Month: October 2014

Why the next global recession will be made in China

china

Vivek Kaul

A Central Intelligence Agency (CIA) paper on China is titled The Art of China Watching. In this paper, the author Gail Solin concedes that “[t]he art of China-watching is imprecise at best….The explanation, or blame, for this often frustratingly lies mainly with the way the Chinese conduct their affairs. To say the Chinese have a penchant for secrecy is almost an understatement.”
This CIA paper was written sometime in the 1970s. Things haven’t changed nearly four decades later. China-watching is still imprecise at best. Or, as one China-watcher put it in May 2013 “It’s a big black box, and it’s quite scary.”
The Chinese property sector is not in the best shape. Home prices fell by 9.3% between April and June 2014, in comparison to the same period last year. Further, data from the National Bureau of Statistics shows that in August 2014 home prices fell in 68 out of the 70 major cities.
This is a worrying trend given that a substantial part of the China growth story is built on the belief that the real estate prices will only go up. Analyst Wei Yao of Societe Generale explained the situation the best in a recent research note titled China: easing mortgages will not make the pain go away, where she said that there was a “strong belief in ever-rising property prices” and that “ has been a major incentive for [people] to make investments in this illiquid asset class.”
Once people give up on this belief, they will stop buying property, which in turns will have massive economic consequences. As Yao puts it “Whether there will be a harsh correction in real estate investment or a mild one, the property price developments in the next two quarters will be the key.”
Nevertheless, the data that has come in up until now, isn’t looking too good. As mentioned earlier housing prices fell by 9.3% between April and June 2014. The situation deteriorated further during July 2014, when the sales fell by 16.3%. This has been the deepest contraction in home sales since late 2008, when the current financial crisis started.
The slowdown in home sales has led to the accumulation of unsold homes. As Wei Yao points out in another report titled China: In the shadow of housing “The ratio of unsold apartments to monthly sales of completed apartments reached an all-time high of 17.1 in June. There is also a big pipeline of projects under construction….Even though growth of floor space under construction has fallen to the lowest level ever, it would take more than 40 months to clear all the supply, based on the current pace of sales – much longer than ever before!”
Further, a major part of the demand for housing in China is now investment led demand. And with falling prices, the investors are likely to stay away.
And this is worrying sign for the Chinese economy. The question is why is the well being of the property sector so important for China? Analysts Manish Raychaudhuri and Rajan Jain of BNP Paribas explain this in a research note titled On the ground in the Middle Kingdom. As they write “a large part of the Chinese economy is directly or indirectly driven by real-estate activity. 67 different industries are directly or indirectly dependent on property, 25% of incremental employment is directly or indirectly generated by the property sector, and 60% of funding of local governments comes from land sales.”
Land sales are a very important part of revenues of local governments. And if the Chinese are not buying as many homes as are being produced, the local government will not get the kind of prices they were getting for their land in the past. The value of the land sold in 100 major cities fell by 51% in July 2014.
The Chinese government has gone quickly into action and has asked banks to give a “helping hand to first time buyers”. Over and above this, 47 out of 70 major cities have relaxed the home purchase restrictions that they had made.
On September 30, 2014, the People’s Bank of China, the Chinese central bank allowed banks to reduce their home loan interest rate to 70% of their benchmark rate but banks don’t seem to be cutting rates.
As Raychaudhuri and Jain write “Banks seem unwilling to reduce their mortgage lending rates to 70% of benchmark rates (as permitted by the PBOC on 30 September 2014). Most property developers we spoke to feel that the best case would be banks reducing lending rates to about 90% of benchmark rates. The issue seems to be that banks are not sure of the value of their collateral (property prices).”
Given this, home sales haven’t gone up despite efforts being made by the government. “Following the mortgage policy relaxation announcements, enquiries have gone up but not translated into increased sign-ups…Developers expect prices to fall 5-10% in tier-1 cities and 10-15% in tier-2 cities in coming months,” the BNP Paribas analysts point out.
All this means a slowdown in Chinese economic growth. And this slowdown is likely to lead to a slowdown in global growth as well. The reason for this being that China is now responsible for more than one third of global growth. As Ruchir Sharma, head of Emerging Markets and Global Macro at Morgan Stanley Investment Management wrote in a recent column in The Wall Street Journal “China has replaced the U.S. as the main engine of the global economy. Its contribution has more than tripled to 34% of global growth this decade from 10% in the 1990s. The U.S. contribution, on the other hand, has fallen to 17% from 32% in the 1990s.”
With China slowing down, it will mean that its demand for various commodities will fall. As Sharma points out, there has been no growth in the Chinese demand for oil this year. It was at 12% in 2010. And this is one of the major reasons why the price of oil has been falling.
The prices of a lot of other commodities ranging from aluminium to zinc to iron ore and steel, will also take a beating. This is clearly not a good sign for many countries whose growth totally depends on commodity exports. As Societe Generale analysts point out in their September 2014 Global Economic Outlook report “For commodity producers, the implications hereof are already being felt. Those economies that have failed to diversify are now paying the price.”
In fact, the Chinese slowdown is reflected in the producers price index (or what we call the wholesale price index) which has been falling since early 2012. In fact, September 2014, saw the biggest month on month drop of 0.4%, points out Yao. This fall in prices has been transmitted to other parts of the world and commodity export driven economies are already feeling the heat.
Interestingly, Sharma feels that China’s actual GDP growth rate may now be lower than official 7%. Also, what does not help is the huge amount of debt that the various sections of the Chinese economy have ended up accumulating. The total Chinese debt currently stands at around 230% of GDP. In fact, the various sections of the Chinese government remain the biggest borrowers.
As Sharma points out “Since 1960, the nations that indulged the 30 biggest credit binges all saw credit rise as a share of GDP by at least 40 percentage points over five years. Of those 30 cases, 70% ended in a crisis after the credit boom peaked, but 100% experienced a major economic slowdown within the next five years. On average, growth slowed by more than half, to 1.5% from 5%.”
This Chinese slowdown as and when it occurs will pull down the global economy along with it as well.

