Ignore financial flatulence, work the real economy

Over the past three days, governments across the world have been serving just one set of people — those suffering from financial flatulence. Gautam Chikermane writes.

columns Updated: Aug 09, 2011 18:52 IST
Gautam Chikermane
Gautam Chikermane
Hindustan Times

Over the past three days, governments across the world have been serving just one set of people — those suffering from financial flatulence. The sickness is old but I decided to give it a name and define it: an infectious disease that hits a group of rich and powerful fatcats who think they are the smartest folks on earth and live off real people by manipulating deals and getting governments to do their bidding. Like a contagion, this flatulence builds up on one part of the world and in these days of instant information, spreads its stink within no time, leaving real people who work and create real goods and services with losses that governments have to make good.

Ever since August 5, when Standard and Poor’s lowered the rating on the world’s most powerful economy, the US, to AA+ from Triple-A, governments have been benumbed by signals from the markets. Such is the level of panic that the G7 as well as the broader G20 have had to issue promises that they would work together to ensure financial stability and liquidity in the markets. This time around, the financial offenders, as we all know, live in the developed West rather than in the East, as was the case in the Asian crisis of the late 1990s.

So, while the markets of the US, Europe and Japan should be rightly crashing, in an unthinking herd mentality, global fund managers have been selling equities in growth markets like China, Brazil and India. At a time when risk has moved to the developed West, money continues to think the East is “risky” and accordingly allocates lower capital here, which on the first sign of trouble (now in the West) runs home. While traders and brokers, who epitomise financial flatulence, lose money and cry for governments to bring markets back, the noise created by them seeps through to average households as well.

So, here are some numbers that real people with real day jobs can gain confidence from. The PE multiple of India, at 15.3 times looks high only when you ignore the country’s high GDP growth rate projection of 8.2%. When you factor this growth, India becomes the world’s third-most attractive market, after Russia and China (the two have other risks that should keep investors away, however). Compared to the US, UK, France or even the resilient Germany, India is dirt cheap.

The shift of economic tectonic plates to emerging economies from developed ones that chief economic adviser Kaushik Basu referred to today has strong numbers to back.

Emerging markets’ share in the global consumption of mobile phones (82%), steel, copper, vehicles (52%), oil is greater than developed ones, a delightful chart from The Economist notes. So are its forex reserves, FDI and exports. Their combined output was almost two-fifths of the world GDP and it consumed 46% of global retail sales. Production, consumption and hence growth is happening here.

This is where governments need to pay attention, and not be run over by financial flatulence indicators like Sensex or short-term bond yields. Once the real indicators are taken care of, there is no way that global capital can stay away from India. Keep your SIPs going — you will retire rich.

First Published: Aug 08, 2011 20:30 IST