"You do things when the opportunities come along.

I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing." - Warren Buffett

WILL

THE CURSE OF BELOW

8%

GROWTH LEAVE INDIA?

Although we like the ratio of optimists to pessimists on the optimism side of things as far as the Indian economy is concerned, the shift right now seems to be in the other direction. Saddened by the sorry state of affairs, most economists have revised downwards their projections for India's GDP growth in the current fiscal. And the trend appears far from over. Just recently, a UN report forecasted India's GDP to expand at less than 8% in 2011. However, it did not stop at this. Even for the next two years, the projection is that of a sub 8% growth. And if you think that this is being quite pessimistic, what would you say to Moody's projections of a mere 6% growth in 2012. To be fair to these institutions though, our policymakers have managed to give them enough reasons to take such a dim view of things. In fact, things have come to such a pass that a leading daily has questioned whether our domestic economy risks consigning itself to below 8% growth for a long time to come. In other words, is sub 8% growth the new normal for India's GDP? To be fair though, this whole idea of GDP obsession strikes a bit odd to us. There is no question GDP is an important indicator but we believe that it also hides as much as it reveals. For e.g. It will not matter to the GDP growth in the near term whether the same has been achieved by converting millions of tonnes of steel into automobiles or plant and machinery. Or whether the same loan that was to be used for buying a tractor has now been extended to buying an item of luxury. But over the long term, the GDP growth would have certainly been much better off had we invested in plant and machinery instead of cars, and tractors instead of luxury items. Theformer would have given us lasting benefits while things like cars and items of luxury would have become useless in few years. Our policymakers did not grasp this crucial difference we believe. When India's GDP was growing at more than 8%, they failed to realise that it was more on account of excess liquidity in the West that was finding its way into India and which may not give us lasting benefits. Thus, when this tide went out, their failings have been brutally exposed. It seems we never had the infrastructure or investment required to sustain an above 8% growth. Hence, if we have to get out of this rut, reforms of the highest order will indeed be needed. Reforms that leads to more investments in infrastructure and more efforts towards improving our productivity. Only then an above 8% growth will be the new normal. Imagine paying 9% on your home loan and the bank tells you to shell out around 25% after one year. You will be shocked, isn't it? Something similar could be happening with the Greece government right now. For as today's chart of the day shows, borrowing costs for 10 year Government bond in Greece has gone up by a whopping 175% in the past one year. For the US though, it has come down by 44% as investors have considered US bonds as asset class of choice in uncertain times. India's borrowing costs on the other hand have remained largely unchanged. Thanks in part to the Reserve Bank Of India (RBI) buying program that was recently undertaken. Marc Faber, the renowned publisher of the Gloom, Doom & Boom Report has a very grave warning forthe globe. He opines that World War III could happen

