Sensex 4,20,000: Coming in 15 years at a stock market near you

rakesh jhunjhunwalaVivek Kaul

It is that time of the year when stock brokerages forecast their Sensex/Nifty targets for the next year. A few such reports have landed up in my mailbox and the highest forecast that I have come across until now is that of the Sensex touching 37,000 points by December 2015.
I was thinking of writing a piece around these forecasts, until I happened to read an interview in which big bull Rakesh Jhunjhunwala said that
he would disappointed if the Nifty doesn’t hit 1,25,000 by 2030.
Nifty currently quotes at a level of around 8,500 points. The logic offered by Jhunjhunwla is very straightforward. He said that the earnings of stocks that constitute the Nifty index will grow by fifteen times over the next fifteen years. And that would take the Nifty to a level which is fifteen times its current level ( actually 15 times 8500 is 1,27,500, but given that Jhunjhunwala was talking in very broad terms let’s not nitpick). Hence, Nifty will be at 1,25,000 by 2030.
How reliable is this forecast? Not very, is a straightforward answer. A period of 15 years is too long a time to make such a specific forecast on the stock market or anything else for that matter. There are many things that can go wrong during the period (or go right for that matter). Hence, such forecasts need to be taken with a pinch of salt and seen as something that has an entertainment value more than anything else.
In matters of forecasts like these it is important to remember the first few lines of Ruchir Sharma’s
Breakout Nations – In Pursuit of the Next Economic Miracles: “The old rule of forecasting was to make as many forecasts as possible and publicise the ones you got right. The new rule is to forecast so far into the future that no one will know you got it wrong.” Jhunjhunwala has done precisely that.
If earnings have to grow by 15 times in 15 years, the Indian economy also needs to grow at a breakneck speed. Over a very long period of time, the companies cannot keep growing their profits unless the economy grows as well. For 15% earnings growth to happen, the economy needs to grow at a real rate of 8-10% per year (the remaining earnings growth will come from inflation).
The trouble is that this kind of rapid long term economic growth in countries is an extremely rare phenomenon.
As Sharma points out in
Breakout Nations:“Very few nations achieve long-term rapid growth. My own research shows that over the course of any given decade since 1950, only one-third of emerging markets have been able to grow at an annual rate of 5% or more. Less than one-fourth have kept that pace up for two decades, and one tenth for three decades. Just six countries (Malaysia, Singapore, South Korea, Taiwan, Thailand, and Hong Kong) have maintained the rate of growth for four decades, and two (South Korea and Taiwan) have done so for five decades.”
In fact, India and China which have been among the fastest growing countries over the last ten years, were laggards when it come to economic growth. “During the 1950s and the 1960s the biggest emerging markets – China and India – were struggling to grow at all. Nations like Iran, Iraq, and Yemen put together long strings of strong growth, but those strings came to a halt with the outbreak of war…In the 1960s, the Philippines, Sri Lanka, and Burma were billed as the next East Asian tigers, only to see their growth falter badly,” writes Sharma.
Long story short: Rapid economic growth cannot be taken for granted and given this forecasts like Nifty touching 1,25,000 at best need to be taken with a pinch of salt. Indeed,
Jhunjhunwala had predicted in October 2007 that the Sensex will touch 50,000 points in the next six or seven years.
Its been more than seven years since then and the Sensex is nowhere near the 50,000 level.
In October 2007, India was growing at a rapid rate. At that point of time it was almost a given that the country would continue to grow at a very fast rate. In fact, this feeling lasted almost until 2011, when the high inflation finally caught up with economic growth and the first set of low economic growth numbers started to come.
Also, Jhunjhunwala and most other stock market experts did not know in October 2007 that more or less a year later, the investment bank Lehman Brothers would go bust, and the world would see a financial crisis of the kind it had never seen since the Great Depression.
The stock market fell rapidly in the aftermath of the crisis. Once this happened the central banks of the world led by the Federal Reserve of the United States, printed and pumped money into their respective financial systems.
The idea was to flood the financial system with money so as to maintain low interest rates and hope that people borrow and spend, and in the process get economic growth going again. That happened to a limited extent. What happened instead was that big financial institutions borrowed money at low interest rates and invested it in financial markets all over the world.
In the Indian case the foreign institutional investors have made a net purchase of Rs 3,19,366.35 crore in the Indian stock market between January 2009 and November 2014. During the same period the domestic institutional investors sold stocks worth Rs 1,27,280.1 crore. The massive financial flows from abroad have ensured that the BSE Sensex has jumped from around a level of 10,000 points to around 28,450 points, during the same period, giving an absolute return of around 185%.
The point being that despite this massive inflow of money from abroad, the BSE Sensex is nowhere near the 50,000 level that Jhunjhunwala had predicted in October 2007. Over the long term a lot of things can go wrong and which is what happened after 2007.
To conclude, let me ride on Jhunjhunwala’s forecast and make my own forecast. Jhunjhunwala has predicted that the Nifty index will touch 1,25,000 points in 2030. This means the Sensex will cross 4,16, 420 points in 2030.
How do I say that? The Sensex currently quotes at around 28,450 points. In comparison, the Nifty is at around 8,500 points. This means a Sensex to Nifty ratio of around 3.33.
Hence, when Nifty touches 1,25,000 points, the Sensex will touch 4,16,420 points (1,25,000 x 3.33). For the sake of convenience let’s just round this off to 4,20,000 points. I know, the world is not so linear. If forecasts were just about dragging a few MS Excel cells, everybody would be getting them right.
But then it is the forecast season and everyone seems to be making one, and given that even I should be making one. And if in 2030 I am proven right, I will search this column and tell the world at large that I said it first way back in late 2014 on
The Daily Reckoning.
To conclude, dear reader, remember you read it here first. That’s the trick and I know how it works.

