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OPINION 11

Volume XVI Number 284

ILLUSTRATION BY BINAY SINHA

MUMBAI | FRIDAY, 13 JULY 2012

Factories floored

With IIP growth still weak, govt should think long-term

n Thursday, the quick estimates of the index of industrial production (IIP) for the month of May were released, showing a small but significant positive growth of 2.4 per cent after months of stagnation or decline. It is dangerous to read too much into this number. Not only is it very low, but the series itself is notoriously volatile. In fact, the governments statisticians had to simultaneously revise their estimate of the previous months growth in IIP: it turns out that, in April, industrial production shrank by 0.9 per cent instead of growing at 0.1 per cent, as claimed earlier. Government data series have had a hard time of late, and this difference will not take away from the scepticism with which the IIP is regarded. That said, however, when the trend is observed, a tiny yet noticeable uptick in Indias troubled industrial sector seems likely. True, mining is still in severe trouble it contracted by 0.9 per cent in May, as tardy clearances and court-imposed controls continue to bite. In addition, the 7.7 per cent decline in the output of capital goods suggests that investment and capital formation are still far short of recovering, implying that any return for India to a highgrowth path is still some time in the future. However, consumer goods grew by 4.3 per cent on the back of a strong performance by the consumer durables sector; manufacturing, overall, grew at 2.5 per cent. These numbers should provide some cautious optimism. Yet the government, which seems to have finally begun to show a sense of realism and even some urgency when it comes to economic matters of late, should view these possible green shoots of recovery with the proper perspective. Basically, it must intensify its efforts to stimulate, in the short term, a recovery of industrial growth through administrative action, swifter clearances, and prioritising its own public saving through infrastructure investment. It cannot rely on consumer demand to nurture the beginnings of recovery. While the latest inflation numbers are not out till Monday, it appears likely that they will be the highest seen this year. Food prices are already reportedly rising thanks to inconsistent monsoon rain. Demand will correspondingly weaken. For the short term, therefore, there is no alternative but to stoke animal spirits through highly visible pro-investment measures. However, even as India moves perhaps out of the lowest point of its manufacturing business cycle, it is important to look at the magnitude of cycle as a whole. Simply put, a fast-growing economy with abundant human resources cannot afford to have a manufacturing business cycle in which the low points are negative and the high points barely in the double digits. The biggest lesson of this overall slowdown is that Indias weak manufacturing continues to be the millstone around its growth story. The National Manufacturing Policy, which aims to create clusters where industrial growth can take off, is still delayed partly because of concerns over its impact on labour and environmental laws. The industrial sectors continuing distress should show the government that the manufacturing policy cannot be delayed much longer.

The McWages index

Some startling facts about living standards revealed
requires the data to be cast in real, or inflation-adjusted, terms. Allowances need to be made for the differences in purchasing power of national currencies. All ANDY MUKHERJEE this leads to additional complications and measurement problems. Finally, living standards might be teacher at a government school who seldom very different in two countries with the same average shows up for work is supposed to be contribut- GDP per capita if in one nation income was more ing as much to the average living standard of the equally distributed, and in the other most of it only nation as someone whos trying to do his job with went to a few. With macroeconomic aggregates presenting an some amount of commitment and diligence. Surely incomplete, and at times misleading, picture of living this cannot be right? But it is. The most common economic representation of standards, an alternative approach may be to look at standard of living per capita gross domestic product the nuts-and-bolts picture in a specific sector of the (GDP) values all public services in terms of what it economy. Princeton Universitys Orley Ashenfelter costs the government to provide them, regardless of employs just such a strategy. He tracks the real purchasing power of the McDonalds restaurant crew the efficacy, or otherwise, of state spending. Adding statistical insult to original injury is around the world. Burgernomics is not new. The how economists Angus Deaton and Economist magazines Big Mac index of Alan Heston have aptly describe the If one hour of work at a currency undervaluation and overvalucommon practice of counting even McDonalds in India no ineffective and wasteful government longer buys even a third ation is 25 years old. Professor Ashenfelter introduced a twist to the spending towards an improvement of a Maharaja Mac story when, in 1998, he began to collect in living standards. A recent paper burger, one has to ask by Francesco Grigoli of the whats gone so wrong in information on McWages, or the hourly wage rate of McDonalds workers. International Monetary Fund and the last four years The wage rate divided by the price of a Eduardo Ley of the World Bank says that a logical step is to purge from GDP the fraction burger led to Big Macs per hour (BMPH) an indiof government inputs that is wasted. If such an exer- cator of how many burgers one hour of work at cise were ever undertaken at a global level, the results McDonalds could buy. BMPH is a crude but powerful indicator of real purcould be startling. Based on cross-country evidence, the authors of chasing power of labour, how it compares across counthe paper calculate GDP losses associated with wastage tries and changes over time. It is crude because people of public resources in education and healthcare. buy a variety of goods and services; nobody consumes Unfortunately, their data set does not include India. But only burgers. Yet, the gauge is powerful because it is there is every reason to believe that public sector uncorrupted by statistical artefacts. Professor Ashenfelters analysis confirms some of wastage in India will more likely be in the ballpark of the equivalent numbers for Portugal (eight per cent) or the things that we intuitively know. For instance, in South Africa (six per cent), rather than South Korea (1.5 2007, BMPH levels in the US, China and India were per cent) or Singapore (zero). This is, of course, just my 2.41, 0.57 and 0.35, respectively. Put another way, one guess. How much is the wastage really? Well never hour of work at a McDonalds in a large city of the US know, until there is some serious attempt to measure it. bought about two-and-a-half Big Macs in the same This is just one pitfall of using per capita GDP as an restaurant; in Beijing or Shanghai, one hour of work as indicator of living standards. Comparing improve- part of the McDonalds crew bought a little more than ments in well-being over time and across countries half a burger, and in New Delhi or Mumbai, the pur-