anytime during the next five years. As per his hypothesis, the epicenter of the war would be the Middle East. As it goes, politics and economics are very intricately related to each other. The underlying triggers of most past wars have been economic. When economies start defaulting on trillions of dollars of debt, war becomes inevitable. How would that affect financial markets? According to Mr Faber, the war would be positive for stocks as unutilised capacities in an economy would be directed towards the defence industry. At the same time, there would be a massive rise in debt and that would affect bonds quite adversely. His warning may come as a shock, but it certainly does appeal to reason. The previous two wars are a testimony to man's warring instincts. And more often than not, it takes just one crazy country and one fanatic leader to start the contagion of war. How will this affect Indian stock markets? We believe that though the impact would be based on India's involvement in the probable war, it would certainly send commodity prices, especially those of crude oil, skyrocketing. We all know how sensitive our economy is to crude oil. A beautiful painting or a rare artefact may look great on your wall or in your showcase. But, how does it look in your portfolio? Well, the art market returned 11% to investors in 2011. This outpaced stock market returns from equity investments for a second consecutive year. According to Financial Times, the performance of the Mei Moses All Art index, a leading barometer of art returns has beaten the S&P 500 in six of the last 10 years. It has posted an average annual return of 7.8% compared with 2.7% for the US index. Strong Chinese demand as well as high prices of work by popular artists led to the Art Index's recent rise. But while the art market has shown good returns, it doesn't make sense for investors to jump on the bandwagon. Current economic conditions have made art collectors more cautions, and if the slump continues, the industry may see slower growth. When Miguel de Cervantes had coined the phrase "Forgive and Forget" for his book Don Quixote, he meant it as a sermon for people who hang on to the past. And the Americans seem to be adopting it as well. They have finally forgiven Goldman Sachs for causing the subprime crisis. The company has come back to its pre-fraud reputation and has been ranked 5 in the Buzz brand score card. Goldman was touted as "a great vampire squid" that was ready to wrap its bloodthirsty fangs around anything that involved money. The company has come under fire several times for its involvement in the subprime crisis as well as numerous frauds related to the same. But it finally seems to have polished off this reputation and has emerged as one of the most improved brands. Strange that people have such a large heart and a short memory. Therepercussions of the crisis caused by Goldman and its peers are still being felt in literally every part of the world. But all has been forgiven and forgotten. Commodities had a spectacular run in the last decade as population in the emerging markets zoomed, fuelling demand. So much so that all of the 14 commodities (notably aluminium, coal, copper, corn, crude oil, gold, lead, natural gas, nickel, palladium, platinum, silver, zinc and wheat) yielded positive returns since 2002. And the star performer among these was not gold but silver with 20% annualized returns. Gold followed close on its heels with 19% annualized returns after which came copper with 18% returns. Of course, there have been hiccups in this ride and one such was witnessed in 2011 when silver and natural gas suffered losses. So what is the outlook for commodities for the next decade? Will gold continue its rally after such a splendid run? The answer is most likely in the affirmative. Indeed, given that the developed world (US, Europe and Japan) has racked up so much debt and are struggling to stay afloat, investors will be looking at safe havens and gold fits the bill perfectly in this regard.

Further, the value of paper currencies has also come under question led by massive money printing by governments and given that gold is a tangible store of value, the demand for this precious metal is unlikely to diminish in the longer term. The trajectory of commodities also depends a lot on where China is headed. Althoughthe dragon nation is witnessing some headwinds currently with many predicting a hard landing for the economy,the country is still expected to grow at a much faster pace than the developed world in the longer term. And as long as that happens, demand for commodities such as copper, coal and oil will sustain.

FALLING

STOCK MARKET MAKES INDIA MORE EQUAL .

DOES

IT MATTER?

Critics say rising inequalities in India are sparking mass resentment and Maoist insurrection. Really? Tribals in the Maoist belt certainly hate those who are growing rich by exploiting them. But do tribals know or care about Mukesh Ambani, the richest Indian? Tribals are surely outraged by differences in power and income between them and the corrupt officials and forest contractors who have long run outrageously exploitative fiefdoms in the Maoist belt. But i doubt they know or care about the wealth of Mumbai industrialists, or of the sharp fall in that wealth in the last four years. Not all readers know that a falling stock market has wiped out half to three-quarters of the wealth of India's biggest businessmen. Critics are astounded to hear this, but it's true. Mukesh Ambani's star company, Reliance Industries Ltd, has fallen in price (adjusted for splits, bonuses etc) from a peak of Rs 1,608 in 2007-08 to just Rs 817 today, wiping out half his wealth. His other major company, Reliance Industrial Infrastructure Ltd, has lost 85% of its peak value (from Rs 3,049 to Rs 441). So, the gap between Mukesh and Maoist tribals has fallen dramatically. Are they cheering? Not at all. Mukesh's wealth is irrelevant to them, whether rising or falling. Anil Ambani has suffered much more than Mukesh. The adjusted price of Reliance Capital is down from a peak of Rs 2,859 to Rs 342; of Reliance Communications from Rs 820 to Rs 96: of Reliance Infrastructure from Rs 2,584 to Rs 528; and of Reliance Mediaworks from Rs 1,815 to Rs 83. The gap between Anil and poor tribals has crashed. This may make Mukesh smile, but is irrelevant for tribals. Ratan Tata has no significant personal holdings in the Tata group. The opposite is true of Kumar Birla, the wealthiest of the Birlas. He is less wealthy than he used to be. The share price of his flagship companyHindalco is down from a peak of Rs 199 to Rs 144; of Grasim from 3,870 to Rs 2,579; of Idea Cellular from Rs 157 to Rs 96; and of Aditya Birla Nuovo from Rs 2,435 to Rs 833. Some critics argue that the greatest public resentment is not against the Tatas and Birlas, who have created world-class enterprises, but against dubious businessmen in real estate