The article was originally published on www.FirstBiz.com on Oct 18, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek) 

Oil prices are at a 4 year-low now but assuming that they will continue to fall is risky business

 oil

Vivek Kaul

Oil prices have been falling for a while now and have now touched a four year low. As per the data published by the Petroleum Planning and Analysis Cell, the price of the Indian basket of crude oil touched $ 82.83 per barrel on October 16, 2014.
There are several reasons for the fall (You can read about them in detail here and here). Analysts expect this growth to continue to fall in the years to come. Several fundamental reasons have been offered as an explanation for the same.
As Crisil Research points out in a research report titled Falling crude, LNG, coal prices huge positive for India “Over the next five years, we expect global oil demand to increase by 4-4.5 million barrels per day (mbpd). However, crude oil supply is expected to increase by 8-10 mbpd. This, we believe, will bring down prices from current levels.”
This augurs well for India as falling oil prices will ensure that the under-recoveries suffered by the oil marketing companies(OMCs) on selling diesel, cooking gas and kerosene, will fall. The government has been compensating the OMCs for these under-recoveries. Falling under-recover will mean lower government expenditure leading to a lower fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends.
Analysts Harshad Katkar and Amit Murarka of Deutsche Bank Markets Research in a report titled Breaking Free point out that “Fuel subsidy could fall to an annual level of $7billion – a 70% reduction over financial year 2014 – by financial year 2020 and potentially reduce the government’s fuel subsidy burden to zero by 2021 driven by elimination of the diesel subsidy and rationalization of the cooking fuel subsidy.”
These arguments sound pretty good. The only problem is that predictions on which direction oil prices are headed invovle too many variables and predicting all these variables at the same time is not an easy thing to do.
On several occasions in the past, well renowned experts have ended up with eggs on their face while trying to predict the price of oil. In January 1974, the Organization of Petroleum Exporting Countries (OPEC) raised the price of oil to $11.65 per barrel. This was after OPEC’s economic commission had determined that the price of oil should be $17 per barrel.
It was around then that the economist Milton Friedman wrote in a column in the Newsweek magazine where he predicted that “the Arabs … could not for long keep the price of crude at $10 a barrel.”
By early 1981, the price of oil had risen to $40 a barrel. A spate of reasons including the politics of the Middle East were responsible for this rise. Other than the politics of the Middle East, in April 1977, the Central Intelligence Agency (CIA) of the United States had come up with a highly influential report which predicted that the growth of the world oil demand would soon outpace production.
This was primarily because of constraints on the OPEC production. The Soviet Union, another big oil producer, would reach its peak soon. This meant that by the mid-1980s, oil would become very scarce and expensive, the report pointed out.
Customers, including some of the biggest international oil companies, were queuing up to buy oil. The report succeeded in generating sufficient paranoia among the oil-consuming nations as well as the big oil-producing companies. Hence, they wanted to buy as much oil as they could.
All the doomsday predictions regarding the price of oil turned out to be wrong. By 1983, the average OPEC price had fallen to $28 per barrel leading to some members of OPEC offering additional hidden discounts in an attempt to boost their stagnating sales.
By 1986, the price of oil was quoting again at $10 a barrel, proving the CIA prediction to be all wrong. Milton Friedman, though, was right about the price in the end. And Friedman would write a “I told you so” column in Newsweek which appeared on March 10, 1986, titled “Right at Last, an Expert’s Dream.” This, of course, was in jest. As Friedman confessed, “Timing, as well as direction, is important…I had expected the price of oil to come down far sooner.”