The article originally appeared on as a part of The Daily Reckoning, on Dec 4, 2014 

As Congress looks for scapegoats, is more Sonianomics on its way?

Vivek Kaul
Abraham Maslow, a famous American psychologist said in 1966 that “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.” This statement is also referred to as Maslow’s hammer or the golden hammer.
A very good example of this is the Congress party and its belief that giving out doles to the people of this country translates into electoral votes, something referred to as Sonianomics these days. In the recently concluded state assembly elections in Chhattisgarh, Delhi, Madhya Pradesh and Rajasthan, the party has been more or less wiped out.
After the results came it has been widely suggested that Sonianomics has stopped working. People are not influenced by only doles any more, they are looking for other things as well. As R Jagannathan, the editor of Firstpost, 
wrote in a recent column “The Congress defeat lies embedded in this hidden voter realisation that by getting freebies, the government may be robbing them of something else that may be dearer – self-respect, safety or faster job or income growth.”
But the question that crops up here is whether the Congress party is thinking along similar lines? Turns out, it isn’t. 
A report in the Daily News and Analysis details the thinking of the Congress party leaders after the election debacle. “They(i.e. the Congress leaders) put the blame on the government’s economic policies, which they said directly hit the party’s core constituency — the weaker sections — which deserted the party and voted for the BJP and the AAP. These leaders demanded the immediate reversal of economic reforms such as those which led to hikes in the prices of cooking gas and diesel. It was argued that price rise affected every family, and that unbridled inflation did the party in,” the report points out.
Yes unbridled inflation did the party in, but there is a lot more to this argument than just blaming the economic policies of the government to raise cooking gas and diesel prices.
The prices of cooking gas and diesel started to go up on a regular basis only in the recent past. And that was after the fiscal deficit of the government threatened to go way out of control. The oil marketing companies sell diesel, cooking gas and kerosene at a price at which they do not recover their full cost. The government compensates them for this under-recovery. Given this, its expenditure goes up, and thus pushes up the fiscal deficit. Fiscal deficit is the difference between what the government earns and what it spends.
Hence, the increase in price of cooking gas and diesel has added to inflation only in the recent past. But high inflation has been around for more than five years now. Ruchir Sharma author of Breakout Nations and the Head of Emerging Markets and Global Macro at Morgan Stanley 
explains this in a column in Financial Times. As he writes “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.”
So inflation clearly did not appear overnight. It has been around for a while. Its just that the Congress led UPA government failed to tackle it. Manmohan Singh even equalled inflation to a sign of prosperity. “This (inflation) is a reflection of demand exceeding supply, to some extent it is a sign of growing prosperity of the country,” 
he said in November 2011.
The main reason for inflation becoming a part of our daily lives is because the Congress led UPA government has been handling out doles, in trying to build a welfare state. As Sharma puts it “The government has let fuel and fertiliser subsidies spin out of control and has bought wheat and rice at artificially high prices to appease large farmers. It has been building an expansive welfare state, rather than pursuing reforms to boost productivity. The government has also been pushing up wages through, for example, measures to guarantee employment to rural workers. Over the past five years rural wages have been rising at an annual pace of 15 per cent – faster than productivity growth and higher than in any other Asian country.”
When income growth is faster than growth in productivity it inevitably leads to inflation. To put it in simple terms, more money chased the same number of goods and services, and this has led to sustained high inflation.
The government led by Manmohan Singh saw this as a cost of prosperity and chose to do nothing about. In fact, on the food front a lot of inflation was created by the government. The dole giving culture that the UPA has espoused has led to the government constantly increasing the minimum support price(MSP) that it pays to farmers for rice and wheat it buys from them.
As economist Surjit Bhalla 
put it in a recent column in The Indian Express “World food prices (FAO data) increased at an average compounded rate of 6.7 per cent per annum between 2004 and 2009; UPA procurement prices increased at an average rate of 9.9 per cent. Since 2009, in the last four years, international prices of food have risen 7.3 per cent; UPA 2 price increase per year — 9.3 per cent. The link between procurement prices and CPI is very strong theoretically and empirically…For each 10 per cent rise in previous years’ procurement prices, there is a predicted 3.3 per cent increase in the current year CPI.”
When the government keeps offering a high price for rice and wheat, a lot of it lands up in the godowns of the Food and Corporation of India, through which it procures food grains. This means that there is lesser rice and wheat in the open market, and thus pushes up prices there. One way of controlling this is to ensure that the government releases some rice and wheat in the open market from its stock. But that doesn’t seem to be the case.
TK Arun writes in The Economic Times “The food minister has been overseeing a prolonged phase of food price inflation, from atop the largest hoard of grain in India’s history, touching 80 million tonnes (MT) when the buffer stocking norm called for only 31 MT. If only he had sold off large quantities of the grain locked up in government stocks fast enough in the open market, rice and wheat prices would not have gone up a steady 20% month after month, jacking up the price index.”
These are the real reasons behind the high inflationary scenario in the country. The dole oriented economics practised by the Congress led UPA is responsible for it. But the Congress leaders obviously can’t look at it that way. For them, it is a vote generating machine. Hence, they have chosen to blame the increase in price of diesel and cooking gas for the electoral debacle.
Given this, it is more than likely that whatever little economic reform has been done by the Congress led UPA government will take a backseat for the remaining part of their term. Sonianomics will make a comeback.
The article originally appeared on on December 11, 2013 