and government infrastructure contracts, who have become rich mainly through political connections and favours. However, the stock market has punished several companies severely for poor corporate governance. DLF is down from a peak of Rs 1,205 to Rs 220, and Unitech from Rs 538 to Rs 26 (down 95%!). Among the infrastructure companies, GMR is down from Rs 131 to Rs 29; GVK from Rs 85 to Rs 16; Lanco Industriesfrom Rs 113 to Rs 29; and Lanco Infratech from Rs 84 to Rs 15. Critics say crony capitalists break many laws with impunity because of their political contacts. Well, politicians may not have penalized them but the stock market has. Their wealth has been decimated because investors see them as companies with dubious practices and balance sheets, and have dumped their shares wholesale. The government may not have reduced inequalities, but the stock market has! Why do tribals ignore this? Because, says one critic, the rich-poor gap is so huge that even a halving of wealth is irrelevant to tribals. Maybe so, but then surely a doubling of wealth is also irrelevant. Yet if this happens, we hear agonized cries about rising inequality. Greater equality through leveling up is excellent. But equality through leveling downexemplified by 97.75% income tax and 3% wealth tax in Indira Gandhi's Garibi Hatao phase--helps nobody. Poverty did not fall at all in that era. The standard measure of inequality is the gini-coefficient. This is lowest (just 0.17) in rural Bihar and Assam. Are these areas paragons of fairness and justice? No, they are sloughs of despond, where equality denotes lack of opportunity, not fairness. That's why people migrate from these egalitarian areas to cities, which are very unequal but provide opportunity. People have always prized opportunity over equality. Thousands risked death scaling the Berlin Wall, to get from egalitarian East Berlin to inegalitarian West Berlin. People swam shark-infested waters to get from Mao's egalitarian China to inegalitarian Hong Kong. Nobody swam in the opposite direction. Tribals have gone Maoist because they have long been neglected and exploited, not because the Ambanis are too rich. Tribals desperately need more opportunity, not lower gini coefficients.

After the situation on Greek debt crisis is over, attention will return to China's Yuan
By Manoj Pant
The present concern of the G20 over the situation in Greece, and the EU in general, will soon be over. After all, the political imperative of keeping the EU together will override all economic concerns about writing off half of Greece's debt. Much of this debt is held by French banks and some by German banks. The loss of this write-off to shareholders of these banks can easily be underwritten by the two governments.

