Wednesday 14 November 2012

Super-bull-market ahead in India (with certain caveats)

Super-bull-market ahead in India
(with certain caveats)


I was reading some stuff from the Economic Survey, and found a vital "interesting" point. Then I looked for a shorter version of the same point so that the readers of this blog can quickly read, and found it in the Times of India:


Key excerpts from the above link:


Labour growth has slowed down in both public and private organized sectors, the Economic Survey has revealed. Just 15% of the total labour force has regular salaried jobs. While employment in the public sector grew at just 0.4% between 2010 and 2009 as compared to 0.7% between 2009-2008 , private sector employment grew at 4.5% as compared to 5.1%.
Job creation remains a massive problem. The government aims to create 5.8 crore jobs between 2007 and 2012, but in the five-year period between 2004-5 and 2009-10 , only 1.8 crore jobs were created. Moreover, the labour force expanded by just 1.2 crore in that period, possibly because more young people stayed on in education, the Survey estimates.
Source: Times of India, March 16, 2012

The fact that just 15% of the labour force has regular salaried jobs is most interesting.

It reminds me of the story of the two Bata shoe salesmen who went to Sub-saharan Africa to explore the market for shoes. The pessimist came back, saying that "Nobody wears shoes - there's no market here". The optimist sent a fax: "Send me a million pairs of shoes - Nobody wears shoes here. The market potential is unlimited".

In a similar vein, a significant group of those who are faced with a constraint of looking at the next quarter or two would belong to the camp of pessimists. And will say: Growth is slowing down. There's very little employment. Both investment and consumption is slowing down. There's too little to hope. And, to top it off, the global trends are not supportive.

However, I'm an optimist and also have a much longer time horizon when it comes to handling my own personal investments. The fact that only 15% of the labour force have salaried jobs represents a humongous opportunity to my mind.

Look at it this way:
  • Schemes like the NREGA are already putting a lot of money in the hands of people at the bottom of the pyramid. Consumption-led demand is far more to blame for the high inflation. While the inflation monster must be tamed, the fact that purchasing power is going up can't be all that bad.
  • Guaranteed education is going to make an ever-increasing group of people "employable" in the years ahead vis-a-vis the number of "employable" people among "new adults" in the past several decades.
  • There is a significant focus on "Skill Development" - don't recall the exact scheme off the cuff, but I'm conscious that there is a lot of concerted (and government supported) effort to actually develop skills.

The above points will ensure that the number of people who enter the "salaried class" will only keep increasing in an exponential manner in the years ahead.

The figure of 15% of the labour force belonging to the salaried class is so very low that the "base effect" will work to our advantage in the years ahead. When the percentage of people belonging to the salaried class goes up from, say, 50 to 55%, that works out to just a 10% increase in percentage terms. However, if the current 15% figure goes up to 20%, that translates to a huge 33% increase.

Statistics has shown that when the per capita income of a country crosses a threshold of $ 1000/=, the momentum of the economy picks up in a significant manner thereafter. We've crossed the figure recently.

And when the inevitable march of an ever increasing population enters the "salaried class", there will be an unprecedented economic boom due to an increase in consumption in virtually every sector that you can imagine. The disposable income would be going up enormously. The ability to spend AND the ability to save will only increase. And we'll enter a virtuous cycle of:
  • Increase in disposable incomes
  • Increase in savings (which enter the economy through either the banking system or through the equity route to promote investments)
  • Increase in consumption expenditure.
  • Increase in demand
  • Improvement in the pricing power of companies
  • Greater volume growth and increased margins for companies
  • Higher tax collection for the government
  • Increased infrastructure spending
  • Much higher GDP growth rates
  • Huge inflow of global capital due to the attractiveness of the country
  • Reducing interest rates
  • Increased earnings of corporates
  • Greater wealth creation for investors
  • Improvement of the physical infrastructure of the country
  • Increase in the number of retail investors entering the equity market directly or through mutual funds
  • Improved feel good factor
  • A repetition of virtually most of the above points due to the rest of the points coming true

The natural result???


A huge bull market that will last for an unimaginably long period of time lasting at least a couple of decades, if not more.

The obvious caveats would be:
  • Local: The government does something stupid and derails one or more of the steps in the virtuous cycle as described above
  • Global: Some major unexpected fiasco occurs resulting in a global recession

My hunch is that the first caveat, while probable, is unlikely: Too many smart people across all major political parties will ensure that the right things get done. I do believe that corruption is likely to reduce in the years ahead. Even corrupt practices continue to prevail, the very same corrupt politician / babu / industrialist nexus will be able to make much more "corrupt money" in a high growth economy than in a recessionary economy. This, by itself, will ensure that all key stakeholders will, in due course, strive to achieve high growth.

The second caveat - that of a global recession - is far more likely in comparison. However, while it will definitely set us back by a couple of years, the advantage that India has vis-a-vis many other developing countries is the domestic consumption story. This key differentiator will ensure that the inward FDI flows resumes in due course.

Folks, the coming bull market is going to be huge. You may question the "when", but you can't question the "whether".

Keep reading my blog regularly for inputs on how to maximise your benefit from the coming bull market.

Regards,

N

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