What this tells us is that it is very difficult to predict the long term direction of the price of oil. One reason why oil prices have not risen in the recent past despite the rise of Islamic State of Iraq and Syria (ISIS) is because the outfit has not been able to move into the southern part of Iraq where a major part of the country’s oil is produced. Southern Iraq is dominated by the Shias who do not support the ISIS.
Then there is the so called deal between Saudi Arabia and the United States, where the ruling dynasty of Saudi Arabia is believed to have engineered a fall in the price of oil so as to ensure that the security guarantee that they have from the United States, continues.
The trouble is that with the price of oil now lower than $85 a barrel, the shale oil boom that is happening in the United States and Canada, might not be able to continue. Shale oil is expensive to produce and it is financially viable only if the price of oil remains at a certain level. As analysts of Bank of America-Merrill Lynch point out in a report titled Does Saudi want $85 oil? “With production costs ranging from $50 to $75/bbl at the well head, a decline in Brent crude oil prices to $85 would likely be a major blow to US shale oil players and lead to a significant slowdown in investment.”
The shale oil boom can lead to a situation where the United States no longer needs to depend on the Middle East and other countries to meet its oil needs. Hence, to some extent it is in the interest of the United States that oil prices continue to fall. At the same time, one reason that dollar continues to be the international reserve currency is because oil continues to be bought and sold in dollars.
Saudi Arabia over the years has cracked the whip among the OPEC nations to maintain a status quo on this front. It is in the interest of the United States that the dollar continues to be the international reserve currency. While every country in the world needs to earn dollars, the United States can simply print them.
And to ensure that dollar continues to be a reserve currency, the United States, needs Saudi Arabia on its side. The Saudis currently would prefer a lower price of oil, in order to make the production of shale oil unviable. At the same time they would like the security guarantee they have from the United States to continue, in order to protect them against the ISIS.
As the Bank of America-Morgan Stanely analysts point out “It should perhaps not come as a surprise that the threat of a stateless group that challenges the status quo by attempting to redraw national borders is shifting incentives for key regional and global players…The Islamic State could present a direct threat to the Arab monarchies at a time of growing social discontent…In our view, Saudi and other regional rulers may prefer to re-engage the US to help protect established borders from the expanding caliphate. What could Arab countries offer the West to help contain this threat? Lower oil prices.”
This issue is too complex to make a prediction on. Nevertheless it will have a huge impact on the direction in which oil prices will go in the years to come. Further, the chances of the current turmoil in the Middle East escalating, still remain. As Milton Ezrati writes in a piece titled ISIS, Oil, and the Economy on Huffington Post “There is no mistaking the huge remaining importance of Persian Gulf supplies. If the turmoil there were to take a significant portion of this output off line suddenly, the world would be hard pressed to replace it, and prices would rise with all their ill effects.”
He further points out that “the Persian Gulf itself is also a choke point of no small significance in oil transport. The EIA reports that upwards of 35 percent of sea going oil and gas passes through the Gulf and the narrow Strait of Hormuz at its head. If Iran were to become further embroiled in Iraq’s problems or otherwise come to a confrontation with Western powers, the strait would close and the world would find itself without any of this still crucial supply.”
The price of oil is not just determined by the demand and supply equation. The politics of the Middle East and which side of the bed Uncle Sam wakes up from remain very important factors. For any analyst trying to predict the price of oil, taking all these “qualitative” factors into account remains very difficult.
To conclude, what are the lessons that we can draw from this. First and foremost we need to ensure that the price of diesel is decontrolled. And more than that we need to ensure that it continues to be decontrolled in the years to come, even if the global price of oil rises.