The other concern that this solution does not address - the issue of why the Greek economy became sick in the first place - can be addressed at a future date. The attention once more will return to the issue of China and its overvalued currency. That this seems a concern is clear from the attention the US lawmakers are giving to a legislation that will empower the President to target countries which 'unfairly' manipulate their currencies for trade gains. The only problem: the Chinese maintain that their currency is not undervalued. Who is right? There exist sophisticated econometric models that can be used to check overvaluation of a country's currency. The problem is the requirements of such models in terms of detailed long-term data on exchange rates, prices, factor supplies, etc. Most of this data and assumptions are then open to challenge. What I will do is to analytically examine the issue and see if there is any presumption of undervaluation and what seems to be happening at the global scale. The idea is to appeal to theory and use some uncontested data as a reference point. My basic premise is drawn from trade theory: that in the long run (say, a few years), no country should be running large trade surpluses or deficits. The logic is that an export actually represents a country's demand for imports. Intuitively, in exporting, a country is reducing the availability of that commodity for its own consumers. To put it another way, exports are the price a country pays for its imports. Logically, if a country has no demand for any import, it should not export either as by doing so, it is simply producing to improve the standard of living of consumers in another country. The same logic applies to exporting firms: they export to buy internationally those inputs they are unable to source domestically. The fact that there are many countries in the real world complicates the bilateral story of the previous para. Countries (and firms) may export to one country but source inputs (products) from some other country. Given this empirical reality, one can modify the earlier argument to say that a country should not be consistently running a surplus (or deficit) with all countries. We looked at data provided by China in the UN Comtrade database for the years 2007 and 2010. Presumably, since this is the period when the Chinese yuan has been under attack, we can see what is happening at the global level. The data shows that in both years, China ran trade surpluses with all the developed countries and these surpluses actually increased between 2007 and 2010. With the US, this surplus increased by almost $20 billion. More important, barring resourceexporting countries of Africa, Latin America and the Middle East, China has a trade deficit (of $10 billion and more) with only some Asian countries like Malaysia, Japan and South Korea. The data also shows that China's surplus with the world declined from about $350 billion to about $180 billion. However, this decline is only apparent as, at the same time, its surplus

with Hong Kong increased by about $40 billion. What is more interesting is the appearance in 2010 of a huge deficit of almost $90 billion with 'other Asia, not elsewhere specified', which turns out to be Taiwan - whose statistics are not normally reported in UN data. The implications are clear. China imports resources and other inputs from the world and Asian countries, which it exports as finished goods to the developed world. In other words, China has become the manufacturing hub of the world. It, thus, keeps its yuan down to export to the developed countries which benefit from the low-priced goods. That the yuan is undervalued is probably true, but this has benefited not only China but Asian countries such as South Korea and (surprisingly) Taiwan. So, a sudden rise in the value of the yuan will hurt consumers in the developed world and suppliers in Asia. So, do not expect any dramatic change in the valuation of the yuan in the near future. The bottom line? The US is only making political noises. A quick rise in the value of the yuan will hurt consumers in the developed world who are already battered by the recession. The yuan is probably undervalued but this has benefited many countries along with China. The only losers actually are Chinese consumers!

What not to expect in the Union Budget

Come February and the feverish pace of activities at the North Block suggests the onset of the Budget season. Investors, corporate and tax payers have expectations galore from the Finance Ministry's annual planning of fiscal outlays. On the pretext of being a developing economy, year after year India's budget proposals have focused on subsidizing the needs of the poor. Consecutive governments have won support from voters by subsidizing utilities and favouring sectors like agriculture. But it seems like the coming Budget can ill afford to tread on the beaten path. If so, then it may risk putting India's economic future into grave risk. Whether it is cost of electricity, farm subsidies, subsidized pricing of diesel or direct taxes for individuals and corporate, the coming Union Budget is unlikely to dole out any generous aid. Both the RBI and the Planning Commission have confirmed that de-controlling diesel prices is a matter of time. The tight fiscal situation and inability to raise funds through disinvestment have made the government rethink its subsidy policies. Further raising the cost of power is a necessity given the dire state that India's power generation companies are in. Also, as pointed out by Reserve Bank Of India (RBI) deputy governor Subir Gokarn, it is time the government focuses on investment rather than consumption for growth. The desired capital formation will fructify only if the government offers sufficient support to private sector investments and complements the same with its own planned outlay. Nee dless to say that reforms in the financial sector can help the Union Budget address India's investment deficit. But what can be an informed guess is that large scale subsidies are certainly not likely to be an eventuality inthe coming Budget. We hope that the Finance Ministry picks up the cues from the (RBI's) Monetary Policy review and the Planning Commission's foreword for the 12th 5-year Plan to decide what best suits the Indian economy in trying times. Only then will it be able to check the decline in GDP growth rate and bring back investor confidence from a long term perspective.

