Investing lessons from Aam Aadmi Party’s Delhi win

Last week saw David(read the Aam Aadmi Party(AAP)) beat Goliath(read the Bhartiya Janata Party (BJP)) in the Delhi elections. AAP won 67 out of the seventy seats in the Delhi assembly, leaving only three seats for the BJP. This led to one WhatsApp forward which suggested that Delhi should now allow tripling(three people travelling on a bike) so that BJP legislators could ride to the Delhi assembly on a bike. Another forward suggested that the BJP legislators could drive to the assembly in a Tata Nano.
Jokes apart, in the aftermath of this electoral debacle many reasons have been offered on why and how the BJP lost Delhi. Reasons have also been offered on why and how the AAP won Delhi. Let’s sample a few here. The ghar wapasi campaign launched by the Sangh Parivar backfired in Delhi. The BJP ran a very negative and a highly vitriolic campaign against AAP and that didn’t quite work.
The AAP supporters on the other hand have been pointing out to the fact that the party ran a positive campaign and that went down well with Delhi residents. Further, the 49 days that Arvind Kejriwal was chief minister of Delhi, the levels of petty corruption in Delhi had come down dramatically. And this, we are told, is something that the people of Delhi haven’t forgotten.
Long story short—the number of reasons offered on AAP’s spectacular performance and BJP’s wipe out, is directly proportional to the number of political pundits analysing the issue. Nevertheless, most of these reasons have been offered with the benefit of hindsight. Most political pundits had no clue about BJP ending with up three seats and the Narendra Modi juggernaut losing steam. But now that it has happened, they need to find reasons and explanations for the same.
As Gary Smith writes in Standard Deviations—Flawed Assumptions, Tortured Data and Other Ways to Lie With Statistics: “Through countless generations of natural selection, we have become hardwired to look for patterns and to think of explanations for the patterns we find…We yearn to make an uncertain world more certain, to gain control over things we do not control, to predict the unpredictable.”
Also, some political pundits have now even said that they saw the whole thing coming and offered explanations of the same. As Nassim Nicholas Taleb writes in Fooled by Randomness: “Things are always obvious after the fact…It has to do with the way our mind handles historical information…Our mind will interpret most events not with the preceding ones in mind, but the following ones.” This tendency is referred to as hindsight bias in psychology.
Daniel Kahneman defines this in his book Thinking, Fast and Slow: “When an unpredicted event occurs, we immediately adjust our view of the world to accommodate that surprise…Once you adopt a new view of the world(or of any part of it), you immediately lose much of your ability to recall what you used to believe in before your mind changed.”
This leads to a situation where one feels that one has understood as well as predicted the past and given that one further feels that one can predict as well as control the future. As Jason Zweig writes in Your Money & Your Brain—How the New Science of Neuroeconomics Can Help Make You Rich: “Hindsight bias is another cruel trick that your inner con man plays on you. By making you believe that the past was more predictable than it really was, hindsight bias fools you into thinking that the future is more predictable than it ever can be.”
This is exploited in particular by financial pundits. As Kahneman writes: “Our tendency to construct and believe coherent narratives of the past makes it difficult for us to accept the limits of our forecasting ability. Everything makes sense in hindsight, a fact that financial pundits exploit every evening as they offer convincing accounts of the day’s events. And we cannot suppress the powerful intuition that what makes sense in hindsight today was predictable yesterday.” That of course is not the case.
Hindsight bias also is also at work when we invest. An excellent example, is of investors saying after a bubble has burst, that they knew all along it was a bubble. But the thing is that if a bubble is obvious to enough investors at the time it is in its initial stage, there would be no bubble in the first place.
Zweig has an excellent example in his book of the link between hindsight bias and investing. As he writes: “In the fall of 2001, after the terrorist attacks of September 11, you tell yourself, “Nothing will ever be the same again. The U.S. isn’t safe any more. Who knows what they’ll do next? Even if stocks are cheap, nobody will have the guts to invest.” Then the market goes on to gain 15% by the end of 2003, and what do you say? “I knew
stocks were cheap after September 11th!””
The moral of the story here is that you may have been able to explain the entire situation to yourself, but you have missed out on the rally.
Then there is the case of missing out on a bumper initial public offering. Zweig offers the case of Google which first sold its shares in August 2004. At that point of time, an investor wanting to invest in the stock, would have thought back about the bursting of the dotcom bubble and the money that he had lost back then.
Using this logic he would have decided not to invest in the stock. He would have then seen the price of the stock jump from the initial price of $85 to $460 by end 2006 and told himself: “I knew I should have bought Google!”
And this would lead to a change in the worldview of the investor and may well make him “more eager to take the plunge” the next time he has “a chance to get in on the ground floor of a risky high-tech start-up.” But as Zweig puts it: “Of course, “the next Google” may turn out to be the next Enron instead.”
Given these reasons it is very important for investors not to become victims of the hindsight bias while investing.

