The media is in the business of selling news, and news of S&P downgrading American Sovereign rating was virtually a non-event for most of the intelligencia (including Montek Singh)! It had been a long time coming! In any case, there is so much mixing of free/fair views with hidden agendas and propagandas of various constituencies, that it’s hard to distinguish one from the other. Besides, financial journalism, (ironically similar in this regard to the rating agencies themselves) in the absence of strict code of conduct, is like the ‘andho mein kanha raja’. Public is quite gullible, and will take on face value whatever the news agencies will give them since they don’t have time/expertise to comprehend anything on their own! So being in the profession myself, I shall try and draw some ‘more than meets the eye’ inferences for you as follows:
I think we are headed for a stagflation in OECD, and slower growth with higher inflation in developing countries (relative to its past). I believe America seems intoxicated in a state of delusion and self-denial. It believes it is God and can keep binging on the World’s savings forever without ever having to repay them. And the longer it continues, the stronger the self-fulfilling prophecy. Euro-zone, on the other hand, contrary to popular perception, seems in a better position than America simply because they recognize they have a problem, and are trying to take harsh measures to resolve the issues. Of course they must go through their share of pain, and this, at worst, may mean taking out a few profligate countries out of the EU.
Closer home, I am appalled at the dismal state of governance in our country. The audacity and profligacy of the government is bound to blow-up in our face. We also have rattled humongous amount of debt (via Farm Debt Waiver, NREGA and all the subsidies etc), without corresponding increase in productivity/growth. The reason for that is, majority of the debt that we raked up has ended up in a corrupt politician’s coffers instead of being used for Capital Formation. There is no free lunch and someone has to foot the bill. Obviously, unless they are hanged to death (which they never will be) this debt cannot be economically repaid; and hence must be paid by inflation.
However the silver lining is that in India, we have enough internal demand and the resources to efficiently provide the same. Our ICOR is 4-4.5, and so we need an Investment rate of 31-32% to fund that growth. Our Savings rate is in that region. So for 6-7% growth, it’s not unreasonable to assume that we are truly ‘decoupled’!
Having said this, life is not a straight line, and hence a few caveats are in order. In a recessionary world, I sincerely do hope that the speculators intoxicated with free-money don’t spoil the party ensuing with cooling commodity prices, Anna Hazare forcibly inculcates some shame in the government so that blatant looting of the exchequer is stalled, and instead the government wakes up from its slumber and get-going with some quick and serious debottlenecking of the stifling bureaucracy.?Therefore, it’s time to tighten belts and run a tight ship (with low fixed costs) while positioning for moderate growth; and being a nation of believers, PRAY! It’s always smart to ignore the politicians who cry wolf about the illusory double-digit growth. An idea worth pondering over, Sirji! 😉