 (Vivek Kaul is a writer. He tweets @kaul_vivek) 

With GDP growth at 4.8%, Chidambaram is finally speaking the truth

Abraham Lincoln once said “You can fool some of the people all of the taaime, and all of the people some of the time, but you can’t fool all of the people all of the time.” The finance minister P Chidambaram finally admitted the truth yesterday. “Consumer inflation in India is entrenched due to high food and fuel prices and monetary policy has little impact in curbing these prices…There are no quick fixes for inflation, will take some time to fix it,” he said.
“Demand is being stoked by the fact that we have high fiscal deficit and that fiscal deficit was not contained for a fairly long period, I think over a period of two years,”
 Chidambaram added.
What Chidambaram meant was that the government over the last few years has spent much more than it has earned, and has been running huge fiscal deficits. This money has not gone into creating physical infrastructure but largely been given away in the form of various subsidies and so called social programmes of the government.
This spending led to an increase in private consumption, which led to inflation, with too much money chasing the same amount of goods and services. And now the inflation is so well entrenched that it refuses to go. In October 2013, the consumer price inflation stood at 10.09% in comparison to 9.84% in September, 201.
One of the things that inflation does is it kills economic growth. And this is very much visible in the second quarter gross domestic product (GDP) growth number that was announced yesterday. For the period between July and September 2013, GDP growth, which is a measure of economic growth, stood at 4.8%, in comparison to the same period last year.
It was slightly better than the 4.4% GDP growth seen during the first quarter of the year i.e. the period between April and June, 2013. This was the fourth consecutive quarter in which the GDP growth has been below 5%. During the same period last year, the GDP growth had been at 5.2%.
The overall GDP growth was helped by a very good growth in agriculture (actually agriculture, forestry and fishing), which came in at 4.6%. This was much better in comparison to 2.7% growth between April and June 2013 and 1.7% growth between July and September 2012. The primary reason for a robust growth in agriculture has been the good rainfall that the country received during this monsoon season.
As Ashok Gulati, Shweta Saini and Surbhi Jain write in a discussion paper titled 
Monsoon 2013: Estimating the Impact on Agriculture released in October 2013 “Of the 4 broad regions of India: the north‐east, the northwest, the central, and the south peninsular India, as categorized by Indian Meteorological Department (IMD), with the exception of north‐east India, all the other three regions received normal or above normal showers.”
This has led to a robust growth in agriculture. As Gulati, Saini and Jain point out “All this is a very good news for a country’s agriculture, where 53% of the gross cropped area is still rain‐fed, and monsoons alone account for more than 76% of the total annual rains. No wonder then that years of good rains are associated with robust agriculture GDP growth.”
A robust growth in agriculture doesn’t help beyond a point because it forms only around 10.8% of the overall GDP (at factor cost at 2004-2005 prices). Manufacturing which is around 14.8% of the total GDP(at factor cost), grew by just 1%. Even though its better than 0.1% growth seen between June and September 2012, 1% growth clearly isn’t enough.

