Limited Resources v/s Economic Growth

Economic growth needs many supply side resources such as food & water for the population, fossil fuels, metal ores etc. There is a growing concern that we would run out of resources impacting economic growth. But at the tipping point, when many predicted worse, things seem to change for better. Read more on this.

The biggest debate on this subject was at the rate we were burning oil, we would run out of them in few decades. Economy won’t advance if we don’t have sufficient energy to produce goods or services or transport them around. So the oil prices went up above $100/barrel increasing inflation in the importing countries and many thought oil prices would never soften. But shale technology changed the industry landscape. Last year, US produced more oil than Saudi. And oil is traded at the half-price sustain-ably for many months now. Forget inflation, welcome deflation! Those who predicted high price of oil are licking their wounds.

Similarly in the agriculture domain, when there was no additional arable land was available, use of fertilizers took up the productivity. Now advances in bio-technology seem to be the next wave to improve agricultural output. World’s population has more than doubled in the last 50 years while the available land did not double up but yet this population is fed better comparatively.

Many are concerned that water would become the reason for the next world war. But we are finding ways to recycle water, preserve rain water, or cut water use in agriculture through drip irrigation etc. Those who are predicting water shortfall might be overestimating the demand or ignoring the improvements which would come in time.

Before coal runs out, wind and solar would have become significant sources of energy production.

Whenever we approach the limits of available resources, a new vista opens up taking these limits higher.

Though the depleting resources have some irreversible impacts on ecology, focus of this blog post is on its impact on economic growth.

In the debate between Environmentalists (who find limits to growth) versus Economists (who are helped by innovation to overcome the limits), the optimists have had the last laugh always. Next time when you get into similar debate, do remember there is no reason to get pessimistic completely and hoping for better would not prove you wrong.

[Inspired by the book ‘Rational Optimist’ by Matt Ridley]

Are India and China growing or recovering?

Labor drove GDP

All of the media project China and India as fast growing economies of the world. And we seem to take pride in that. But look back into the history (not decades but centuries), you will know that India and China contributed to greater portion of world GDP. They were the biggest economies of the world. Asia had larger population concentration and so had largest share in the world GDP too. But the driving factors would not remain same forever.

Productivity and Politics drive GDP

Taking a look at chart shows that things started changing the 19^th century. Both India and China missed the Industrial Revolution. Europe benefited hugely (at the expense of India and China). Colonialism by European countries and unfair trade practices did hurt the economies of Asia badly. Two world wars decided how things would shape in future. Russia (Stalin) won the war against Germany (Hitler) but US made better use of changing situation. And there is no look back for them till today.

Other things to note is advancing technology, new inventions such as IC Engine helped productivity to increase in a different scale. They could produce more with less people. And their political strategies backed with weapons helped them win new trade territories. Higher production and larger markets helped the economies of Europe and USA flourish.

Playing catch-up

Though depressed and beaten (economically), both China and India would transform themselves and get ready to play catch-up. But it took few decades to go through damage control mode into recovery mode. China started its economic reforms during the end of 1970’s and India began its efforts during early 1990’s. This restructuring helped them grow and expand their economies in the last decade and become fastest growing economies of the world. Since China started its efforts earlier than India, it is a bigger economy than India. But in the next two decades, India would have higher growth rates than China and would reduce the gap.

Will they become super-power again?

Population concentration is still highest in Asia. But productivity is comparatively low. Improving the infrastructure, investments in technology, better awareness of international politics would help them earn back their place. Becoming a super-power should not become the aim. We need to power to defend territory but it is trade which helps us grow. And more than GDP, human development index should become the priority. GDP and the resulting power would follow us.

Sun Pharma would not remain a defensive stock; So will be TCS

During last few years, when Rupee lost significantly against dollar, two export oriented industries - Pharma and IT were seen as defensive in the stock market. When the broader market was seeing sell-off, these two sectors attracted that money. And the leaders in those sectors Sun Pharma and TCS respectively, outperformed Nifty.