(The article originally appeared on as a part of The Daily Reckoning on Feb 16, 2015)

One lesson from many lessons offered on BJP’s Delhi defeat

narendra_modiA small industry seems to have evolved around trying to explain why the Bhartiya Janata Party(BJP) lost the Delhi elections. A spate of reasons have been offered. One gentleman even went to the extent of saying that it was a weekend, and the BJP voters were not in Delhi.
And then there have been regular reasons like the fringe elements in the Sangh Parivar and the comments they have been making, costing BJP the election. It was also said that the BJP ran a very negative campaign in Delhi, where they targeted Arvind Kejriwal more often than they should have.
Some political pundits have done a complete turnaround and been telling us that they knew all along that the BJP would lose big time in Delhi. The best explanation for this came on one of the Hindi news channels on the day when votes polled for the Delhi election were being counted.
A journalist explained that he had covered the prime minister Narendra Modi’s rallies in Delhi and they did not attract the same kind of crowd that they had when the BJP organized rallies with Modi as the star speaker, at the time of the Lok Sabha elections. He further explained that he saw people leaving the rally even before Modi’s speech had ended. And that was a clear habinger of things to come.
The question is—if this journalist was so sure about all this, why didn’t he say so at the time the rallies were held. Or even other analysts and journalists who have been coming up with different reasons for BJP’s loss in Delhi—if they were so sure, why didn’t they say so earlier?
The “I already told you so,” explanations that have been offered in the aftermath of BJP’s Delhi defeat are an excellent example of what psychologists and behavioural economists call “hindsight bias”.
The Nobel Prize winning economist Daniel Kahneman defines hindsight bias in his book Thinking Fast and Slow, as follows: “When an unpredicted event occurs, we immediately adjust our view of the world to accommodate that surprise…A general limitation of the human mind is its imperfect ability to reconstruct past states of knowledge, or beliefs that have changed. Once you adopt a new view of the world(or of any part of it), you immediately lose much of your ability to recall what you used to believe in before your mind changed.”
Hindsight bias is also referred to as “I knew it all along effect”. As Nassim Nicholas Taleb writes in Fooled by Randomness: “Our minds are not quite desinged to understand how the world works, but, rather, to get out of trouble rapidly and have progeny. If they were made for us to understand things, then we would have machine in it that would run the past history as in a VCR, with a correct chronology, and it would slow us down so much that we would have trouble operating. Psychologists call this overestimation of what one knew at the time of the event due to subsequent information…the “I knew it all along” effect.”
This bias is clearly at work in the explanations that are now being offered for BJP’s shocking defeat in Delhi. One explanation that has been offered is that the freebies/sops offered by the Aam Aadmi Party, essentially led to BJP’s wipe out. But if that were the case then Ashok Gehlot would not have lost in Rajasthan and neither would have M Karunanidhi, the last time they faced the electorate. Oh, and what about Sonia Gandhi? If it were just about offering freebies to voters, would the Congress have been reduced to 44 seats in the current Lok Sabha?
This brings us back to the question, why did the BJP lose so badly in Delhi? One answer lies in the fact that the vote share of the Congress party collapsed and it moved lock, stock and barrel to the Aam Aadmi Party. Why did this vote share not move to the BJP? This is where all the explanations start to come in. But almost all these theories are a matter of conjecture because nobody really knows what’s going on in the minds of a huge number of voters.
The human mind likes explanations for what it does not understand. As Gary Smith writes in Standard Deviations—Flawed Assumptions, Tortured Data and Other Ways to Lie With Statistics: “Our inherited desire to explain what we see fuels two kinds of cognitive errors. First, we are too easily seduced by patterns and by the theories and discount contradicting evidence. We believe stories simply because they are consistent with the patterns we observe and, once we have a story, we are reluctant to let it go.”
In the context of the Delhi elections what this means is that if you are a BJP supporter you would like to believe that the BJP lost because the Aam Aadmi Party offered freebies to voters. If you are an Aam Aadmi Party supporter you would like to believe that the party won because of the positive campaign that it ran. But as Smith points out: “Order is more comforting than chaos…Our vulnerability comes from a deep desire to make sense of the world, and it’s notoriously hard to shake off.”
Further, the more unpredicted an event is, the greater is the hindsight bias. Kahneman explains this through the example of 9/11. As he writes: “In the case of a catastrophe, such as 9/11, we are especially ready to believe that the officials who failed to anticipate were negligent or blind.”
On July 10, 2001, the CIA received information that al-Qaeda was planning an attack on the United States. The CIA director George Tenet told the National Security Adviser Condoleeza Rice and not President George Bush.
When Ben Bradlee the legendary executive editor of The Washington Post came to know of it, he remarked: “It seems to me elementary that if you’ve got the story that’s going to dominate history you might as well go right to the president.” This is classic hindsight bias.
As Kahneman writes: “But on July 10, no one knew—or could have known—that this tidbit of intelligence would turn out to dominate history.”
Long story short—it is always easy to be wise after the event. And that is what is happening with all the lessons/explanations that have been offered for BJP’s defeat in Delhi.