Even though the International Monetary Fund (IMF) reduced the expected world GDP growth in 2012 by 0.7%, what was clear is that China and India together have a very important role to play in the economic recovery. As seen in today's chart, the two Asian giants are expected to contribute nearly half of the world GDP growth in 2012. While China will corner a third of the growth prospect, even Indian economy despite being just one-seventh thesize of the US economy will contribute more than the latter's share. It is believed that while predicting the future, the past is our best guide. But relying too much on it or expecting thepast to completely replicate the future, moment by moment, can perhaps set us up for a disaster. A well known research firm in the US seems to be falling in the same trap. It has compared current valuation levels in US equities with those prevailing in the 1990s and hence come to the conclusion that stocks are at their cheapest levels in well over two decades. Investors should thus make a beeline for equities in 2012 as per the firm. Well, we believe that there could be a couple of fundamental flaws in what the firm has tried to assess. For starters, it is next to impossible to make a prediction for a period as short as one year. Secondly, the economic background and the financial health that theUS economy currently possesses are vastly different from the one prevailing in the 1990s. Thus, calling for a revival in equities just on the basis of historical valuations could be a dangerous thing to do as per us. As Warren Buffett once famously said, 'If past history was all there was to the game, the richest people would be librarians'. With food inflation in the negative zone and a bumper wheat crop staring us in the face, India seems to have fewer worries on this front as of now. This is a sharp contrast to last year, where food inflation was in high double digits and almost every new RBI policy review came with a rate hike. India's wheat output this crop year is likely to cross last year's record of 85.9 m metric tons. A prolonged spell of cold winter weather in the northern states and higher sowing helped contribute to this record. Fungal crop disease has also been stemmed. According to Farm Minister, Sharad Pawar, the bumper output may be a sign for the government to roll out its food security program which aims to provide cheap grain to the poor. However, without sufficient investments in warehousing and food distribution systems, the bumper harvest may go in vain. The Europe debt crisis has dominated the headlines for quite some time now. What has emerged from it is thatthe debt across countries has ballooned, some of the economies are on the verge of default, the European Central Bank is trying to solve the problem by injecting more liquidity and the governments of these countries have been constantly bickering. Not just that, there are talks doing the rounds that the Euro might break up and if not that, then some countries will be forced to exit. So, all in all things look bleak indeed. Therefore, we were surprised to see a Reuters article mention that the worst of the Europe crisis might be over although it acknowledges the issues confronting the European nations. One of the reasons for this is that the yields on 10-year bonds have reduced drastically than November 2011 levels. Not that these are not very high, but the possibility of the governments being able to fund themselves looks more likely. The other arguments put forth are that the purchasing managers' sentiments has been the highest in 4 months and that the new Italian and Spanish governments seem committed to bringing durable fiscal and economic improvement. We are not so sure. What seems certain is that it will take a long time for these countries to get back on their feet given the scale of the problems. Whether the scenario will get worse from now on remains highly debatable though.