THE OUTSIDE VIEW

Drop by drop
he devastating floods in Assam and the continuing scarcity of water in its cities are woeful manifestations of Indias mismanagement of water. India may not be a water-rich country, but it is not waterstarved either. Its average annual rainfall of around 120 centimetres compares favourably with the global average of 100 cm. Since most of this rain, nearly 89 cm, comes in just four months of the monsoon season, and its geographical spread is also skewed, conservation of rainwater is imperative. This can help moderate, if not wholly prevent, monsoon-season floods and summer shortages. Even the impact of frequent droughts can be blunted to an extent through this approach. Sadly, whatever water management policies have been pursued in the past have failed to promote the conservation of water as well as curb its wasteful use. Consequently, on the one hand, the bulk of rainwater flows to the sea, eroding precious soil on the way and causing water bodies to silt up; and, on the other, whatever water is available is exploited unchecked. Worse still, a substantial amount of water is being virtually exported through shipments of agro-commodities produced with a huge water input. One kilogramme of rice, for instance, takes an estimated 4,200 litres of water to grow. Likewise, wheat consumes over 780 litres of water per kg of grain, and sugar (through sugarcane) an amount higher still. To produce so much rice, wheat and sugar that some must be exported is, thus, to export water from a country struggling to get it to its fields and its taps. This is obviously unsustainable. The solution is self-evident conserve each drop of rain; produce more crops per drop; change crop patterns; preserve water in situ through check dams and watershed management; store surplus monsoon rainwater in reservoirs; and enhance the regulation and efficiency of water use in all fields. The watershed approach for water conservation can help recharge underground aquifers currently being over-tapped in several intensively farmed areas. The present water-stocking capacity in the countrys 84 major water reservoirs and numerous other water bodies is hardly enough to meet the requirement for the whole year. In the US, as a comparison, enough water is captured in reservoirs to take care of two or more years consumption. More reservoirs, big and small, on rivers and streams especially on those that discharge considerable amounts of water into the sea are needed. The transfer between basins of water from surplus to deficient regions, too, needs to be enabled, if not on the giant river interlinking scale imagined earlier; but, for this, the states monopolistic control over water may have to be diluted, perhaps by declaring water a national asset. Urban areas, meanwhile, can benefit enormously by encouraging rainwater harvesting at micro as well as macro levels. States like Goa and the Andaman and Nicobar Islands meet the bulk of their water requirement in this way. Cities such as Chennai have also performed well. Other cities can surely emulate these examples to meet at least part, if not whole, of their water needs. Unless a nurturing attitude towards Indias water resources is more widely inculcated, the countrys water woes are unlikely to abate.