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

The column originally appeared on on Feb14, 2015

Big Retail is no monster: By not allowing FDI, BJP proves it’s a party of traders

WalmartVivek Kaul

In a press conference to mark the 100 days of the Narendra Modi led National Democratic Alliance (NDA) government, commerce minister Nirmala Sitharaman said “We are clear that FDI will not be allowed in multi-brand retail trade….There is no ambiguity. There is no confusion on this.”
This decision makes no sense from multiple angles. The big fear is that all the foreign companies that might come into India through the multi-brand retail route or big retail as it is better known as, will source their products from China.
But the thing is even without the presence of foreign companies in big retail, goods are being sourced from China. If a foreign player in big retail can source products from China, so can Indian companies.“Made in China” is a part of our lives now. The
pitchkaris used in Holi and the statues of Lakshmi and Ganesh, without which no Diwali celebration is complete, are also being sourced from China. A lot of the electronic products that we buy are Made in China. Some of India’s biggest mobile phone brands source their products from China, and simply brand it and sell it in India.
As Professor Rajiv Lal of Harvard Business School said in an interview to
Forbes India “without the presence of big retail, if Indian companies are already sourcing from China, and the Indian consumer does not mind them sourcing from China, then what are we talking about.”
The other big fear is that foreign players in big retail will destroy the Indian players in the market. Evidence from other emerging markets suggests otherwise. Pankaj Ghemawat, Anselmo Rubiralta Professor of Global Strategy at IESE Business School in Barcelona, Spain, in an interview to
Forbes India argued that much of the fear about FDI in retail is exaggerated, because even with full liberalisation, foreign retailers would hardly come to dominate the Indian market.
“Retail is a very local business, where an intimate understanding of customers, real estate markets, and so on, is essential to success,” he said. He cited a recent estimate that 40 foreign players account for only about 20% of organised retail in China, to suggest that foreign and domestic retail could thrive side-by-side in India.
“Foreign retailers don’t always win out against domestic rivals,” he added. “Electronics retailers Best Buy from the US and Media Markt from Germany both shut down their stores in China in the last few years. They just couldn’t compete with local rivals Gome and Suning, which had greater domestic scale and business models more attuned to the Chinese market. Home Depot also exited China in 2012. But Chinese consumers gained anyway – competition against foreign retailers spurred locals to improve customer service, one of their weak points.”
Also, as Ghemawat says retail is a very local business. And this is something that foreign companies trying to build economies of scale do not always take into account. In his book 
Redefining Global Strategy, Ghemawat points out a very interesting story. “As the former head of the company’s German operations, now shut down, plaintively observed, “We didn’t realise that pillowcases are a different size in Germany.””
The third fear is that the big retail will end up destroying the
kirana shops. As Anthony Bianco writes in The Bully of Bentonville – How the High Cost of Wal-Mart’s Everyday Low Prices is Hurting America “It (Wal-Mart) grows by wrestling businesses away from other retailers large and small. In hundreds of towns and cities, Wal-Mart’s entry put ailing …shopping districts into intensive care and then ripped out the life-support-system.”
Nevertheless what is true about the United States cannot be true for the rest of the world as well. The
kirana shops in India work on very low margins, something which big retail may not always be able to compete with. As Lal put it in the Forbes India interview “If you look at the kirana stores they operate at a gross margin of 15-18%. Now if you look at the cost structure of an organised retailer it is much more than 15-18%, and unless the organised retail can set themselves up in a way that they can actually do a lot of savings in the supply chain, they cannot compete with the kirana store.” And that explains to a large extent why most of the big Indian retail players have been losing money over the years. They just can’t compete with the cost at which the kirana shop can operate.
As Lal elaborated further “If you look at organised retail, you look at the cost of real estate, electricity, labour ,energy, taxes etc, these are all things that the
kirana store does not worry about. If you put that all together it leads to a significant cost structure.” Hence, the fear of big retail destroying kirana shops is overdone.
Ghemawat feels that there is a lot that India can learn from China on the big retail front. The country started opening up its retail sector to FDI in 1992, initially with various restrictions, but ultimately allowed 100% FDI in 2004. This benefited them with foreign players bringing in new management practices along with supporting technology and investment capital. Further, the foreign retailers began sourcing goods from China and exporting them, and helped Chinese exports grow. This is likely to happen in the Indian case as well, if big retail is allowed to set up shop here.
The other big advantage of big retail is that it has the ability to create jobs at a reasonably fast pace. This point becomes even more important given that India hasn’t had a manufacturing revolution. Big retail can create a lot of jobs for the huge amount of semi-skilled work force in the country. As Lal put it “Big retail also employs a lot of people. The bottom line is that I really don’t think organised retail can grow at a speed relative to the economic growth of a country that it can lead to a loss of jobs. And second if you take a look at most of these
kirana stores, their children do not want to continue this lifestyle. They want to go to school, get educated and get better jobs. So, the question is whose jobs are we protecting?”
Given these reasons, big retail is not exactly the monster it is often made out to be. Hence, its fear is overdone. To conclude, in the past, the Bhartiya Janata Party has often been categorised as a party of traders (i.e.
banias), who are also supposedly the biggest financiers of the party as well. By not allowing FDI in retail the party is essentially living up to that image.