The way politicians behave before and after elections may stir the interest of statisticians. For the sheer accuracy with which they change behaviour is amazing. Before elections, politicians tend to promise the moon to woo thevoters. Once elections are over, all the romance comes to an abrupt end and reality starts kicking in. Yesterday's State of the Union address by US President Barrack Obama is a perfect testimony of that. Given that the 2012 general elections are some months away, Mr Obama made a speech that was a clear attempt to secure the chance of getting re-elected as president. Predictably populist and hardly any different from last year,the focus of his speech was on economic fairness. Among other things, he held up legendary investor Warren Buffett's suggestion that the wealthy should be taxed more. There is little chance that most of the promises that he made yesterday will see the light of day. But will Mr Obama see another term as US President? That is theonly question that he seems to be interested in. Natural disasters have hurt Japan in the worst possible manner. Last year's earthquake combined with thesubsequent run up in the country's currency has severely hurt the economy. So much so that the country that has been well known for running a trade surplus has reported its first trade deficit in over 30 years. The surge in import of oil after the quake raised the import costs for Japan. To add to this, strengthening in the Japanese Yen hurt its exports. While this is a one off figure, however, with loss of nuclear power, the country has started to increasingly rely on oil imports. At the same time its exports have lost the competitive edge that they enjoyed earlier. As a result, it is possible that the country may see trade deficits in the years to come. As long as Japan continues to see pos itive flow of income from its in vestments abroad, this trade deficit would not hurt the country's current deficit. But if the growth in trade deficit outpaces the flow of income, then Japan is looking at bad times to come. Taking off from where they left yesterday, the indices in Indian stock market continued with the buoyant mood today as the RBI's 0.5% cut in the cash reserve ratio (CRR) aided investor sentiments. Banking, commodity, auto and power stocks led the pack of gainers. At the time of writing, the BSE Sensex was trading 90 points (0.5%) higher. Indices across other key Asian markets also closed higher while those in Europe have started on a positive note.

Why are cash-rich companies returning the money?

For a very long period that spanned over four decades, legendary investor Warren Buffett neither paid dividends to his shareholders nor initiated any share buybacks. As long as there were opportunities to invest and to earn a good return on capital, he found such exercises futile. But in September 2011, he shocked the financial world when he announced his plans to buy back shares of Berkshire Hathaway. It was a clear indication that there was a dearth of investible opportunities for the Oracle of Omaha. Given the bleak current prospects for the US economy, his change of stance is quite understandable. But what's happening in India? Today, the board of Mukesh Ambani-led Reliance Industries Limited (RIL) will consider the proposal for a share buyback program which is touted to be one of the biggest share buyback programs in the history of India. The stock markets have given a thumbs-up to the news and the stock price of Reliance Industries has gone soaring in the last couple of days. It must be noted that the stock had been quite an underperformer in 2011, shedding about one-third of its market capitalisation. But does the proposed share buyback mean good news? Well, the answer is both yes and no. Yes, because stock buybacks are like indirect dividend payments. By

reducing the number of equity shares, it boosts the earning per share of the company. But there is another way of looking at it and that makes us a little uncomfortable. The money that will be utilised to exercise the buyback could have been invested in building productive capacities, developing infrastructure and other such assets which in turn would have generated income and employment. In other words, the money is being returned to shareholders for lack of investible opportunities. But how can there be a dearth of opportunities in an emerging economy like India? In reality, the problem is not lack of opportunities but a bad business environment. Is it any coincidence that India ranks as low as 134th out of 183 countries on World Bank's 'Ease of Doing Business' index? What is even more disappointing is the fact that the case of RIL is not an exception but a trend. Several other cash-rich companies are also finding it quite difficult to deploy their funds into productive assets. Just a few weeks back we had written about how the cash-rich Piramal Group was also struggling to find viable investment opportunities. This does not bode well at all for the Indian economy. In a growth phase, an economy akin to a corporate needs investments to keep the growth momentum. If that is not happening, then the future prospects of the Indian economy are certainly under threat. So what does India need to get past the roadblocks? In one word, it is 'reforms'. Reforms that will make it easy for entrepreneurs to conduct business in a smooth manner. But will the government do anything? Not until pushed onto the brink of a crisis we believe. So what does India need to get past the roadblocks? In one word, it is 'reforms'. Reforms that will make it easy for entrepreneurs to conduct business in a smooth manner. But will the government do anything? Not until pushed onto the brink of a crisis we believe. Do you think cash rich companies are forced to buy back due to unavailability of viable projects? Share yourcomments with us or post your views on Facebook page / Google+ page. While the year 2011 was one of the worst years for the Indian stock markets, the year 2012 has commenced on a pretty positive note. Since the start of the new year the benchmark BSE-Sensex has registered a rise of 7.7% so far. In fact, this is the best performance during this period in the last 10 years. The rise has been driven mainly by capital inflows by foreign Institutional Investors (FIIs) due to moderating inflation and possibility of monetary easing after a series of rate hikes by the Reserve Bank of India (RBI) in last two years. Mention the term 'inflation' and the chances are that you will get a variety of definitions from different people. But according to us, the best of the lot was the one given by the famous economist Lord Keynes. He very astutely observed that inflation is a process where the Government confiscates, almost secretly and unobserved, an important part of the wealth of its citizens. And higher the inflation the greater the amount of confiscation we believe. Is there a way to avoid this wealth destruction? There certainly is and the most conventional thing to do is to invest in assets that have a history of inflation beating returns. However, a growing number of communities in the US are adopting an even more radical strategy to deal with the economic woes of the country. CNN reports how this strategy is nothing but the usage of home grown local currencies. Not only have more local currencies started their operations but the membership for each currency has also seen a huge spike in interest. "With everything happening in the economy and the banking sector, people are paying more attention to their local communities and there's more awareness of keeping money in our community," observed an administrator of one of the currencies.

