How the world changes!

Recently I came across a very witty piece of Data compilation by Goldman Sacs on few statistics, basically market prices, index levels, debt rates et.al between 2010 and 2015. Ignoring the fallacy of judgement based on only 2 time series data points(ignoring the trend patterns/inflation etc) it does throw some interesting numbers. Some of them would have seem absurd if someone would have predicted them in 2010.

The data can be found here : G.S Data

Some of the interesting ones:

1. Brent oil has dropped by 60%. Even by commodity standard (with higher Vols than other asset classes) this is a huge dip. On hindsight we can all attribute the drop on specific reasons, but my God,  how has it changed. I remember debates and articles predicting Oil going to 150-200 $/barrel leading to a flourishing shale oil industry, which is in a big problem now. Moreover with Oil stable at over 100$/barrel for a good amount of time ~2011 to 2014, the figure is all the more stark.

2. Iron Ore had dropped a whopping 77%. Again the blame is on demand side weakness led by stagnation in the west and slowdown in emerging economies.

3. Sovereign bond yields have dived even further with German Bund at 60 bps yields down by 235 bps. This was probably expected due to the perpetual Eurozone drama going on since 2010.

4.The cost of technology and its penetration have moved as expected with a 58% drop in cellular phone/equipment prices and a huge jump in smartphone penetration. Huge drops in prices of newer technologies like LED lamps, Solar batteries et.al. The rise of Tech businesses in terms of users, revenues and market caps(Apple is now the biggest company compared to Petrochina).

Taking the idea forward, I have compiled some data points of Interest from an Indian perspective, particularly which affect us on an everyday basis.

	2010	2016/2015	Delta
Price of Petrol	47.4	59.4	25.1%
Price of Diesel	35.5	45.0	27.0%
NIFTY Index	5232.2	7963.2	52.2%
10 Year G-Bond yield	7.6	7.8	2.5%
Inflation (CPI% YOY change)	9.5	5.4	-43.6%
Consumer Food Price Index(2012 series)	86.6	131.3	51.7%
GDP, current prices(USD Billion)	1708.5	2182.6	27.8%
GDP Per capita(PPP, Current Prices USD)	4494.0	6209.4	38.2%
Population(Billion Persons)	1.2	1.3	8.6%
India's Richest person	Mukesh Ambani	Mukesh Ambani
Facebook Users in India(Million)	8.0	125.0	1462.5%
Biggest company(Market Cap)	RIL	TCS
Team India ICC ranking(Tests)	1.0	1.0	0.0%
USD-INR rate	46.1	67.9	47.2%

* The above data is compiled from Various sources available freely on the web and accuracy, though intended, is not guaranteed. The 2016 data is as on Jan 1st wherever possible or latest available for 2015.

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Hullabaloo in the Emerging Markets

Lately there has been a disproportionate amount of attention on the emerging markets. The primary reason for this attention is the recent decline is the EM currencies vs the Dollar led by the spectacular decline in Argentine Peso. The below chart depicts the 1 year performance of a fe EM currencies. The chart does not depict the actual volatility in the currencies which would show that the India Rupee has actually gained back a lot of ground in past few months (2^nd graph below).

Source: Oanda

There are varied views in the market about the views one should have on the emerging markets with some fiercely shoring while others are using this as an opportunity to buy more and increase EM weight in their portfolio.

I believe that it is not correct to club together the emerging markets and analyse them as one distinct asset class simply because of their varied behaviour, economic situation and events to come in the future.   

Below are a few (among a train of articles in recent press) stories/opinions about the same.

Let us wait and watch what happens. 

http://www.economist.com/news/leaders/21595454-there-no-reason-broad-emerging-market-crisis-nervous-investors-could-yet-cause

http://www.project-syndicate.org/commentary/nouriel-roubini-explains-why-many-previously-fast-growing-economies-suddenly-find-themselves-facing-strong-headwinds

http://www.project-syndicate.org/commentary/michael-heise-shows-why-some---but-not-all---emerging-market-currencies-have-come-under-attack-in-recent-weeks

http://www.project-syndicate.org/commentary/kenneth-rogoff-looks-beneath-the-turmoil-roiling-emerging-economies--equity-and-currency-markets

http://www.project-syndicate.org/commentary/dani-rodrik-reviews-the-fundamental-lessons-about-emerging-economies-that-economists-have-refused-to-learn

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Ray Dalio's model of economy applied to India

The much publicized, celebrated and sometime criticized model (basic and not an exact/advanced/expansive as per Dalio himself) when applied in the Indian context reveals a few pointers. Though it appears to be  a simplistic model but i feel that it does encompass a good macro level summation of the overall economic scenario. Especially the cyclic nature of the business cycle.