The piece originally appeared on on September 9, 2014

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

The costly ticket to achche din

A few days back a friend complained on Facebook that since the Narendra Modi government had come to power, power cuts in his city had gone up dramatically, and he had not been able to sleep at all during the night. “So where are the
acche din that had been promised?” he asked. To this someone cheekily replied that the promise was of acche din and not acchi raatein.
Narendra Modi and the Bhartiya Janata Party fought the Lok Sabha election on the plank of “acche din aane waale hain”. The slogan offered “hope” to the people of this country, in an environment where economic growth had been falling and inflation had been rising. It was for the first time that a political party was not treating the voter as a “victim”. The slogan struck a real chord with the Indian voter.
The success of the slogan has now led to a scenario where every tough economic decision that the Modi government makes is and will be viewed through the lens of the “
acche din aane waale hain” slogan. Take the recent case of the decision to increase the railway passenger fares by 14.2 per cent and freight fares by 6.5 per cent.
The hike in railway passenger fares has been the steepest in 15 years and has been long overdue. Between 1999 and 2014, the passenger fares were increased only thrice, of which one hike was reversed. This has left very little money with the railways for any sort of modernisation and the upkeep of railway tracks. It has also led to a scenario were traveling has become increasingly unsafe, as can be made out from the spate of railway accidents over the last few years.
The trouble is that for too long Indian Railways has been used as a political tool and not a service which is economically viable on its own. One way to correct this is to index fares to the prevailing rate of inflation and increase prices on a regular basis, every year. So, if the inflation is 8 per cent during the course of the year, then fares can go up by 8 per cent at the beginning of the financial year, on April 1. If this practice were to be followed, the chances of railways being economically viable and safer are likely to go up. Also, it would rule out the chances of one-off increases in fares, which upset the monthly budget of people who use the railways to travel regularly.
In the short-term, this increase in fares is expected to add to inflation. There are other decisions that the government will have to make over the next few months which will add to inflation. Take the case of oil. The price of the Indian basket of crude oil stood at $111.94 per barrel on June 19, 2014. It averaged at $106.72 per barrel between May 29 and June 11, 2014.
The price of oil has gone up by close to 5 per cent in such a short period of time primarily because of a threat of war in Iraq. India imports 80 per cent of the oil it consumes. The government will have to pass on this increase in the price of oil to the end consumer. If it does not do that it will have to compensate the oil marketing companies for the “extra” under-recoveries they are likely to face on the sale of diesel, cooking gas and kerosene. This would lead to an increase in government expenditure and, hence, the fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends.
The government is already very stretched on the fiscal deficit front with the last government leaving unpaid bills of more than Rs 1,00,000 crore. Hence, it will have to pass on the increase in the international price of oil to the end consumers. This will mean higher inflation and another jolt to the promise of
acche din.
What makes the situation even more difficult is the fact that the monsoon is expected to be much lower than average this year. In fact, data from the India Meteorological Department shows that rainfall upto June 18 has been 45 per cent lower than normal. This number may improve in the days to come, given that it is still early days for the monsoon. It needs to be pointed out that a bad monsoon does not necessarily lead to a lower production of food. In 2009, even with a 22 per cent deficient rainfall, the agriculture production did not go down. The real problem is once the psychology of drought sets in, the prices of food products start to go up, even though their production may not be impacted.
One thing that the government can do to prevent inflation is to procure a lower amount of rice and wheat from farmers this year. As on June 1, 2014, the Food Corporation of India (FCI) had food grain stocks of 74.8 million tonnes, when it does not require more than 41-47 million tonnes. By buying less from the farmers, the government can ensure that more rice and wheat lands up in the open market, and helps prevent a price rise. The government also needs to ensure that it does not raise the minimum support price of rice and wheat at the rate that the Congress-led UPA government had done in the past. These moves are unlikely to go down well with the farmers, who have also been promised
acche din.
It is important that Mr Modi borrows a leaf from Franklin Roosevelt, the President of the United States between 1933 and 1945. This was a difficult time for the US — the Great Depression was on. Between 1933 and 1944, Roosevelt made 30 fireside chats through the radio, explaining to Americans the tough decisions he was taking to get the economy back on track. Mr Modi and his government need to keep talking to the people and explain why they need to take some tough decisions over the next few months.

