Elephant In The Room is a series of articles that will goad the reader to pay attention to some obvious wrongs — or rights — happening in financial markets. Why elephant? Fifty years after the phrase was first used, it remains a cogent description of someone in denial: seeing, but not believing. As we all know now, these wrongs (or rights), if treated in time, can save (or make) investors pots of money. If not….
The attempt is to provoke thought; and the writers, from deep within the markets, who are worried sick or want to tell the world the great things that are in store. They shall remain unknown for compliance issues, because their jobs don’t always let them tell it like it is. Ergo, they shall let the steam out in DNA. Happy reading.
This is one of those rare situations where a recipe for disaster is actually being applauded by the markets.
Equities are up over 70% calendar 2009 till date, the rupee has appreciated against the US dollar, and bond yields are resilient.
The market in its myopia is looking at the Reserve Bank of India-created liquidity, government’s expansionary fiscal policies and a global economic recovery brought about by expansionary policies of major governments and central banks.
India has reduced taxes, increased wages and provided for higher expenditure to bring the economy back to a potential 9% growth path.
The fact that a 9% GDP growth came with a bubble bust has gone completely unheeded.
Unfortunately the government policies for a 9% GDP growth is also a recipe for another bubble bust.
The fiscal deficit of the central government is set to exceed 6.8% of GDP for the year 2009-10. The Centre plus states fiscal deficit is expected to cross 10% and if one adds on oil bonds and other off-balance sheet items the fiscal deficit is close to 11% of GDP.
India’s debt is close to 100% of GDP.
In all this, India has to pay higher wages to the most unproductive sector of the economy, the government sector.
The Pay Commission revision implemented last year has meant government employees receiving more pay for being less productive. The labour policy of the government for a 9% growth is hire more and no productivity targets.
When countries like Ireland are forced to cut public sector pay and reduce public sector workforce to bring down a fiscal deficit which is similar to India’s, India is just going the opposite way.
The government recently approved a higher spending of Rs 30,000 crores. The reasons were higher food, agriculture and fuel subsidies. The government is reeling under the impact of complete inaction on agriculture over the boom years of the 2000’s. Food price inflation is at 20% levels and the government from their noises are completely clueless in reigning in food prices.
Their solution?To increase the minimum support price (MSP) to farmers. The higher MSP translates into a higher cash inflow into the most unproductive sector of the economy, which, unfortunately, is not taxed.
The agriculturists are spending the cash resulting in more demand for scarce goods but how long can this be sustained is what one need’s to ask.
A higher MSP will add to inflation, not necessarily result in higher food production and is difficult to roll back.
The markets are applauding, but is this really sustainable? And what are the potential impact of a runaway fiscal deficit and runaway inflation even if led by the so-called supply shocks?
Have something important to say but can't?Now you can have your say. Mail all to us in confidence at elephant@dnaindia.net. We’ll take it forward, together.
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