As per the model 3 factors diagnose/assess the economy :

• Productivity growth 
• Short term debt 
• Long term debt

The below graph represents the Indian scenario:
  

Below is the break up of the short term and long term debt of India

 Below is how the productivity and its growth rates (YoY and 5 year MAT) pan out

Quick observations :

• The short term debt situation does not look very promising. If we believe in the previous 2 short term debt cycles, then a correction is imminent and near. This might be either good( India increases productivity, reduces deficits and pays off the debt) or bad( Defaults or keep restructuring short term debt). More analysis is in order here. A cursory look of economic literature led to a paper which concluded that increase in short term debt is an indication of a weak economy and not its cause. India is, at least in the short term not too healthy, although the last quarter numbers have given some hope.
• The second graph is indicative since the data (from IDS World bank retrieved Dec 2013 ) is not really matching up and needs to be verified/validated by other sources. But what is definitely true is that the proportion of India's short term debt  to its total debt has gone up significantly since 2006. Not a good sign since this can mean mostly refinancing/debt servicing/import obligations. 

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Fama-French & Momentum return model for Indian Equities

It is great to know that the best finance professors in India have come out with a databank for Indian equities and their French Fama and Momentum  factor returns. I guess I can’t ever stop wondering at the erudition of Prof. J.R Varma.

Agarwalla, S. K., Jacob, J. and Varma, J. R. (2013), Four factor model in Indian equities market, Working Paper W.P. No. 2013-09-05, Indian Institute of Management, Ahmedabad. URL:http://www.iimahd.ernet.in/~jrvarma/Indian-Fama-French-Momentum/four- factors-India-90s-onwards-IIM-WP-Version.pdf  

Data : http://www.iimahd.ernet.in/~jrvarma/Indian-Fama-French-Momentum/

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The lost decade?

The year was 2004 and UPA had succeeded in forming the government. I had joined my engineering college. Located in Noida, a region which mirrored India’s coming of age and magical growth rate. Commentators and economists were projecting that India would be among the top 3 economies of the world. With malls featuring global brands, numerous call centres, IT companies and real estate projects mushrooming across the city & NCR. On campus the mood was even better. IT giants like Infosys, HCL and others were flocking to our campus and hiring in hundreds.

The economy was performing brilliantly with growth rates of 9.5% in FY 05 and 06. Among the numerous chain emails floating, there was one peculiar one which caught the fancy of most fellow students. It portrayed the resume of the new Prime Minister Mr. Manmohan singh. It ran into several pages and seemed to be perfect with one achievement after the other. Indeed, he followed it up with a few good moves notably the nuclear deal. During UPA I, the biggest villain (or rather the scapegoat) was the left front with its anti west and industry unfriendly policies.

As I write this (2013, 10 years later), the scenario both in sentiments and in reality seem to have done a barrel roll. Much has been written about the bad state of economy (which grew at a rate of 4.96%), governance, policy logjams etc.  But the one thing that stands out starkly is the fall of Mr. Manmohan singh from being a national hero of sorts about whom all of us, the educated middle class felt proud about. Who has been shunned by the public, media and even his own party. He is facing tough times ahead, personally, with his name being dragged in the cola scam and maybe a few more in the not too distant future.

Personally(and biased), the future does not appear as bright, exciting & full of prospects as it did 10 years ago to the starry eyed yet-to-be engineer. I wonder if this truly has been the “Lost decade” or just the beginning of an elongated Stagflation period of India’s economy.

P.S : To an extent it might be wrong to compare the GDP of a few good years with that of the last 3 years but there are numerous other factors like twin deficits, consumption rate , industry/services growth rates, gross fixed capital formation , job creation , inflation, overall investment climate etc which point to a bleak scenario. 

   

A couple of good articles today:

This gives some insights on the informal economy of India.http://economictimes.indiatimes.com/opinion/comments-analysis/informal-workers-making-up-90-of-workforce-wont-get-a-good-deal-till-netas-notice-them/articleshow/24682274.cms

The below argues that FIIs have not been efficient in allocation of risk capital in India and the scope of implementing liberal policies for foreign investors in India. http://ajayshahblog.blogspot.in/2013/10/the-investment-technology-of-foreign.html#comment-form

Data source : http://planningcommission.gov.in/data/datatable/data_2110/table_1.pdf

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Volatile Times : Exciting or dismal ???

The past 2 weeks have been an exciting time from the economic perspective. Markets have swayed like the sine curve as evident by the VIX rising to as high as 32%. The same has happened with USD-INR with currency fluctuating to as high as 68 and now trading at around 64. The major factors (again with the reasonable margin of doubt and not being opaque and falling for the causation myopia (reference: NNT)) have been the continued effects of FED QE tapering, U.S stance on Syria, dismal august IIP and GDP figures. The bad news was countered by the confident, no nonsense stance on the economy and a slew of plans for reforms, primarily in the financial sector by the new Governor Mr Raghuram Rajan (Also my alum). He seems to be the toast of town with a plethora of articles and op eds being written. Yesterday’s rally of 750 odd points on the SENSEX accentuated by higher exports , lower imports , increase in auto sales and the likes seems to be a god send. But still fundamental weakness remains in the economy and it would be prudent to not fall for this short term exuberance. Going forward FED’s stance on 19^th September on the future course of QE tapering should be a market mover as will be  RBI policy review on 20th Sept..