The article originally appeared in The Asian Age/Deccan Chronicle on June 23, 2014
Vivek Kaul is the author  of the Easy Money trilogy. He can be reached at [email protected]

How UPA turned NDA’s economic growth into shambles

upaVivek Kaul 

In both love and war, it makes sense to hit where it hurts the most.
The war for the next Lok Sabha elections is currently on. And there is no love lost between the two main parties, the Congress and the Bhartiya Janata Party (BJP).
The BJP today hit out at the economic performance of the Congress led United Progressive Alliance government, over the last ten years.
Politically, this makes immense sense given the bad state the economy is in currently. Economic growth as measured by the growth in gross domestic product (GDP) is down to less than 5%. The GDP grew by 4.7% between October and December 2013.
The rate of inflation as measured by the consumer price index had been greater than 10% for a while and has only recently come below 10%. The consumer price inflation for February 2014 came in at 8.1%.
Industrial activity as measured by the index of industrial production (IIP) was flat in January 2014, after falling for a while. The overall index grew by just 0.1% during January 2014. Manufacturing which forms a little over 75% of the index fell by 0.7% during January 2014, in comparison to January 2013. This primarily is on account of the slowdown in consumer demand.
People have been going slow on spending money because of high inflation. This has led to a scenario where they have had to spend more money on meeting daily expenditure. Retail inflation in general and food inflation in particular has been greater than 10% over the last few years, and has only recently started to come down. Given this, people have been postponing all other expenditure and that has had an impact on economic growth. Anyone, with a basic understanding of economics knows that one man’s spending is another man’s income, at the end of the day. When consumers are going slow on purchasing goods, it makes no sense for businesses to manufacture them. When we look at the IIP from the use based point of view it tells us that consumer durables (fridges, ACs, televisions,computers, cars etc) are down by 8.3% in comparison to January 2013. The overall consumer goods sector is down by 0.6%.
This slowdown in consumer demand was also reflected in the gross domestic product(GDP) numbers from the expenditure point of view. Between October and December 2013, the personal final consumption expenditure(PFCE) rose by just 2.6% to Rs 9,81,463 crore in comparison to September to December 2012. In comparison, during the period October to December 2012, the PFCE had grown by 5.1%.
The lack of demand along with a host of other reasons also means that the investment climate for businesses is not really great. This is reflected in the lack of capital goods growth, which was down by 4.2% during January 2014. If one goes beyond this theoretical constructs and looks at real numbers like car sales, they also tell us that the Indian economy is not in a good shape as of now. Smriti Irani,
a television actress turned BJP politician summarized the situation very well, when she said “Today, as the Congress-led UPA leaves office, it leaves behind a legacy of an economy which has been mismanaged.” Yashwant Sinha, former finance minister and senior BJP leader, went a step ahead and said that “an investment crisis” and “a crisis of confidence in the economy”. The Congress party is likely to react to this attack by the BJP by following the conventional line that it has always followed. The party is most likely to say that India has done much better under the UPA than the BJP led National Democratic Alliance (NDA).
Prima facie, there is nothing wrong with the argument. Between 1998-99 and 2003-04, when NDA was in power, the average GDP growth rate was at 6% per year. Between 2004-05 and 2012-2013, when the UPA has been in power the average rate of growth has been at 7.9% per year. If one takes into account, the GDP growth rate for this financial year i.e. 2013-2014, this rate of growth will be lower than 7.9%,
but still higher than the 6% per year achieved during NDA rule.
But it is worth remembering here that the economy is not like a James Bond movie, where the storyline of one movie has very little connection with the storyline of the next. An economy is continuous in that sense.