India wastes most of its water and exports the rest

chasing power of the same hour of work shrank to about one-third of a Maharaja Mac. One would have perhaps expected Chinese McDonalds workers to enjoy much higher real purchasing power than their Indian counterparts. But its common knowledge that the development model that China has pursued for more than 30 years has emphasised investment over consumption. Hence depressed Chinese real wages are not really a surprise. It is also not a surprise that Big Mac affordability per hour of work at a McDonalds grew rapidly in China, India and Russia between 2000 and 2007, even as it stalled in much of the developed world. Remember the investor communitys fascination with emerging markets, especially BRIC (Brazil, Russia, India and China), for most of last decade? That wasnt all hot air: real income growth at the bottom of the economic pyramid was, as it now appears, quite real. But something strange happened between 2007 and 2011. By the end of last year, BMPH in the US had slumped to 91 per cent of its 2007 level. Given the intensity of the economic trauma first, of the subprime mortgage crisis and, then, of a disappointing recovery it is only to be expected that McDonalds crew members in the US have lost some of their real purchasing power in the last four years. However, Professor Ashenfelters data show that the drop in real purchasing power of McDonalds workers in India may have been 1 times bigger than that of their American counterparts: Indian McWages grew, but prices of burgers rose much faster. Incidentally, burger prices rose almost as much at Chinese McDonalds as well. But wages for the crew there doubled, leading to a gain in the real purchasing power of Chinese workers. It will be interesting to see how Professor Ashenfelters data stack up for this year. Indias economy lost its mojo a while back. Chinas slowdown is the scary big news of 2012. Will this lead to a loss of workers purchasing power, and show up as a drop in Big Macs per hour of work? Professor Ashenfelters analysis is also a good starting point for those who want a realistic picture of whats happening to living standards in India, particularly of the lower middle class in urban centres. If one hour of work at a McDonalds no longer buys even a third of a Maharaja Mac, one has to at least ask whats gone so wrong in the last four years and who should be held responsible for it.
The writer is a Singapore-based financial journalist. These opinions are his own

Has a serious dollar rally begun?

few days ago, a friend from Karachi sent me some data on gold price movements since 2001 showing that each peak was hit about 20 months after the previous one, and was higher by an average of some 30 per cent. Extrapolating from this, he wondered whether gold would reach about 2,600 in April 2013. I told him that my view was exactly the reverse. I think we are on the threshold of a significant dollar bull trend, and that gold, rather than rising JAMAL MECKLAI to 2,600, would more likely move towards 1,200 over the next few years. The serial highs hit by gold since 2001 were, in many senses, a reflection of the fact that the dollar was on a long-term bear trend, with the DXY falling from over 120 to a low of 72. Before that, the dollar was the only game in town gold was a forgotten asset at under $300, the euro had just been born and had little credibility, and Japan was scrabbling around on the ground. The lost decade, they called it. The dollar was the only place to put your money, and by the end of 2000, it looked like dollar strength would never end. I remember, at that time, I had asked Pramod, who worked with me and was indeed, is perhaps the smartest market analyst I know, to come up with a set of scenarios that could push the dollar lower. Three months of brainstorming led us nowhere we

MARKET MANIAC

couldnt come up with a single credible scenario for a weaker dollar. But, of course, the dollar did turn and start and continue falling. I had to relearn the lesson that it is impossible to forecast a major turning point before the fact. The best you can do is trust your gut, and, of course, watch the market. For the past two years or so, I have had a feeling driven simply by the knowledge that nothing moves in one direction forever, and 10 years is a long time that the dollars bear trend was approaching its end. Kind of confirming this, the DXY has been strengthening recently, and has gained nearly 10 points (a bit over 13 per cent) since its all-time low in April 2011. But 13 per cent is not a major trend. Bull markets are defined as a minimum 20 per cent rise, and during the dollars bear phase, the DXY fell by 47 points (or nearly 40 per cent) from its peak 2002. So, if this is the start of a major bull run, there could still be a long way to go. As I think about it, its back to 2000, with the euro losing credibility fast, and the yen and gold already much too high to provide comfort for nervous money. The dollar is, once again, the only game in town. In which case, why is the DXY still around 82 or 83? Why hasnt it shot up to 90 or more? Clearly, the market has obviously not fully bought

into dollar bullishness. There are more and more believers, but sentiment is still tentative. Perhaps, there are concerns that when Barack Obama wins reelection in November, US markets will sell off, since he is perceived as less pro-business than Mitt Romney. This concern could explain the dollar edging higher on last weeks disappointing June employment numbers, which was seen as negative for Mr Obama. Another reason that the market may be circumspect could be the now-near-certain belief that the euro will break up. Depending on how that happens, the new Deutsche mark (or the new euro) would certainly appreciate, attracting huge funds, which could also put a hefty dent in a dollar bull run. If I am correct, the stronger dollar should and would filter into USD/INR; thus, if DXY went up to 95 (a 15 per cent rise) over the next 12 to 18 months, USD/INR should rise by ~7-8. On the flip side, dollar strength would push commodity prices lower, making Indias current account deficit much easier to finance. This, in and of itself, should improve sentiment, earning back at least ~2-3 of the decline. If, in addition, the euro broke up and the new regime settled in, say, a year or so, we could see a huge boost to global sentiment, which could bring investment flows pouring back into India and get the rupee moving back towards 50. My guess is that during 2013 and 2014, we will see both 65 and 50 to the dollar.
jamal@mecklai.com

