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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Growth cannot last forever

Posted by Muthu on April 28, 2011

When a politician dies, lot other politicians pay their last respects. The same is the case with a businessman. There are also words of praise from the people in the same field. 

Seeing the television yesterday, I was wondering why when a guru dies, other gurus don’t offer praise or pay their last respects. May be I don’t know how the guru world functions. May be the ways of the enlightened ones are beyond the grasp of ignorant mind like me.

One elderly lady, who is the devotee of the above guru, called me yesterday and was upset that I did not call her and offer my condolences. She said that she waited 3 days for me to call before her initiating the same.

Taking a cue from the above call, I offer my condolences for those of you who feel bereaved due to the demise of Sathya Sai Baba.

Jeremy Grantham is one of the respected names in the investment management industry across the world.

His writings are insightful.

His April Newsletter has certain pointers worth thinking about.

Infinite growth is not possible in the world. Once the base becomes higher and higher, the growth rate tends to get lower. At the pinnacle of development, even the growth rate may start becoming negative.

Even in the last post on Nisargadatta’s wisdom, you would have read that societies are like people; they grow and reach a point of relative perfection before they decay and die.

I’ll touch upon some of the pointers mentioned in the above news letter and share my thoughts on the same. I’ve given the link at the end of this article to read the complete report. It’s fairly long but worth reading due to wonderful analysis.

Despite the rapid growth the world has seen especially in the last one century, we cannot forget the fact resources cannot be stretched beyond a point. We would simply outgrow our resources.

In 1800, only 800 million inhabited this planet. Its’ now 7 billion.

All of us are rapidly consuming finite resources. With more people in countries like India are expected to start coming out of poverty, the consumption rate is going to increase at a very higher scale.

U.S.A which has just 4% of world’s population consumes 25% of its resources.Africawhich has around 15% of world population consumes a meagre 1%.

Countries like U.S.cannot expect grow forever.

Jermey says “If we maintain our desperate focus on growth, we will run out of everything and crash. We must substitute qualitative growth for quantitative growth.

He also points out for almost 100 years  till 2002, all commodities prices (except oil) declined by an average of 70%.

The trend which got reversed in 2003, may take the world to a different order in terms of inflation and scarcity of resources.

Now China is consuming commodities like metals furiously as if there is no tomorrow.

I did some research on China’s growth and felt that the growth numbers are misleading and is not convincing. I shared my thoughts with a Tamil Magazine. Due to election fever, the article never saw the light of the day.

Seeing China’s infrastructure and conclude that all is well with Chinese model is as good as seeing me and concluding that I’m healthy. I only know what is happening inside.

To quote Raghav Bahl, “Over 200 years of economic experience tells us that hyper-investment creates a bubble and ends in a dreadful collapse. Even common sense should tell us the same thing. If you spend trillions of dollars in creating mammoth bridges, malls, plants and ports, the immediate impact is nice and invigorating. The economy expands, people earn more, they spend more, factories hum with production, and wealth gets created.

But problems begin when ports go half empty (because they are larger than needed) or roads fall short of toll revenue targets (because fewer cars are being driven). It’s what economists call ‘over-capacity’ created by ‘hyper-investment’—in common sense terms, it’s simply a case of building a palace when all you needed was a five-bedroom dwelling.”

China’s wealth and GDP predominantly comes from state owned corporation and I feel that Chinese are fudging numbers.

The opaque, fully controlled Chinese banking institutions NPA (Non Performing Assets – the loans which may not be paid back) are extremely high (between 30% to 50%) and the government is keeping them float by pumping money. It looks like a house of cards.

In India, our banking industry’s NPA is only around 2%.

China’s bank credit is 150% more than its GDP itself. Whereas inIndia, bank credit is roughly 50% of our GDP.

As Jermey rightly points out, any near term crash or strong correction in Chinese economy may bring along with it the commodity prices.

But in the longer run, we should learn to live with higher inflation as the resources are limited and the demand for them may get only higher.

The best way to beat the inflation and generate real return in the long term is to invest in equities. If we do not have significant exposure to equity, the value of our savings would be eaten away by inflation.

Higher growth rate would not be possible for ever.

It’s so happened by design that India is in a sweet spot. The base is very low. So the growth rate is high and is expected to be highest in the world for next few decades.

To explain what I mean by the base is low, Indiawhich has 17% of the planet’s population living here has a GDP of around $1.2 trillion. In fact it nearly took 60 years after independence to touch $1 trillion GDP.

U.S., which has 4% of world’s population has a GDP of $14.7 trillion. High base with limited population would saturate the future growth.

InIndia, our GDP is expected to be around $5 trillion in 2020.

With a lower base and 50% of the population is less than 25 years old (65% of the population is under 35 years), the growth looks optimistic for next few decades.

We would also be reaching our saturation point and that is decades away.

The biggest challenge would not be the growing prosperity of Indian middle class but how to bring out 77% of our people who are surviving less than Rs.20 a day.

Despite our politicians, corruption, caste and religious problem, and to mention Edward Luce’s book title ‘ In spite of the Gods’,  it looks like we are destined to grow, unless someone sitting in a desert decides to wipe us all out through nuclear weapon and is able to execute it!

For people who forget cyclical nature of the economy and civilisations and keeps projecting compounded growth rate forever, Jermey gives an interesting analogy. If ancient Egyptian civilisation which has been there for 3000 years, had they just started with a cubic meter of physical possession and compounded it annually at 4.5%, it would be worth 10 to the power of 57. A billion of our solar systems would not be sufficient to store these!

By 2050, when India is expected to reach its pinnacle of economic development, if we are alive (I don’t count myself), we may even be happy to get 0.5% returns or like Japanese may pay money to the banks for keeping our money.

It is only 2011 now and we are going to face decades of high growth and high inflation. Ignoring equity would be at our own financial peril.

Please click the link below to read the complete report of Jeremy Grantham.

http://www.gmo.com/websitecontent/JGLetterALL_1Q11.pdf

2 Responses to “Growth cannot last forever”

  1. amol said

    good article…

  2. jitesh said

    Muthu,

    A confident is good in our country but a false confidence is not going to help our country in the long run. I have seen 100’s of blogger explaining the financial growth opportunities available for india in coming decades. but my friend there is much world beyond finance, economy etc. I agree that india’s GDP will be great by 2020 or whatever year you mentioned in this blog but WHAT ABOUT THE QUALITY OF LIFE ?

    when you compare india with other western countries like US or Europe please also understand the quality of life they are living in ?
    Can we expect it even in 100 years from now.

    We have such a huge huge population, bad infrastructure, pollution and plenty of other issues

    JUST A GROW IN FINANCE DOESN’T MEAN GROWTH. AFTER ALL MONEY IS NOT EVERYTHING

    IF TOMORROW YOU GET 100 MILLION RS. BUT DONT HAVE FRESH AIR TO BREATH WHAT IS THE USE OF THAT

    THIS AND MANY SUCH THINGS, INDIA IS LOOSING DAY BY DAY…
    ALL PEOPLE IN INDIA ARE JUST BEHIND MONEY MONEY AND MONEY

    THEY DONT UNDERSTAND THE IMPORTANCE OF NATURAL RESOURCES.

    please dont take my comments otherwise. I also love my country as you do

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