The article originally appeared on www.FirstBiz.com on Oct 18, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek) 

Number tricks

rupee

The main page of one of India’s largest e-commerce websites advertises an array of products which can be bought from it. It is interesting to see the prices of a large number of products being sold. As I write this in early August there is a bag being sold for Rs 399, an LED television for Rs 12,299, an insect repellent for Rs 199, a telephone for Rs 14,899, a pair of sunglasses for Rs 1399, a watch for Rs 999 and so on. There are many books also being sold at prices of Rs 299, Rs 399 and Rs 499 respectively.
There is a clear effort to sell products at a price which ends with the digits 99. Hence, the LED television does not cost Rs 12,300 but Rs 12,299. And the watch does not cost Rs 1,000 but Rs 999. This is the e-commerce avatar of what is basically an age-old marketing trick.
The original explanation for this trick was that it was a technique used by retailers to deter theft by their cashiers, before computers had made an appearance in retail. If something was priced at $1, the cashier could simply put the money into his pocket, when the consumer paid for it. But if the same product was priced at $0.99, it was unlikely that the consumer would offer the exact amount to pay for the product. He was likely to pay $1. Hence, the cashier would have to open the till to repay one cent to the consumer and the moment he did that, the chances of him recording the sale and not pocketing one dollar, went up. But this explanation sounds too good to be true in this day and age.
As Tim Harford the author of such wonderful books like The Undercover Economist asks in a column “Cunning. That’s not really why product prices end in 99p[pence], though, is it?” “Probably not – perhaps it once was, but in a world of credit cards, e-commerce and self-checkout, the story does not really fit. We need to look for a psychological explanation,” Harford goes onto write.
The real reason behind products being sold at prices ending in 99, lies in the fact that most people read from left to right and because of that the first digit of the price registers the most on the human mind. This is referred to as the left-digit effect. As Alex Bellos writes in his new book Alex Through the Looking Glass “When we read a number, we are influenced by the leftmost digit than we are by the rightmost since that is the order we read, and process, them. The number 799 feels significantly less than 800 because we see the former as 7-something and the latter as 8-something.”
Due to this reason since the 19th century shopkeepers have chosen prices ending in 9 and hence tried to create the impression that a product is cheaper than it actually is. “Surveys show that anything between a third and two-thirds of all retail prices now end in 9,” writes Bellos. In fact, controlled experiments carried out by economists have shown that when prices end in 99, sales tend to go up.
As Bellos points out “In 2008, researchers at the University of Southern Brittany[in France] monitored a local pizza restaurant that was serving five types of pizza at €8 each. When one of the pizzas was reduced in price to €7.99, its share of sales rose from a third of the total to a half. Dropping, the price by one cent, an insignificant amount in monetary terms, was enough to influence customers decisions dramatically.”
In fact, just ensuring that the price of a product ends with the digit 9 leads to better sales. Eric Anderson and Duncan Simester explain this very well in a Harvard Business Review article titled Mind Your Pricing Cues published in September 2003. As they write “Response to this pricing cue is remarkable. You’d generally expect demand for an item to go down as the price goes up. Yet in our study involving women’s clothing catalog, we were able to increase demand by a third by raising the price of a dress from $34 to $39. By comparison, changing the price from $34 to $44 yielded no difference in demand.”
E-commerce, which is the newest kid on the block when it comes to retail business, has been using this age-old trick very well. Interestingly, researchers also point out that pricing a product ending with digits 9/99 acts in the same way as a sale sign and tells consumers that they are getting a good deal. “Some retailers do reserve prices that end in 9 for their discounted items. For instance, J. Crew and Ralph Lauren generally use 00-cent endings on regularly priced merchandise and 99-cent endings on discounted items,” write Anderson and Simester.
Even Bellos makes a similar point in his book. As he writes “An up market restaurant, for example, would never dream of pricing a main course at, say, £22.99. Nor would you trust a therapist who charged £ 59.99 a session. The prices would be £23 and £60, which feel both classier and more honest.”
An e-commerce website trying to sell everything under the sun, doesn’t need to be classy. It’s unique selling proposition is based on giving the consumer a better deal than he is likely to get if he were to buy the same product from a local shop. Hence, it makes tremendous sense for e-commerce websites to price products ending with digits 99 and give the consumer a sense that he is getting a better deal.
To conclude, there is another number trick that the e-commerce websites can use to drive up their sales. Researchers at the Cornell University tested a very interesting idea at a Cafe in Hyde Park, New York. They found that consumers tend to spend more when the currency sign was left out of the menu. Hence, consumers were quicker to spend money when the price was listed as 10 rather than $10. By doing this they were able to increase sales by 8%. By leaving out the dollar sign, the researchers ensured that the “price of paying” response wasn’t triggered while paying and hence, the consumers ended up paying more.
This is something that e-commerce websites in India can easily test by doing a controlled experiment. Prices without the rupee sign can be offered to one set of customers. And prices with the rupee sign can be offered to another set of customers. The results can then be checked out to see if there is any increase in sales.