Thus, with people's faith in the fiat money system fast dwindling, are we about to go back to theera of gold standard? Well, only time will be able to answer this. All eyes are now on whether the upcoming Union Budget will offer more sops to manufacturing units, fiscal benefits to services and infrastructure and subsidies on crude. Agriculture that has enjoyed subsidy benefits year after year seems to be on the backburner now. In fact, this time there is a high possibility of fertilizer price rationalization, hike in diesel prices and some upward revision of electricity rates. Will these reforms make the case of Indian agriculture any better? In a country where farmer suicides get largely ignored, statistics about rising farm output and increased demand catch media and government attention. While the growth rate of agriculture has not been too disappointing in recent times, the same can be attributed to low base effect. The average rural income level too seems to be heavily influenced by the income from schemes like Prime Minister's 'Rojgar Yojana'. Hence if the rise in farming costs make the activity unviable for small and marginal farmers, there is a high possibility of them quitting farmlands altogether. Important to note that hired labour and fertilizers represent more than 60% of the total cost of cultivation. And these have seen rapid increases in recent years. Yet more than half the nation's youth is still employed in agriculture. Going forward, however, the employment in farmlands may be shunned by most. Hence, as correctly pointed out in an editorial in Mint, the challenge for the government is dual. It is not only to ensure a revival of growth in agricultural output, but also to ensure the revival in fortunes of those whose livelihood depends on it. Europe and the US look like they will not be recovering anytime soon which means that the onus lies on emerging countries to spur global growth. But that is easier said than done. Growth in Asia has settled into a middle pace. It is neither fast enough to accelerate global GDP (Gross Domestic Product) nor is it so slow that policymakers can afford to ease policies. Unlike the developed world where interest rates are already close to zero and debt has ballooned so as to leave little scope for more stimuli, Asian economies are not yet in such a sorry state. They still have headroom to cut interest rates and boost government spending. But given that many of the emerging nations including India have been battling inflation, easing rates is something that these economies may not rush to do. The World Bank in the meanwhile has cut its global growth forecasts to 2.5% this year and 3.1% next year. While its outlook for the developed nations remains gloomy, the Bank does not have a rosy view of the emerging nations either and has warned them to have contingency planning in place lest another crisis of the same scope as the global financial crisis erupts. However, given that they have their own headwinds to face, emerging countries may not pay much heed to World Bank's warnings and may be content with the current pace of growth and policymaking. Meanwhile, the Indian stock markets were trading in the positive territory but not before losing some of the initial gains. The BSE-Sensex was trading higher by 59 points (up 0.35%) at the time of writing. FMCG and healthcare stocks are trading weak while banking stocks are leading the rally. Major Asian indices are trading in thegreen with Japan and Korea leading the pack of gainers. European markets, however, have opened on a mixed note.

