Every economy has a natural “frequency” that is determined by a range of factors, including size, population and its age distribution, type of government, dynamism (as measured by things like ease of doing business), importance of religion, culture and so on. Technology, of course, is a key factor, both in terms of assessing the frequency and in terms of changing it.
While there is no way of accurately measuring this frequency, all the PhD theses notwithstanding, at an empirical level, most people would agree that the US has a much higher natural frequency (changes are assimilated more rapidly) than, say, Europe or Japan.
India, too, has a high natural frequency, much higher than, say, 40 or 50 years ago. Further, the low current level of several parameters (from internet penetration to skin care spend per capita) ensures that our natural frequency is steadily rising.
One of the implications of this is that no major economic trend lasts for too long — the natural frequency of the economy takes over and forces things to turn around. In a sense, India, economically speaking at least, is like a child that easily catches cold (or worse) but recovers in double quick time.
All of this is very intuitive, but, as mentioned earlier regarding the US, there is considerable empirical evidence in favour of this belief. Witness, if you will, how the stock market has held up – quite well supported now at 17000 – despite having had “the worst finance minister in history” and a government that is “catatonic with policy paralysis” and a corporate sector that is “gun-shy of investment because of the huge policy uncertainty” and inflation that “remains at unacceptably high levels despite slowing growth”.
Of course, it is difficult to see out of this sandstorm, and about a year ago I was frightened out of my belief by a couple of the more astute observers of the economy. Last September, when forecasts of eight per cent plus growth were the norm, one of them told me that he believed growth in 2012-13 would be 6.3 per cent; a couple of months later, by which time growth forecasts had been trimmed to eight per cent minus, another friend said he expected growth to be no higher than 5.5 per cent for two more years.
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I was appalled and alarmed, since I had – in my usual rose-tinted way – believed that the slowdown would be temporary.
As it turns out, it appears that all three of us were correct in parts — 6.3 per cent has already been reached, and several worthy forecasters have been shoving each other aside to push their targets even lower than 5.5 per cent.
And there are now unmistakable signs that we have passed the nadir of the slowdown some time in the April to June quarter. I started to become convinced of this some time in May when I ended up walking out of a TV programme where five or six worthies were wringing their hand and berating the government for the pretty pass things had been brought to. I have learned, from many years at my father’s knee, that when everyone is negative, chances are you are past the worst.
And, sure enough, we have a new finance minister who has already – and, importantly, without any specific actions – put a floor under sentiment, inflation numbers that have, finally, shown some respite, a late season recovery in the monsoon, and a trade deficit that is more than 20 per cent better on a monthly basis following the sharp depreciation of the rupee.
We are far from out of the woods, of course. The global economy remains weak, keeping exports under pressure. The European crisis is miles from denouement, which, when it comes, will certainly hit growth everywhere. Investment remains a problem, although there are some positive signs, assuming Mr Chidambaram really gets to work. Banks are in a tricky place, engorged as their asset books are with dangerous credit — the multitude of government-facing companies that leveraged their relationships to “loot” public resources.
The good news is that this cat is finally out of the bag. None of these companies will see any meaningful growth in value, as investors have shifted focus to companies that are consumer-facing or in exports and have demonstrated much stronger governance practices. Many of these have actually found the recent slowdown very valuable since it has served to shake out players who were weak fundamentally but had been able to compete in the easy days.
Even as I put my rose-tinted glasses on again, I do have to admit that things will remain tough, but then making money is not supposed to be easy. And while the Sensex may not be able to run up too rapidly – it is weighed down by several large government-facing players – there are without doubt a very large number of investments that will easily provide 20 to 25 per cent returns over the next 12 months.