3 Year stock performance chart for Sun Pharma and TCS along with Nifty (Source: Google Finance)

But that story seems to be changing now. When Sun Pharma announced its last quarter results, stock fell by 10%. And when the broader market is seeing selling pressure, Sun Pharma joined hands with them which was unusual few months ago. What has changed? Sun Pharma has become real big, that’s all. When a company is small with great products, and it has a growing market, both its revenues and profits will expand rapidly (like it is happening in e-commerce now). But when the target market reaches a saturation point and the company in focus has already grabbed a big market share, its growth opportunities will reduce. For further revenue growth, it has to acquire other players in the game. So Sun Pharma bought out troubled Ranbaxy. That would mean cost structures would change for the combined entity before they are properly integrated. There will be many one-time expenses as Sun Pharma reported in its last quarter. But for few more quarters to come, margins would take a hit. And the stock would react accordingly.

Similar structural changes are happening in the IT industry too. Their customers are tightening their spend. Revenue expansion in double digits is not a ‘taken for granted’ any more. When the top lines would stall, operational models need to be tweaked to generate more profits. Once the operations are also set in great order, there is not much to optimize. Profit growth too would slow. TCS did grow at a good pace in the last decade, did many M&A and then worked on its cost structure to generate superior profits. But now it is seeing that market it serves is not growing like before and there are many avenues left inside to tweak and save considerable cost. So there is a likelihood that it would not keep up with its pace like before. But look at the P/E multiple of stock. It is lot higher than industry P/E and the index P/E. When earnings do not grow at the same rate as before, its P/E multiple would shrink and the stock price would not command the same premium. In the quarters to come, do not be surprised if TCS stock behaves the same way Sun Pharma stock did after this quarter result. Tech Mahindra (another IT stock) lost 10% after its latest earnings surprised investors.

I do not mean they are turning bad companies but there are signals that their stocks may not outperform. They would become what Reliance Industries has become, a slow moving big elephant.

There are many Kingfisher Airlines and they are getting exposed now

All of us know Kingfisher Airlines borrowed more than they were capable of repaying comfortably and their game was up when their cash flows were not sufficient enough to service their debt. Once a company is identified as defaulter, nobody would lend them further and they cannot continue their business. And if they do not have sufficient assets to cover their debt, you know who will have to write it off – their lenders, banks in this case.

5 year stock performance of JPA; Source: Google Finance 

Today many stocks had witnessed a sell-off. JP group companies, Unitech, ADAG, many more stocks in reality, infra sector and those with heavy debt on their balance sheets burnt their investor wealth. It is not just this today or this week, they have been falling over past few months. Many are at 52 week low and few are at all low time lows burning out all the value accumulated since their listing.

Do you ask why now, when Indian economy seem to be improving? Here is my reasoning.

RBI had cut repo rate by 75 bps so far in 2015. But industry does not seem to be happy. As further rate cut hopes are put to rest and with a weak monsoon warning raising the fear of demand/consumption to come down, there was a blood bath in the stock markets. Indices were already 15-20% down from their all-time highs. But it is few sectors and stocks which lost significantly.

Though economic recovery is weak, lower interest rates (however small they are) would have reduced the capital costs burden. But it does not seem to be sufficient for those companies which had big debts on their balance sheets. If you had read this article on Value Research last week (https://www.valueresearchonline.com/story/h2_storyview.asp?str=28001), you would have known stock markets behavior this week was expected. It is not uncommon for infra companies to have higher debts but what happened with these companies in the list are loans grew at a higher pace than their top line and profits. Too much leverage would have been digested in an economy growing in double digits but now they are sinking with the debt load and there is not much hope let for them.

Source: Value Research Online

So this puts forward one important aspect. Even if RBI reduces rates further by 100 bps, these companies would still struggle to service their debts. And when that hope (of reducing rates) vanishes along with headwinds to economy (weak monsoon) coming to surface, it acts as a trigger for the sell-off. If and when these companies start defaulting on their loans, they cannot get fresh loans and their business continuity will be at risk.