Trade, hotels, transport and communication, which form nearly 28.1% of GDP at factor cost, grew by 4%. But the growth had been at 6.8% between July and September, last year. Community, social and personal services which form around 14.3% of GDP (at factor cost) grew by 4.2% compared to last year. This was half the growth of 8.4% seen during the period between July and September 2013.
All these factors contributed to a sub 5% GDP growth. High inflation remains a major reason for the same. Lets try and understand how. GDP can be measured in different ways. One way is to measure it from the point of view of various industries and agriculture i.e. factors of production. This is referred to as GDP at factor cost, and this is the measure I used earlier in the piece. So we saw that the GDP growth when measured from this point of view was at 4.8%.
Industries depend on demand from people. When people spend money, it translates into demand for industries, and this in turn leads to GDP growth. But there are situations when people can’t spend as much money as they had been doing in the past. One of the reasons is high inflation where prices of goods go up, leading to people cutting down on what they think is unnecessary expenditure.
This is reflected in the private final consumption expenditure(PFCE) number which is a part of the GDP number measured from the expenditure point of view. The PFCE for the period between July and September 2013 grew by just 2.2%(at 2004-2005 prices) from last year. Between July and September 2012 it had grown by 3.5%. The PFCE currently forms around 59.8% of the GDP when measured from the expenditure side.
Hence, if it grows by just 2.2%, it slows down the overall GDP growth. This is because a slowdown in consumer demand means less business for industries and this impacts GDP growth. This is how inflation kills economic growth.
So the question is where will GDP growth go from here? Montek Singh Ahluwalia, the deputy chairman of the Planning Commission, 
is as usual optimistic and he expects the GDP growth rate “in the second half of the current year to be better than the first half.” But that’s what Ahluwalia has been doing for the last few years, forever trying to tell us that the next quarter, the next six months and the next few years are going to be better. He has become a seller of the great Indian hope trick.
Chidambaram was a little more realistic and he felt that the GDP growth will be close to 6% in the next financial year (i.e. between April 1, 2014 and March 31, 2015)and 8% by 2016-2017(i.e. between April 1, 2016 and March 31, 2017). “India will get back to the high growth path,” he said.
But inflation remains the main bottleneck if India has to go back to what Chidambaram calls the high growth path. The only way for controlling inflation is to cut down on government expenditure and the fiscal deficit. And that is easier said than done. In fact, as per data released by the Controller General of Accounts yesterday, the government has already reached 84.4% of the annual fiscal deficit target during the first seven months of the year i.e. the period between April and October 2013.
To conclude, India needs to grow at a much faster rate if there has to be any hope of getting many more people out of poverty. Ruchir Sharma, author of 
Breakout Nations and the head of Emerging Market Equities and Global Macro at Morgan Stanley Investment Management, explained the situation best in something that he said at a  literary festival in Mumbai late last year. As Sharma put it “People tell me that if India grows at 5% what is the big deal because that is still faster than the US or many of the European countries. And my response to it is that is the wrong way of looking at it because if India grows at 5% per year, India’s per capita income is really low and it is far too low to satisfy India’s potential and for India to get people out of poverty. And which is why India’s case of a 5% growth rate is a big disappointment.”
And now we are not growing at even below 5%.
The article originally appeared on on November 30, 2013
 (Vivek Kaul is a writer. He tweets @kaul_vivek) 