The rate of economic growth in 2003, a few months before the UPA came to power, was at 7.9%. The rate of inflation was at 3.8%. In fact, the rate of inflation during the entire NDA term averaged at 4.8%, whereas during the first nine years of UPA regime between 2004-2005 and 2012-2013, it has averaged at 6.7%.
If we take the rate of inflation during this financial year into account the number is bound to be higher. The index of industrial product, a measure of the industrial activity in the country,
was growing at 8% in early 2004. Currently it is more or less flat.
The fiscal deficit for the year 2003-2004
came in at 4.5% of the GDP. The fiscal deficit for the year 2012-2013 was at 4.9% of the GDP. The fiscal deficit for the year 2013-2014 has been projected to be at 4.6% of the GDP. Fiscal deficit is the difference between what a government earns and what it spends.
As I have explained in the past, this number has been achieved through accounting shenanigans and does not reflect the real state of government accounts. The expenditure and thus the fiscal deficit of the government
is understated to the extent of Rs 2,00,000 crore. This is not to say that there wouldn’t have been any accounting shenanigans under the NDA rule, but they would have been nowhere near the present level.
The broader point here is that the NDA had left the economy in a reasonable good shape on which the UPA could build. And the first few years of growth under the UPA rule came because of this. In simple English, unlike James Bond movies, growth under the UPA cannot be separated totally from the growth under the NDA. The growth under UPA fed on the earlier growth under the NDA.
That’s one point. The second point that needs to be brought out here is that the massive economic growth during 2009 and 2010,
when India grew by 8.5% and 10.5% respectively, was primarily on account of the government expanding its expenditure rapidly.
The government expenditure during 2007-2008 had stood at Rs 7,12,671 crore. This has since rapidly grown by 123% and stood at Rs 15,90,434 crore for 2013-2014. While this rapid rise in government expenditure ensured that India grew at a very rapid rate when the world at large wasn’t, it has since led to substantial economic problems. During the period Atal Bihari Vajpayee was the Prime Minister of India, the government expenditure grew by 68% and stood at Rs 4,71,368 crore during 2003-2004.
This rapid rise in government expenditure in the last few years has led to loads of problems like high interest rates and inflation, as an increase in government spending has led to an increase in demand without matched by an increase in production.

As Ruchir Sharma put it in a December 2013 piece in the Financial Times
“With consumer prices rising at an average annual pace of 10 per cent during the past five years, India has never had inflation so high for so long nor at such an unlikely time…Historically, its inflation was lower than the emerging-market average, but it is now double the average. For decades India’s ranking among emerging markets by inflation rate had hovered in the mid-60s, but lately it has plunged to 142nd out of 153.”
In fact, if one looks at the incremental capital output ratio, it throws up a scary picture.
Swanand Kelkar and Amay Hattangadi in a December 2013 article in the Mint wrote “the Incremental Capital Output Ratio (ICOR)…measures the incremental amount of capital required to generate output or GDP. From FY2004 till FY2011, India’s ICOR hovered around the 4 mark, i.e. it required four units of investment to generate one unit of output. Over the last two years, this number has increased with the latest reading at 6.6 for FY2013.” Currently, the number stands at 7.
This, in turn, has led to a massive fall in investment. As Chetan Ahya and Upasna Chachra or Morgan Stanley write in a recent research report titled
Five Key Reforms to Fix India’s Growth Problem and dated March 24, 2014, “Public and private investment fell from the peak of 26.2% of GDP in F2008 to 17.3% in F2013. Indeed, private investment CAGR[compounded annual growth rate] was just 1.4% between F2008 to F2013 vs. 43% in the preceding five years.”
What all this clearly tells us is that the economic growth during the UPA rule fed on the economic growth during the NDA rule. The UPA has left the economy in shambles, and the government that takes over, will have a tough time turning it around.
The article appeared originally on on March 30, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)