The article originally appeared in the Sep 2014 edition of Mutual Fund insight magazine.

(Vivek Kaul is the author of Easy Money: Evolution of the Global Financial System to the Great Bubble Burst. He can be reached at [email protected])

Why the Rs 7,00,000 crore EPFO needs to look beyond just public sector stocks

EPFOLogoVivek Kaul

A news report in The Times of India today (i.e. October 17,2014) points out that the Employee Provident Funds Organization (EPFO) wants to invest a portion of its corpus in stocks. As the report points out “At an informal meeting with labour minister Narendra Singh Tomar on Monday, representatives from Congress-backed INTUC and Bharatiya Mazdoor Sangh, which is affiliated to the ruling BJP, offered their support to a diversification of the EPFO’s investment mix into public sector stocks. At the same time both recommended that such investment should only be undertaken on expert advice.”
The Rs 7,00,000 crore EPFO currently invests only in government securities. Hence, from the point of view of diversification of investment, this proposal, if it goes through, makes immense sense. Nevertheless, there are several problems with the proposal in its current form.
First and foremost the EPFO wants to currently invest money only in ‘navratna’ public sector stocks. There are a couple of problems with this. If the idea is to give investors in EPFO a certain exposure to equity, then why limit it to only the best public sector companies?
The second problem is that the free float of the public sector companies is a lot lower in comparison to the overall market. Free float is essentially the number of shares that are deemed to be freely available in the market. In case of public sector companies the shares held by the government are not considered to be available for sale.
The free float of the companies that constitute the BSE Sensex works out to 53.3% currently. In comparison the free float of the public sector companies that constitute the BSE PSU Index, it works out to 29.2%.
Even if only 5% of the employees provident fund (EPF) corpus were to be invested in the stock market, this would mean Rs 35,000 crore of new money suddenly finding its way into public sector stocks. With a low free float, so much new money is likely going to drive up the value of public sector stocks. Hence, EPFO will end up buying stocks at a higher price. And this in turn will impact the return that the EPFO investor earns.
This is why it is important that the EPF invests in the best companies and not the best public sector companies. A simple way to do this would be to run an index fund which simply invests in stocks that constitute the BSE Sensex or the NSE Nifty. An index fund simply invests in stocks that constitute a market index.
Further, the EPFO wants experts to manage their equity investment. Experts repeatedly get the direction of the stock market wrong and this is something that EPFO can ill-afford at the beginning of what is basically an experiment. A better bet is to simply run an index fund and keep experts out of the equation totally. It is important that investors in the EPF, at least earn the market rate of return, first.
As far as experts are concerned, it is worth remembering what Nassim Nicholas Taleb writes in The Black Swan, The Impact of the Highly Improbable, “Simply, things that move, and therefore require knowledge, do not usually have experts, while things that don’t move seem to have some experts. In other words, professionals that deal with the future and base their studies on the non repeatable past have an expert problem. I am not saying that no one who deals with the future provides any valuable information, but rather that those who provide no tangible added value are dealing with the future.”
Stock market experts have to deal with future and base their decisions on a non repeatable past. The EPFO needs to remember this while deciding how to manage its investments into stocks.