With gold imports almost zero, trade deficit unlikely to fall further

goldVivek Kaul 
The trouble with being a one trick pony is that the trick stops yielding dividends after sometime. Something similar seems to have happened to the efforts of the government of India to control the huge trade deficit. Trade deficit is the difference between imports and exports.”
Trade deficit for August 2013 was at $10.9 billion. This is a major improvement in comparison to the trade deficit of $14.17 billion in August 2012. The deficit was $12.27 billion in July, 2013.
This fall in trade deficit has come through the efforts of the government to bring down gold imports by increasing the import duty on it. India imported just 2.5 tonnes of gold in August and this cost $650 million. Now compare this to 47.5 tonnes imported in July, 31.5 tonnes in June, 162 tonnes in May and 142.5 tonnes in April of this year.
In April 2013, the 142.5 tonne of imported gold had cost $7.5 billion and the trade deficit was at $17.8 billion. If there had been no gold imports, then the trade deficit for April would have stood at $10.3billion($17.8 billion – $7.5 billion). If the gold imports had been at $650 million (or $0.65 billion) as has been the case in August 2013, then the trade deficit would have stood at $10.95 billion ($17.8 billion – $7.5 billion + $0.65 billion). This number is very close to the trade deficit of $10.9 billion that the country saw in August 2013.
So the point is that the government has been able to control the trade deficit by ensuring that the gold imports are down to almost zero. 
As the Indian Express reports “Gold imports stopped after July 22 due to confusion over a rule issued by the Reserve Bank of India, which required importers to re-export at least 20% of all the purchases from overseas.”
The confusion has now been cleared. Also, with Diwali in early November and the marriage season starting from October, gold imports are likely to pick up in September and October. Even if it doesn’t, the imports are already close to zero. So, any more gains on the trade deficit front by limiting gold imports, is no longer possible. 
The Indian Express report cited earlier quotes a senior executive of the Bombay Bullion Association as saying “Imports may again rise to around 30 tonne in September, as jewellers usually start building inventory to cater to the requirement during the festival and marriage season.”
At the same time, the government hasn’t been able to do much about oil, which is India’s biggest import. In August 2013, oil imports stood at $15.1 billion, up by 17.9% in comparison to the same period last year. Oil imports formed nearly 40.8% of the total imports of $37.05 billion. There isn’t much the government can do on this front, other than raising prices majorly to cut under-recoveries of oil marketing companies and limit demand for oil products at the same time.
But that may not be a politically prudent thing to do. The commerce minister, 
Anand Sharma, warned that with the international prices of crude oil rising over the past 10 days, the oil import bill may go up in the months to come. And this may lead to a higher trade deficit.
As Sonal Varma of Nomura Securities wrote in a report dated September 10, 2013, “Looking ahead, a seasonal rise in imports during the festive season and higher oil prices should result in a slightly higher trade deficit in Q4 2013(the period between Oct and Dec 2013), relative to Q3 (the period between July and Sep 2013).”
But imports form just one part of the trade deficit equation. Exports are the other part. Exports for August 2013, went up by nearly 13% to $26.4 billion, in comparison to August 2012. In July, exports were at $25.83 billion.
While exports may have gone up by in August due to a significantly weaker rupee, whether they will continue to go up in the months to come is a big question. As Ruchir Sharma, Head of Global Macro and Emerging Markets at Morgan Stanley, and the author of 
Breakout Nations, told me in a recent interview I did for Forbes India “Exports are dependent on multiple factors, exchange rate being only one of them. Global demand which is another major factor influencing exports, has been weak. If just changing the nominal exchange rate was the game, then it would be such an easy recipe for every country to follow. You could just devalue your way to prosperity. But in the real world you need other supporting factors to come through. You need a manufacturing sector which can respond to a cheap currency. Our manufacturing sector, as has been well documented, has been throttled by all sorts of local problems which exist.”
This something that another international fund manager reiterated when I met him recently. As he said “A part of the problem that India has is that the economic model has been based more on the service sector rather than manufacturing. The amount of manufactured products that become cheaper immediately and everyone says that I need more Indian products rather than Chinese products or Vietnamese products, is probably insufficient in number to give a sharp rebound immediately.”
The other big problem with Indian exports is that they are heavily dependent on imports. As commerce minister Anand Sharma admitted to “45% of exports have imported contents. I don’t think weak rupee has any impact on positive export results.”
In fact 
The Economic Times had quoted Anup Pujari, director general of foreign trade(DGFT) on this subject a few months back. As he said “It is a myth that the depreciation of the rupee necessarily results in massive gains for Indian exporters. India’s top five exports — petroleum products, gems and jewellery, organic chemicals, vehicles and machinery — are so much import-dependent that the currency fluctuation in favour of exporters gets neutralised. In other words, exporters spend more in importing raw materials, which in turn erodes their profitability.”
Also, the moment the rupee falls against the dollar, the foreign buyers try to renegotiate earlier deals, Pujari had said. “As most exporters give in to the pressure and split the benefits, the advantages of a weak rupee disappear.”
What all these points tell us is the simple fact that the trade deficit will be higher in the months to come. And given, this the market, like is the case usually, is probably overreacting.
The article originally appeared on on September 11, 2013 

 (Vivek Kaul is a writer. He tweets @kaul_vivek)