in the first week of March after hitting a capitulation bottom.

Now, if Moody’s had started with widespread downgrades in late 2007, that would have been some really admirable foresight. Keep in mind that economist Nouriel Roubni had come out with a very uncanny step-by-step analysis in 2006 of how the housing bubble would burst and the crisis would unfold. As for Moody’s, here’s what it had to say in a Reuters update in August 2007.

“Moody's Investors Service on Friday said widespread rating downgrades are not expected for the world’s banks as a result of the current market turmoil. Third-quarter earnings will likely decline for a number of banks, however, and a handful of banks may be downgraded, Moody's said in a report. ‘We are unlikely to change bank ratings because of temporary liquidity problems,’ said David Fanger, a managing director at Moody's.”

By the time Moody’s started with major downgrades, the recovery cycle had already begun.

Here’s another point that dents the credibility of the current downgrades: Out of the 15 banks, 11 were downgraded by two or more notches. That’s ridiculous! Did a tsunami hit the U.S. that a sudden two-notch downgrade was required? No, nothing catastrophic has happened in the U.S. or the global economic scenario that would deserve an overnight two-notch downgrade. Issues around the temporary U.S. slowdown and the euro-zone crisis have been known for a while now.

On the credibility side, take a look at what blogger Tyler Durden had to say around the current downgrades.

… CNBC, which apparently is where Moody’s leaked all its data … . So ... this leaves Morgan Stanley with the dreaded 3 notch cut.”

And there you have it – the reason for the delay were last minute negotiations, most certainly involving extensive monetary explanations, by Morgan Stanley’s Gorman (potentially with Moody’s investor Warren Buffett on the call) to get only a two notch downgrade. And Wall Street wins again.”

Here’s what Christopher Whalen, of Tangent Capital, had to say: “Watching the latest move by Moody's to downgrade various global banks, one can only be impressed by the lagging nature of the major ratings agencies’ financial prognostications.”

Again, I don’t mean to pick on Moody’s. It’s just that this was the latest news. In fact, my previous analysis suggests that firms like S&P, Morgan Stanley and Goldman Sachs are all in the same boat as far as credibility of their ratings and reports are concerned.

My analysis further suggests that global economies are in various stages of bottoming out and recovery. With S&P and Moody’s downgrades starting to come in, it further confirms the bottoming out scenario and a high possibility of stock markets breaking out upward in the next few months.

Related Analysis
Be wary of S&P ratings
Be wary of Marc Faber’s public forecasts
Global recovery robust – Part II

Wednesday, June 13, 2012

Interpreting IIP Numbers the Right Way

India’s growth story is very much intact so far, even as IIP has posted 0.1% YoY growth. It won’t make a difference even if IIP posts negative YoY numbers for a few more months.

Refer to my earlier analysis regarding the way looking at YoY numbers is not always the right way to interpret macro trends. The right way to look at the GDP and IIP numbers is to simply look at a chart of absolute IIP and GDP over time. Furthermore, one has to differentiate between a long term trend short term business cycles.

Take a look at the chart below of IIP numbers for the past seven years along with a 12 month moving average. As can be seen from the chart, the long term uptrend is intact, and is comprised of many ups and downs as part of regular business cycles.

image

Keep in mind that IIP was posting negative YoY numbers during April - June 2009 even as corporate profitability was improving and markets were making new highs. In fact, the IIP YoY % were posting very flattish trends until Oct 2009. During this same time period Nifty more than doubled from 2500 levels to 5100 levels!

As for S&P, as per my previous story, one has to be wary of their reports and ratings. In 2009 they had downgraded India’s sovereign rating just three months before the markets did an upward breakout and growth numbers turned around!

Monday, June 11, 2012

Pranab is right

Pranab Mukherjee has given statements in press saying that S&P report is not based on fresh rating action, and that there would be a turnaround in country’s growth prospects in coming months.

I believe him to be right. My analysis shows that India growth story is intact and the gloom and doom scenarios being painted is due to inability of analyst’s to interpret numbers correctly, and an undue focus on business cycles at the cost of long term trend.

As for S&P, as per my previous story, one has to be wary of their reports and ratings. In 2009 they had downgraded India sovereign rating just three months before the markets did an upward breakout and growth numbers turned around !

India’s growth story is no thanks to the current government, but is a tribute to a basic resilience and the underlying growth momentum of Indian economy itself.

India growth story is intact, not because of government action, but notwithstanding government inaction !