This article originally appeared on www.FirstBiz.com on Oct 17, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Yes, inflation is lower, but Arun Jaitley should not be happy about it just yet

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010Vivek Kaul

The wholesale price index (WPI) inflation for September 2014 came in at a five year low of 2.38%. In a statement released yesterday, after the WPI inflation number was published, the finance minister Arun Jaitley said “It is heartening to note that we have been able to bring food inflation under control. Growth in vegetable and protein prices that have been contributing to the recent increase in inflation rates have shrunk thanks to the steps taken by the government. We are committed to continuing reforms in food markets that will improve supply responses and keep inflation low and stable.”
Food inflation, which forms around 14.34% of the wholesale sale price index, stood at 3.52% during September 2014. In comparison it had stood at 18.68% during September 2013. The price of the politically sensitive onion crashed by 58% in September 2014, in comparison to a year earlier. Vegetable prices have fallen by 14.98%. But potato prices rose by 90.23% during the same period. Fruit prices were up by 20.95% and milk by 11.55%. Nevertheless, the overall rise in food prices has slowed considerably in comparison to the last few years.
The government deserves some credit for this, but there are clearly other factors at work as well. The global food prices have also fallen in the recent past. The Food and Agricultural Organization of the United Nations said in a recent statement that the “the decline” in food prices “in September marks the longest period of continuous falls in the value of the index since the late 1990s.” Food prices in September 2014 fell by 2.5% in comparison to August 2014 and 6% in comparison to September 2013. Hence, global food prices have also had an impact.
While Jaitley is quick in taking trading for controlling inflation, he offers no explanation for the low manufacturing products inflation. Manufacturing products make up 64.97% of the wholesale price index. Inflation in this group was at a low 2.84% during September 2014. This was not significantly different from the 2.36% inflation that prevailed during the same period last year.
A low manufacturing products inflation is a reflection of the low consumer demand that has been prevailing in India for a while now. For more than five years, food inflation in India was at very high. High inflation ate into the incomes of people and led to a scenario where their expenditure went up faster than their income. This led to a cut down on expenditure which is not immediately necessary. As I have often pointed out in the past, half of the expenditure of an average household in India is on food. In case of the poor it is 60% (NSSO 2011)
When people cut down on expenditure, the demand for manufactured products falls as well. This lack of demand is also visible in the index of industrial production(IIP) number, which rose by a minuscule 0.4% in August 2014 in comparison to August 2013. The IIP is a measure of industrial activity in the country.
Nevertheless high inflation can no longer be an explanation for lack of consumer demand. Inflation has constantly been falling over the last few months. So why isn’t the Indian consumer in the mood to get his shopping bags out again? One possible explanation is that despite falling inflation, inflationary expectations still remain high (or the expectations that consumers have of what future inflation is likely to be). Or as economists like to put it the inflationary expectations have become firmly anchored.
A good data point to look at is the Reserve Bank of India’s Inflation Expectations Survey of Households: September – 2014 which was a survey of 4,933 urban households across 16 cities, and which captures the inflation expectations for the next three-month and the next one-year period. The median inflation expectations over the next three months and one year are at 14.6% and 16%. In March 2014, the numbers were at 12.9% and 15.3%. Hence, inflationary expectations have risen since the beginning of this financial year.
The RBI points out that these inflationary expectations “are based on their individual consumption baskets and hence these rates should not be considered as benchmark of official measure of inflation.” Nevertheless, “the households’ inflation expectations provide useful directional information on near-term inflationary pressures.”
What these numbers clearly tell us is that the Indian consumer is still not convinced about the fact that low inflation is here to stay. As the RBI Survey points out “The survey shows that housewives and retired persons have marginally higher level of inflation expectations based on median inflation rates…About 72.8 per cent (72.0 per cent in the last round) and 78.7 per cent (74.0 per cent in the last round) of respondents expect double digit inflation rates for three-month ahead and one-year ahead period, respectively.”
These expectations have ensured that the low consumer demand scenario has continued despite a fall in inflation. This also explains why many analysts are downgrading the economic growth expectations for this financial year. JP Morgan recently predicted an economic growth of only 5.1%, instead of the earlier 5.3%.
The only way the Indian consumer will get his shopping bags out again is if inflation continues to stay low for a while. Whether that happens remains to be seen. Some economists are still not convinced that the spiral of food inflation has been broken. They feel only after November 2014, the real picture on the food inflation front will start to emerge, once the impact of the below normal monsoons on summer crops becomes more visible.

The article originally appeared on www.FirstBiz.com on Oct 16, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)