There have been a slew of great articles , some of them are mentioned below.

http://www.bloomberg.com/news/2013-09-10/banks-seen-at-risk-five-years-after-lehman-collapse.html

http://www.project-syndicate.org/commentary/the-end-of-quantitative-easing-and-emerging-economies--growth-by-stephen-s--roach

http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/letter-from-a-banker-thank-you-governor-but-what-do-we-do-with-our-police-politicians/articleshow/22473493.cms

The below article mentions some of the figures showcasing the fundamental weakness but excludes important factors like twin deficits , forex outflows etc.

http://economictimes.indiatimes.com/news/economy/indicators/road-to-recovery-of-indian-economy-littered-with-many-trouble-spots/articleshow/22473406.cms

It was also disheartening to read the below article. But for all it states , it is mostly true and has been so for a long time

http://www.thehindubusinessline.com/opinion/indias-never-had-it-so-bad/article5093685.ece

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A macro level historical perspective of India's poverty

It is ironic that the commencement of this blog coincides with the freefall of INR vs. USD that is being witnessed. Also the state of economy is fragile with bond yields at a 5 year high, Current account deficit (which showed signs of narrowing last quarter) has again increased to 4.8% and GDP growth rate at sub 5% levels. The wider stock market is also looking bearish with about 140 stocks hitting their 52 week low today, although the large CAP NIFTY and SENSEX have been holding up as opposed to mid caps and small caps that have lost much more market value. Economic times reported that out of 2415 stocks on BSE more than 55% were trading at prices below their book value.

Cutting back from the current to the historical, this post seeks to address two questions. Questions which inadvertently crop up in my mind, whenever I observe and experience the disparity in the development and standard of living in India as compared to the west.

So, two questions:
1. Has India been historically poor or is that a recent phenomenon?
2. Has population got anything to do with it?

 Method: Macro level analysis and trends of GDP , GDP growth rate , GDP per capita , percentage salience of County out of overall GDP and GDP per capita.

Data source: All the data was extracted from the Angus Maddison project. Relevant links and citation is at the end of the article.

Note: All figures are standardized to 1990 USD as per PPP multipliers. Details can be found at source
Ok, so to keep things simple the data is being shown as a single graph below. The same concerns India alone and does not touch how other economies have performed (To come later)

The data , especially the per capita income is not very reliable till 1500. The absolute figures of Population is in ‘000 000. 
The data points are only for the years mentioned above and thus they may or may  not be absolute lows/highs.

1) India was rich , very rich in absolute terms and in a way dominated the world economy till about 1700 AD when it commanded a share of 24% of World’s GDP. But when we look at the per capita incomes , it was just about average till 1500 , peaking to about 128% of the world's average income per capita in 1600 and then going on a free fall to reach as low of 14% in 1970's .

 Historically , India did well till end of Mughal empire (1707). Its decline seems to coincide with the increasing prominence of east India company , Company rule , British Raj and finally till 1991 pre liberalization era. Thus the average Indian has never been rich , might have just been about average for a brief period of 100 years in he 17th century. A point to note is that the decline of India’s absolute GDP share of the World GDP coincides with the advent of industrial revolution which started around the mid of the 18th century.

2) It would appear from a simple glance that the increase in population has had a direct negative correlation with India’s share of world GDP but with the lack of a credible sample set it would be wrong to infer that. Rather when we look at the population vs per capita income there seems to be a positive correlation (with coefficient of 0.9, again with the statistically dubious sample set). Thus the increase in population has in a way increased per capita incomes.

Rather than population as a factor in understanding India’s poverty and stagnation post 1700 it would be prudent to look at factors like plunder by the British rule, late adoption of modern manufacturing process by India et al. Post independence we should look at factors like opening the economy et al which was done by other colonial/poor Asian economies like China and Korea who have done exceedingly well (More on that later).

Bottom line: Right Policy (with proper execution) , in the broad sense ,  is probably the most important driver to growth.

Update : The above is not an attempt to make a full fledged economic growth model. I am not sure if that is even a good idea for such a long period with numerous possible variables.

Source: 
Citation:
Bolt, J. and J. L. van Zanden (2013). The First Update of the Maddison Project; Re-Estimating Growth Before 1820. Maddison Project Working Paper 4.
Links:
http://www.ggdc.net/maddison/maddison-project/home.htm
http://www.keepeek.com/Digital-Asset-Management/oecd/development/the-world-economy_9789264022621-en

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