Jaitely enjoys GDP… Rajan Prides on Inflation … Swamy for Sacking Rajan…Who cares for Manufacturing

There is an all out war between the rulers and the regulator on failed monetary policy. In Japan, they say “don’t blame the people but blame the process”. 

Going by that, lets us not look at who is right whether “Swamy or Rajan”. Let’s try and understand the root of the problem.

Though India is a high growth economy on Statistics, we have hardly made any progress on achieving inclusive growth in the last 10 years despite attracting billions and billions of global money from different routes. Inclusive growth and Manufacturing revival has been only a political statement for successive Governments.

Monetary Policy targeting Inflation (WPI or CPI) and Fiscal Policy targeting more on austerity less on Capital Formation has been the crux of the problem. Many times we have found rulers and regulators blaming each other on their approach towards these two issues. It is also interesting that Inflation measured by GDP deflator does not look so alarming in the last few years.

Globalization and subsequent crisis has led to policy makers across developed world introducing Stimulus programs to revive demand in their economies, but knowingly or unknowingly started exporting Inflation to different parts of the world.

Global demand was met by domestic supplies as countries were tempted to become big exporters, resulting in burden of supply shortages to fall on domestic population.

India got into this trap of exporting food products and industrial materials thereby increasing the export quotient and leaving domestic economy on high inflation. We simultaneously were struck on weak fiscal policies, with rulers not really able to bring necessary reforms needed for supply side expansion.

Today we are in Stagflation and the developed world is struck in deflation. 

The Global money flow has been directed towards Technology and Consumption based business and conventional manufacturing sector hardly attracts capital needed for growth and expansion, since they don’t attract high valuations.

This is a risky scenario. Manufacturing has not embraced technology and automation fully across the globe and hence has been the major source of employment generation. 

With lack of capital flow to this sector, developing economies like India will suffer in the long run with inadequate wealth creation.

Countries like India having dependence on Manufacturing as the core sector for growth and employment generation may have to relook at Inflation as the influencing factor for policy actions.

Policy should be guided by the risk on output and employment generation rather than WPI or CPI index.

Policy Regulators, instead of putting their conditions with rulers on inflation management, should link monetary measures with that of government’s commitments and performance on capital formation for output growth and Employment generation.

Above data’s, if it were of any reference for policy decisions, speaks in volume the dire state of the economic condition while the regulator and rulers are busy looking at Inflation and GDP data to prove their own points.

Manufacturing in India needs a major boost and lower interest rate is the minimum requirement on the agenda for revival. 

We have conflicting risk which is building in the near future. Technology is expected to slowly take over manufacturing through automation, artificial intelligence, robotics etc., which can become a threat to human jobs. 

This can become a big challenge to the young demographic advantage, we are so proud of.

Expanding the contribution of Manufacturing to GDP over 25% from the levels of 13% within next few years should be the focus point. 

Capital formation and lower interest rates are critical for this and both the monetary and fiscal authorities should have this as the objective to drive India to sustained and inclusive growth.

Inflation is a lesser evil and it can be tolerated with higher growth

Standalone GDP of 7.5% does not give the cherish we want. The real day of happiness will be when growth happens across the value chain.

Forget who is right... let’s focus on what is right

T  Margabandhu

Education & Employment should become Global Responsibility – Inequality a Global Shame

The World has come to understand it is difficult to manage Deflation than inflation. We love to have inflation. Deflation seems to be deadly and the whole world is not happy about oil at 40USD or Copper coming down by 30% in a year or Gold hitting the bottom. The pain of deleverage has hit everybody. Understandably, Country like India, which stands to benefit the most out of falling commodities, remains to be Promising but lacks the performance in terms of growth.

Looking beyond macro economics, lack of education and unemployment are two great factors which are pulling the global economic growth. Irrespective of the size of the economy, the unemployment levels are alarming and most of the economies are understating their numbers. Lack of education and higher levels of poverty in many African and Asian countries add to the problem.