Decoding the political calculus on inflation

By Rudy Gopalakrishnan
Since the 1980s, India has not seen high rates of inflation for three consecutive years. There are good reasons for this. Economic history has taught us that inflation can be debilitating, destabilising and detrimental to governments who preside over long periods of high inflation. Mark Twain once said, "If you hold a cat by the tail, you will learn a lesson you won't learn any other way." Allowing inflation to fester in India was akin to holding a billion cats by the tail! Inflation has now been close to double digits for three years. Critics have been quick to print the epitaph on the ruling government's prospects in the 2014 elections, while others have been even less charitable, questioning whether the government will survive its term. But these criticisms may potentially be mistimed, for inflation has yet to hurt economic growth in any material way. Take the rural-based agriculture workers, for example, who account for only 16% of GDP but 52% of the employed workforce. The government has largely protected agricultural workers from the effects of inflation. First, income-enhancing policies such as hikes in minimum support prices (MSPs) well above historical increases have helped bolster farm incomes. Second, NREGA has put money into the hands of individuals, benefiting both the urban and rural poor. Third, rural spending has risen considerably over the last few years. A study by the International Food Policy Research Institute has shown that the building of rural infrastructure, especially the road sector, had a disproportionate rise on non-farm incomes. This has held true even in places like China, where it is estimated that every $1 rise in rural road infrastructure saw a $4.5 increase in non-farm GDP due to investments in ancillary businesses and services. In short, incomes, both farm and non-farm, have seen considerable appreciation in the last three years. Let us integrate these thoughts and consider the profit-and-loss account of the rural agricultural worker. Incomes have risen, in part due to MSP increases, NREGA and higher rural spending that has helped boost non-farm income. On the costs side, some items have largely stayed constant due to government subsidies power, fertiliser, LPG, kerosene and interest costs - while others - labour, pesticides, seeds, etc - have increased. So, the net income of the farmer has been flat, at best - hardly a doomsday scenario. The balance sheet of the rural worker looks even better. Thanks to the government's farm loan waiver, 'net debt' has shrunk without any cash flowing out. The potential of seeing a repeat of such a policy before the next election could mean that rural balance sheets will become even healthier. Do rural agricultural workers have much to be aggrieved about? Next, let us analyse industry data to understand the impact of inflation on India's 500 largest companies. In the aggregate, these companies have shown wage cost growth in line with inflation increases. Clearly, workers are getting compensated for higher inflation. You would

have expected this to have created some dent in corporate profitability but as a group, the BSE 500 companies have recorded high operating margins relative to historical levels. Pricing power and growth, the hallmarks of any business, appear as strong as ever. Even government employees, thanks to the Sixth Pay Commission, have seen incomes rise in line with inflation. Paradoxically, the ruling government seems to have shrewdly calculated that if inflation is a by-product of populist policies, so be it. Ultimately, as long as incomes rise faster than costs and GDP growth remains above 7%, the economic miracle of high growthhigh inflation we are witnessing today will be sustained. The reality, however, is that no country in the world has ever gained its way to prosperity by running high levels of inflation. India will be no exception. Ultimately, if the government doesn't time the recalibration of policies correctly, the flaying of the government by critics will seem thoroughly deserved. For example, MSP increases, NREGA and rural spending without regard to productivity improvements could culminate in some dire, albeit unintended, consequences. In addition, with the government linking NREGA to inflation, farm costs are bound to increase. This, in turn, will necessitate higher MSPs, but higher MSPs will lead to higher inflation, so the circuitous spiral of higher inflation via higher incomes is complete. Strong corporate profitability and double-digit wage inflation have coexisted, surprisingly, over the last few years. If inflationary expectations take hold, the economics of businesses, both public and private, will move from the impossible to the inevitable without stopping at the probable. What is incontrovertible is that a 'soft landing' will be required in India as much as anywhere else in the world. It will be interesting to see who will be in the control room when this happens.