Understanding the underlying forces that transform global markets

Updated: Sep 28 2008, 07:10am hrs
Investors will have to carefully look at productivity and not just growth in the times to come reckons Amit Dalal

When Steve Wozniak was in high school in the mid-1960s he dreamed of owning a computer. His father told him that the computer cost as much as the down payment on a house. Then I will live in an apartment, Wozniak said. The other Steve of Apple, as Wozniak is popularly known, is the reclusive co-founder of Apple Inc and the engineering genius who made computers affordable, user friendly and a household necessity.

Wozniak recalls that by the mid-70s, in Sunnyvale California - the heart of the Silicon Valley, People were talking about how we were going to revolutionise the world. Contrary to the Silicon Valley, the world in the mid-70s was talking about the oil crisis. Global economies were filled with peril on the effect of the increasing prices of oil. The negative and crippling impact of higher oil prices did slow down the growth for many economies.

The technological revolution started in the US, changed the world and resulted in spectacular growth in the US. Many companies have changed the way the world works, lives, travels, etc. They are the cause and contributors of improved productivity and growth first in the US and then in the world. Many a thesis, by financial critics, has been propagated about how the US GDP has grown only on the back of a financial and war economy. I state that all such observations are made by shallow critics. They fail to credit an environment, which created the technological revolution of the 21st century. The fact that US GDP grew consistently during the last 30 years is a result of this constant innovation and the technology revolution.

The rise in the equity markets and the derivative wealth effect is a result of the GDP growth. The current financial world is convinced that the wealth effect from the markets produces consistent and robust growth, which in turn increases earnings. This is a fantasy! Interest rates impact valuations and have some impact on consumption but they cannot improve productivity or stimulate growth beyond the short term. The growth in the US economy for the last three decades stands witness to this basic economic phenomenon.

The slowdown in the US that started in 2000-01 should have been an obvious outcome. The US Fed should never have intervened by providing artificial liquidity. Hindsight now shows that this low cost capital provided by the Fed to rejuvenate growth did not result in real growth but unbridled rash asset speculation.

Why an obvious outcome Economic growth is a result of increased productivity and development of new markets. NASDQ at 5,000 forecast the growth and development of web commerce and web-based markets. This never happened to the degree visualised! In a consumer-driven economy, even today, internet purchases account for less than 0.5% of GDP. Thus, the world benefited from the internet as the foremost tool for increasing productivity but it did not lead to the development that the markets were forecasting. The breakdown in the equity markets with no new innovation in the new millennium, except the iPOD and the Palm, a resultant slowdown in the rate of GDP growth was a natural effect.

The future in the US

The breakdown of the trust and quality US financial institutions will bring a recession, which the world is expecting, in the US. The high oil prices are causing pain to consumers. Global economies are reeling under the pressures of commodity inflation. But maybe these circumstances will give birth to a Steve Wozniak. Maybe twenty years later he will recall to the world that in XYZ town in the US We were already talking about how we will revolutionise the world.

China and India

What innovation is to the US economy, infrastructure development is to emerging markets -drivers of growth through improved productivity.


China and its ambition of being the worlds lowest cost manufacturer resulted in stupendous growth in its economy over two decades. China became the largest destination for industrial development in the 1990s. By the end of the millennium, China became the fastest growing economy in the world. The huge forex reserves, created from hard work of the Chinese people rather than speculative flows, allowed their government to invest in world-class infrastructure. The infrastructure in the form of airports, cities, trains have further led to growth and prosperity from higher and higher productivity.


The last five years of impressive growth in India were a result of the remarkable success of the Indian corporate sector.

Economists and analysts credit the lower interest rate regime and the resultant demand growth as the major driver of GDP growth. I disagree! I believe GDP growth was from pure industrial development. In the late 90s, Indian manufacturing was written off as uncompetitive, perhaps outdated. But the Indian entrepreneur proved the world wrong. Exports have grown! Domestic production competes with foreign imports at globally competitive low custom duties. India is becoming a hub for global auto manufacturers like Hyundai, Nissan, Ford, etc. The BPO and call centre industry is the success of the youth and increased consumption is the larger wallet size of this youth.

Lower interest rates, growth in individual borrowings assisted consumption, but ability to repay came from employment growth. The slowdown in FY2008 is the best boon that could be given to Indias economy. It was becoming increasingly obvious that capital allocation and business plans that were being construed would have led to inefficient and unprofitable development, be it in residential and commercial real estate, SEZs, metro, multiplexes, hospitals, etc. The current slowdown will bring awareness of the financial capacity of Indias middle class and the development roadmap suitable for this market. It will bring to light the unprofitable and rash investments made by some corporates both in India and the US.

The capital markets

The year 2007 was an outlier in the history of Indias capital flows. FDI flows, FII flows, NRI capital flows perhaps equalled the total savings and investment generated by the Indian economy.

This created a whirlwind of asset appreciation both in the real estate and equity markets.

A lower GDP growth in India in FY2008 will be a natural outcome of lower capital flows. FY08-09 will be a test for Indias import reliance. But, FY09-10 will see Reliance Industries changing the fortunes of Indias import reliance. The gas from the KG Basin and the Value Add, which will be earned by RPL, will perhaps accrue $10-12 billion to Indias Forex Capital Reserves.

For India to become a favoured capital flows destination, it will be imperative for the current and the next government to monitor the implementation of the 11th 5 year plan.

For India to record above 9% GDP growth, assuming inflation in single digits, the government will have to take reforms many steps further.

For Indian corporate profitability to earn the high ROEs observed in FY06/07 and FY07/08, Indian managers will have to take harsh divestment and reorganisation decisions.

For the market to experience a new bull rally reaching upwards of the Sensex 25,000, analysts will have to be able to forecast a new era of higher productivity, efficiencies and growth in the Indian economy and the corporate sector.