We need to declare Education and Employment as a Global Responsibility. Every living global citizen should have Education and Employment as birth right. People who are below the poverty line who cannot afford to have basic education and thus are not employable should be treated as global citizen and a Global Prosperity Fund has to be created to achieve basic education, skill development and employment for such deprived people.

While it is understandable that every country is working hard towards eradicating poverty and achieving education to all and full employment, still lot of internal pulls and pressures and economic conditions lead to failure on such initiatives.

Global Prosperity Fund will have its corpus built on contribution from every member country depending upon the size of their economy, need for education and employment for its people etc.,

GPF prime responsibility will be to absorb, people BPL (Below the Poverty Line) and those who are economically deprived of education and employment, across all countries and provide them with basic education and specific skills and make them a productive asset for the world. GPF will have to build its infrastructure needed for providing education and skill development and should become a source of supply of productive labor force across the world based on demand – supply conditions.

The objective of GPF should be Basic Education, Skill Development and Full Employment. One of the major problems which the world is facing at any point of time is Terrorism and trillions of money is being spent to combat terrorism. World wide it has been accepted that the major cause for terrorism has been lack of employment.

Once the burden of education and employment becomes a global responsibility, the respective economies can become productive in terms of focusing on development and growth. Every country will be benefitted if GPF can focus and achieve these two critical issues. Then the world will be better off in terms of

·         Inclusive Growth

·         Higher Productivity

·         Reducing Inequality

·         Innovation

·         People Empowerment

·         Higher Per capita income

·         Savings on Social Security

·         Eliminate Demography risk

·         Eliminate Terrorism

While we need to appreciate the roles of IMF, WB and UN on their initiative to combat Poverty and bringing about education awareness, it is not enough and it has been slow in progress. World Bank in its recent report has said it will take up to 2030 to make the world free of extreme poverty. This can delay inclusive growth by another generation.

By making GPF, functionally responsible for bringing full education and employment, we can actually fast track the process and make it achievable before a decade. We can use IOT and digital space to make education reach those who cannot afford and make them be part of the inclusive growth.

Cost of labor has been a major factor which is bothering the economic growth across the world. If we can achieve giving basic education and skill development to deprived people across the world, that will lead to more supply of productive labor thereby reducing the cost of labor.  Also Demographic mismatch can be handled better by bringing equilibrium on people resource across the world.

Enabling every nation to achieve full employment and effective use of human resources can transform the global growth model completely. We can neutralize the effects of Inflation and Deflation with lower cost of labor and higher productivity.

On the one side we will be seeing new technologies, IOT and Automation replacing people on many mundane jobs, education will help individuals at the bottom of the pyramid to look for newer opportunities elsewhere.

GPF should run independently by eminent personalities having impeccable record on Integrity, Ethics and Governance and there should not be any interference from any nation except for the fact that they have the right, as a contributing country, to measure the performance of their employment and education numbers.

It’s a global shame to have poverty persisting in the world, which is dominated by modern technological advancements. Recent global turmoil has made the globalization a failed concept and that was because of the skewed capitalist policies. Neither is it fact that, socialism can bring equilibrium.

We strongly believe making, Education, Skill Development and Employment, mandatory for all living citizens can only bring inclusive growth.

It is possible, if it is made a global responsibility, and we wish it is not a wishful thinking.    

T Margabandhu

M/s Marggo India 

Lifting the Small Boats from the Economy of Exclusion. Purge the Poverty and Push People towards Prosperity

In a recent address at Grandes Conferences Catholiques, Brussels, Christine Lagarde, Managing Director, IMF has discussed about what is called as “Small Boats” - the livelihoods and economic aspirations of the poor and the middle class.

It is globally a known fact that the inequality between the rich and poor in every Nation has been a problem of permanence which in fact, to a great extend, has pulled down the potential economic growth of every country on absolute terms.

While the global inequality has been addressed to some extend and the gulf between the rich and poor countries are falling down steadily over the centuries, the ability on the part of each country to reduce the gap between the richest and poorest has always been on deficit.

Emerging economies have responded well in the recent decades in terms of rising average incomes of their people and they have outperformed the developed world in on the rate of growth in income levels.  