Be wary of S&P ratings

Here`s an extract from a news item dated Feb 2009 :
"S&P lowers India’s sovereign rating : MUMBAI: Standard & Poor’s Ratings Services on Tuesday revised the outlook on the long-term sovereign credit rating on the Republic of India to negative from stable”


Two months later, in April 2009 markets did a breakout move. And since then India GDP has grown by nearly 30% (Rs 1.08 lac crore in Dec 2008 quarter to 1.39 lac crore in March 2012 quarter)


S&P is Lehman tainted. They were assigning Triple A ratings to real estate CDO`s and other derivatives even as the housing markets were crashing. In the grand jury hearings, one of the excuses they gave for unjustifiably high ratings - Excel error !


If you are interested in some solid long terms analysis, the right source are Rakesh Mohan`s interview on Moneycontrol , Rakesh Jhunjhnwala interview on ET, RBI research papers and other such sources, not the reports from S&P`s, Morgan Stanley`s and Goldman Saches of the world.

Saturday, June 9, 2012

India’s Growth Story Intact: Interpreting macro numbers and trends the right way

There has been a lot of debate about India’s growth story coming to an end, with many top brokerages like Morgan Stanley and Goldman Sachs cutting GDP forecasts to sub 6% levels. However, my analysis shows India’s growth story is not only intact, it continues on a robust path.

The gloom-and-doom scenarios being painted today are an exact repeat of the phenomenon that happened during 2008-09 when the debate started that India’s growth story might be over and the Morgan Stanleys and Goldman Sachses of the world cut the GDP forecast for FY10 to sub 6% levels and some to even sub 5% levels.

What happened next?

In FY10, India posted a GDP growth rate of nearly 8%!

So what went wrong with all the doomsday scenarios for India? Two things went wrong.

First, an undue importance was placed on year-over-year (YoY) growth rates without looking at the trend in absolute GDP. That’s a simple number interpretation issue. A case in point is all the gloom surrounding the sub 6% YoY growth rates posted in the last two quarters of fiscal 2008-09 and the latest 5.3% YoY growth posted for the March 2012 quarter.

Second, not looking at the long-term trend and the impact of business cycles. That’s an economic analysis issue. Take a look at the chart below. I have compared the trend in absolute values of India GDP with that of U.S. GDP since 2005. I have compared just the India and U.S. trends in order to clearly explain how long-term growth rates and business cycles need to be interpreted. To facilitate a comparison, I have indexed the GDP values by initializing the starting values to 100.

clip_image002

As you can see, the chart speaks for itself. The trend in U.S. GDP is like a straight line, having grown only a total of 7% in the past six years. India GDP, on the other hand, is on a strong uptrend, having grown more than 80% in the same period. Within this long-term trend, the ups and down of a normal business cycle can clearly be seen.

Understanding long-term trends and business cycles, more often than not, does not need complex models. Most of the time simple charts and a bit of common sense work well enough. For those who would rather look at complex models, the RBI website is the right source, not brokerage research reports. There is some fantastic analysis available on the RBI site, the summary of which is that a growth rate in the 8% range is now the new normal.

Current Economic Problems: More imagined than real

The U.S. economy faces some structural issues, which are very real. Meanwhile, in India, the challenges to the long-term growth trend are more imagined than real.

The problems facing the Indian economy today are more tactical and cyclical rather than of a strategic or long-term nature. It’s not as if everything is hunky dory – no it’s not. There are challenges around fiscal deficit, current account deficits, governance and reforms. But all these challenges have pretty much existed for the past six years during which the economy continued to grow at a very healthy rate.

So, Is India’s Growth Story Intact?

As of now, yes.

As the chart clearly shows, the long-term trend in India GDP is fully intact and issues like the slowdowns in 2008 and 2011 are simply the business cycle playing itself out.

So, is there nothing that can derail the growth story? Of course, there are many factors which can do so. But it’s only major structural changes that can derail India’s growth story, things like a significant fall in competitiveness in services exports, a rollback of reforms and such like. Not factors like dollar volatility, oil prices and minor variances in fiscal deficit.

India has continued to grow at a steady pace for six years, a period characterized by a slowdown in reforms, the Lehman meltdown, dollar volatility, high fiscal deficits, high food prices and what not. Factors like these have only caused the normal ups and downs of a business cycle in India, and I forecast that they would only cause normal business cycles going forward, too.

So, What Happens Next?

In the next phase of India’s business cycle, the continuing drop in commodity prices, oil prices and interest rates will speed up the recovery process. Corporate profitability, which has already improved significantly, would post some handsome growth numbers. All these would result in a continuing GDP uptrend.

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Related analysis

5.3% GDP: Numbers not being interpreted correctly; recovery is intact

GDP Downgrades: Be wary of research house estimates; India’s growth story intact

Party Time Again: Time to buy panic for the Sensex ride to 80,000

Hiring and Salaries Going Up: Where’s the slowdown?

Greece Paranoia: A blessing in disguise for India

IIP Shows Recovery, Not Contraction

Recovery Underway: Fears unfounded