The book of lists

BOOK REVIEW
M S SRIRAM
Startup Asia is a coffee-table book. No, not in the sense in which we understand coffee-table books; it is a book that feels like a purposeless chat around the coffee table. What does it say? It says that Asia is the next innovation hub and that it should be watched. What do we mean by Asia? Asia here means Vietnam, India and China (VIC). If BRICS Brazil, Russia, India, China and, later, South Africa could be coined as a term to describe emerging markets, we could do so for other regions as well. So, welcome to the world of VIC, an innovation hub. Startup Asia is written in the curious style mastered by Ruchir Sharma. Sometimes, it reads like a series of blogs; other times, a rushed travelogue. It even has a P3 party feel; and it occasionally reminds us of a Keya Sarkar column that assumes that the entire world is interested in a sari shop in Santiniketan. The tone is chatty, directionless and preachy all at the same time. Obviously, there has to be something in the 239 pages, in addition to the photographs of investors, entrepreneurs and innovators. The book rambles, first talking about the hot spots of innovation in Asia China, India and Vietnam. The hot spots are identified on the basis of patents filed, and anecdotal narrations of new companies that have either innovated or replicated an existing business model concentrating, mostly, on the tech space. More anecdotes are thrown in

about the regulatory environment and markets. If this were a coffee-table conversation, you would come away with the impression that you have talked to a person who has profound insights. Unfortunately, having lots of data that you can reel off and a series of anecdotes to prove the data provides us with lists rather than insights. Insights come from a theoretical framework of looking at patterns and examining if these patterns add up, whether these patterns could be theorised, or whether others could learn the underlying principles. If we ask whether we are any wiser after reading this book or what we have learnt about start-ups, Asia or innovation the answer could be vague. Clearly, the author is in a hurry the number of companies she studies, the number of people she visits and the number of conclusions she arrives at indicate a pace that shows impatience and restlessness. Heres an example: Lunchtime! Office manager Raghu Rao has ordered in box lunches of spicy Indian curries, chicken tandoori, saag

paneer, basmati rice and nan from the upscale Taj West End hotel for us. We sit around the conference room table and Sethi gives me a brief history of the evolution of India tech entrepreneurship. Between bites, I type as fast as I can on my netbook computer and something I couldnt have done in China tweet some of his more relevant points. It is indeed a lot of work and a quick way of learning lessons in evolution and undertaking research. In this hurry, however, the author fails to check some basic facts. She writes, Shaadi, a Sanskrit word of wedding and Another innovative cyberspace security startup I encountered at IDGs Bangalore office is iViz, a spinout in 2006 by Bikash Barai from his alma mater Indian Institute of Technology, in Calcutta. We can agree that the government has been mindlessly setting up the Indian Institutes of Technology and the Indian Institutes of Management in places like Jodhpur, Rohtak, Raipur and Kashipur, but a new IIT with a readymade alumnus in Calcutta? So what are her strategies for cashing

in on the innovation boom? It is evident in the titles of the chapters catch the mobile boom (example: Justdial); get in on the cleantech boom (Attero, D.light, Reva); ride the consumer wave (Coffee Day; Kaati Zone); outsourcing (MindTree); tap in government incubators (Rotimatic, tenCube); become the next Twitter (Gobi Partners, MakeMyTrip, Ushi); originate a Discovery (Helion). We get insights into many start-up cases as she travels and holds meetings amid lunches and teas. The author wraps up the book with two chapters that celebrate going public, listing and going global. That is the ultimate purpose of innovation; that is the mission of a start-up. Once on NYSE or Nasdaq, the mission is accomplished. So as we conclude this review, here are some nuggets of strategy. Strategies with severe word limits. For example: Strategy: Reva Develop patented technologies and reap the benefits of first-mover advantage before the market gets crowded. Partner with a big multinational

with enough presence in the local market to boost distribution. If you are a technologist, stay true to your original mission and let others deal with business hassles so you can focus on what you do best. One never knew that there could be a self-help book on start-ups. This appears to be one. Ruchir Sharma would be delighted to see that his travelogue style of understanding global economies has been perfected in this micro world of innovative start-ups. The acknowledgements are a delight to read: they provide a guide to the hotels where the author stayed and a Twitterlike review of her stay at those places.
The reviewer is visiting faculty, Indian Institute of Management, Bangalore. mssriram@gmail.com

STARTUP ASIA
Top Strategies for Cashing in on Asias Innovation Boom Rebecca A Fannin John Wiley and Sons; 239 pages