The massive global flows of products, services, people, knowledge, and ideas have been good for global equality of income – and we need more of that. So we can further reduce the gap between countries.

Wealth Creation for poor is an irrelevant term as they only manage through to meet their ends, throughout their life cycle. Countries, with strong demographics and growing middleclass, like India, should have structural policies encouraging higher savings in financial assets that can help in harnessing potential economic growth and reducing economic inequality.  

The sub- par growth in India can be on account of excessive savings on physical assets which directly does not contribute to the GDP. Savings through banking system is equally substantial in India but it acts more as a measure of safety rather than creating wealth.

Long term Investments into capital market as a measure of wealth creation, is very low in India, as the conservative culture embedded on Indian family system prevents them to look beyond safety. Individual families rely upon gold and real estate as key assets to create and transfer wealth to their successive generations.

The biggest flaw with the State is their lack of ability to impress upon the population, the power and velocity of the financial assets in generating growth, employment and earnings which can lead to faster wealth creation and to reduce income inequality.

Interestingly, the rich and ultra rich who are supposed to be the ones investing in Capital markets, also have limited exposure to stock markets and mutual funds.

	LONG ROAD TO WEALTH CREATION
YEAR	GDP (Cr)	FIN SAVINGS (Cr)	Equity savings(Cr)	Fin Savings To GDP(%)	Equities To Fin savings(%)
2006-07	42.9L	7.6L	50,600	17.7	6.7
2007-08	49.9L	7.6L	74,000	15.2	9.8
2008-09	56.3L	7.2L	-5,100	12.8	-0.7
2009-10	64.8L	9.9L	44,800	15.3	4.5
2010-11	77.8L	10.7L	1,700	13.8	0.2
2011-12	90.1L	9.2L	-2,800	10.2	-0.3
2012-13	101.1L	10.2L	43,800	10.1	4.3
2013-14	113.6L	11.3L	27,400	10.4	2.4
2014-15	126.6L	13.4L	39,300	10.6	2.9
2015-16	140.5L	15.2L	52,200	10.9	3.4

While the equities as a % of financial savings are very low in India, which is a concern, the larger issue is the lack of broad base. Even a small part of their savings, from middle class families, routed through equities as long term Investments, can make a substantial difference to the economic growth as well as the family’s wealth creation.  

Private sector should also play a vital role in bring the awareness on the power of velocity which the financial assets can generate and enable the emerging middle class to make a part of their savings coming through capital market. This will make a massive transformation for the nation in terms of incremental growth and can really help the small boats to rise along with the yachts, in creating wealth over the long term.

Latest data from NSSO show that the share of total value of assets in equities in rural India is 0.07% and that of urban India is just 0.17%. The share of Bank Savings in the total value of assets in rural India is 1.65% and that in urban India is 4.35%. It is still dominantly skewed towards the physical assets.

While the Government and Private sector has the responsibility of investing into Innovations, Infrastructure, Education and Employment generation, the People of the country also have equal responsibility in terms of generating more savings into financial assets which can flow into the economic system.

India has the most favored demography, which will be the driving factor for growth and can generate more capital required for growth internally if People can make a decent shift in their savings from Physical assets to Financial Assets.

People should come forward to trade a bit on the risk, to generate wealth. Indian Equities have generated a CAGR of 12% in the last 3 decades and many Mutual Fund Assets have delivered as high as 17% CAGR in the last 20 years.

Over 500 million of Indian Population is in the earning cycle and this will move towards 650 million by 2030. If every Individual earning population of India starts saving 2-3% incrementally on financial assets and especially into capital markets, the impact on growth can be substantial.

As Madam, Christine Lagarde says, we need to lift the “small boats” to generate stronger and more durable growth.  If we lift the income share of the poor and middle class by1 percentage point, then GDP growth increases by as much as 0.38 percentage points in a country over five years.

Expecting an Inclusive growth is not enough… to achieve the same…Inclusive efforts too are required and People of the Country do should contribute, by saving more into productive assets.

T Margabandhu