When some of these companies sink, what will happen to their lenders (banks)? Now you know why Bank Nifty saw all of its components in red on the day RBI announced a rate cut, despite capital costs coming down for Banks and borrowers eventually.

And if multiple corporate (darlings of yesteryear stock markets) go out of business, they will act as a speed-breaker for the economy which is slowly recovering. There would be efforts from the Government and the banking system to avoid defaults and they may succeed in reducing the impact but they cannot save all for sure.

ಪುಸ್ತಕ ಪರಿಚಯ: ಶಿಕಾರಿ (ಯಶವಂತ ಚಿತ್ತಾಲ)

ಏಕಾಂಗಿಯೊಬ್ಬನ ವ್ಯಥನ ಕಥನದಂತೆ ಪ್ರಾರಂಭಗೊಳ್ಳುವ ಈ ಕಾದಂಬರಿ, ಪರಿವರ್ತನೆಗೊಳ್ಳುತ್ತ ಸಾಗುವ ಕಥಾ ನಾಯಕನ ಹೊಸ ಆಯಾಮಗಳನ್ನು ಪರಿಚಯಿಸಿ, ತನ್ನ ಬೇಟೆಗೆ ನಿಂತ ಶಿಕಾರಿಗಳ ಪ್ರಯತ್ನಗಳನ್ನು ನಿರರ್ಥಕಗೊಳಿಸಿ, ಬದುಕಿಗೆ ಹೊಸ ಉದ್ದೇಶ ಕಂಡುಕೊಳ್ಳುವ ನಾಗಪ್ಪನ ಕರಾಳ ದಿನಗಳನ್ನು ಓದುಗರ ಮುಂದಿಡುತ್ತದೆ.

ನಾಗಪ್ಪ (ಆಫೀಸಿನಲ್ಲಿ ನಾಗನಾಥ್), ಮುಂಬಯಿಯಲ್ಲಿ ರಾಸಾಯನಿಕ ಕಂಪನಿಯೊಂದರ ವಿಭಾಗವೊಂದರ ಮುಖ್ಯಸ್ಥ . ದುರದೃಷ್ಟವೆನಿಸುವಂಥ ಬಾಲ್ಯ ಇತನದ್ದು. ಕೆಟ್ಟ  ಬಾಲ್ಯದ ಪರಿಣಾಮವೆನ್ನುವಂತೆ ಈತ ಅಂತರ್ಮುಖಿಯಗುತ್ತಾನೆ. ಸಹಜವಾಗಿ ಇತರರೊಡನೆ ಬೆರೆಯುವುದು ಈತನಿಂದ ಸಾಧ್ಯವಾಗದೆ ಹೊಗುತ್ತದೆ. ಈತನ ಸ್ನೇಹಿತನೊಬ್ಬ ತನ್ನ ಗೆಳತಿಗೆ ಮೋಸಗೊಳಿಸಿ ಆಕೆಯ ಆತ್ಮಹತ್ಯೆಗೆ ಕಾರಣನಾಗುವ ಕೃತ್ಯಕ್ಕೆ ಸಾಕ್ಷಿಯಾಗುತ್ತಾನೆ. ಮುಂದೊಂದು ದಿನ ಇದನ್ನೇ ಆಧರಿಸಿ ಕಾದಂಬರಿಯನ್ನು ಬರೆಯಲು ಹೊರಡುವ ನಾಗಪ್ಪನಿಗೆ ಆತನ ಹಳೆಯ ಸ್ನೇಹಿತನೇ ಶತ್ರುವಾಗಿ ಮಾರ್ಪಡುತ್ತಾನೆ. ಇನ್ನು ಕೆಲವರನ್ನು ಸೇರಿಸಿಕೊಂಡು ನಾಗಪ್ಪನ ಶಿಕಾರಿಗೆ ನಿಲ್ಲುತ್ತಾನೆ. ಮಾನಸಿಕವಾಗಿ ತುಂಬಾ ಕುಗ್ಗಿ ಹೋದ ನಾಗಪ್ಪ ಅದರಿಂದ ಹೊರ ಬಂದು ಇದರ ಜಾಲದ ಸುಳಿಗೆ ಸಿಲುಕದೆ, ಪಿತೂರಿಯನ್ನು ಸಮರ್ಥವಾಗಿ ಎದುರಿಸುತ್ತಾನೆ. ಎಲ್ಲ ಆಮಿಷಗಳನ್ನು ನಿರಾಕರಿಸಿ, ಕೊನೆಯಲ್ಲಿ ತನ್ನ ಹುದ್ದಗೆ ರಾಜಿನಾಮೆ ನೀಡಿ, ತನ್ನ ಜೀವನದ ಮೂಲ ಉದ್ದೇಶ ಕಂಡುಕೊಳ್ಳುತ್ತಾನೆ.

ಈ ಕಾದಂಬರಿ ಸ್ವಗತದಂತೆ ಕಂಡರೂ, ಪದರ ಪದರವಾಗಿ ಕಥೆಯ ಎಳೆಯನ್ನು ಬಿಚ್ಚಿಡುತ್ತ ಹೋಗುತ್ತದೆ. ಮನುಷ್ಯನಲ್ಲಿ ಅಂತರ್ಗತವಾದ ಬೇಟೆ ಪ್ರವೃತ್ತಿಯನ್ನು ಮತ್ತು ವ್ಯಕ್ತಿಗತವಾದ ಸುಳ್ಳು, ಮೋಸಗಳನ್ನು ತನ್ನ ಸ್ವಾರ್ಥಕ್ಕೆ ಬಳಸಿಕೊಂಡು, ದುರ್ಬಲರನ್ನು ಜಾಲದಲ್ಲಿ ಸಿಲುಕಿಸಿ, ಶಿಕಾರಿಯಾಡುವ ಜನರನ್ನು ಮತ್ತು ಅವರ ಅಂತರಂಗವನ್ನು ಪರಿಶೋಧಿಸಿ, ಇದು ಒಂದು ಮನ ಶಾಸ್ತ್ರದ ಪುಸ್ತಕವೆನ್ನುವಂತ ಭಾವನೆ ಮೂಡಿಸುತ್ತದೆ.


ಇದು ಲೇಖಕರಾದ ಯಶವಂತ ಚಿತ್ತಾಲರಿಗೆ ಪ್ರಶಸ್ತಿ ಮತ್ತು ಜನಪ್ರಿಯತೆ ಗಳಿಸಿಕೊಟ್ಟ ಕೃತಿ. ಲೇಖಕರು ಜನಿಸುದ್ದು ಉತ್ತರ ಕನ್ನಡ ಜಿಲ್ಲೆಯ ಹನೇಹಳ್ಳಿಯಲ್ಲಿ, ಜೀವನ ಸಾಗಿಸಿದ್ದು ಮುಂಬಯಿನಲ್ಲಿ. ನವ್ಯ ಕನ್ನಡ ಸಾಹಿತ್ಯವನ್ನು ಶ್ರೀಮಂತಗೊಳಿಸುವಲ್ಲಿ ಇವರ ಕೊಡುಗೆ ಅಭಿನಂದನೀಯ.  ೧೯೭೯ ರಲ್ಲಿ ಪ್ರಥಮ ಬಾರಿಗೆ ಮುದ್ರಣಗೊಂಡ ಈ ಕಾದಂಬರಿ, ಒಂಬತ್ತು ಬಾರಿ ಮರು ಮುದ್ರಣಗೊಂಡಿದೆ ಮತ್ತು ಲೇಖಕರ ಪ್ರಯತ್ನವನ್ನು ಸಾರ್ಥಕವಾಗಿಸಿದೆ.