Rupeeweakness,growthnumbersandthelong-termtrend

Dow Jones closed in green yesterday. Hang Seng trades in red currently. Dollar Index and US yields both continue to retreat trading at 92.17 and 1.64 (10-year) respectively. The real movement of late has been in the Indian rates where the 10-year benchmark is on the verge of breaking the 6% level on the downside. The Rupee also trades significantly weaker compared to pre policy day trading at 74.70 now. The forward premiums have also come down in last few days, getting the hedging costs to a reasonable level. Brent Crude and Gold make sideways move.

Moving on let’s come back again to MPC policy statement this week. The RBI came out with growth estimates which underline their decisions. The real GDP growth for FY 2021-22 is estimated at 10.5% with Q1 showing 26.2% on YOY basis. The economic shocks by the second wave of the virus though remain a real concern. IMF also recently came out with its growth estimates for the world economy and estimates that it is expected to grow by 6% in the calendar year 2021. World GDP in 2022 is expected to grow by 4.4%. In 2021 the advanced economies are expected to grow by 5.1% and US is set to clock 6.4% growth.

We have often deliberated at length about the issue of inflation affecting the societal structure. Today on the back of all these growth assumptions by the RBI and IMF, let’s try to see these growth numbers in a historical perspective and its long-term impact on the economy. Our reference text for such an exercise remains Thomas Piketty’s magnum opus Capital in the Twenty-First Century. Piketty writes that historically economic growth has clocked fairly modest numbers. He divides the overall growth into two components firstly is demographic and second is economic or productivity related. He traces the data back to the year zero AD and pulls up the analysis till the current times. To his credit he upfront states that the precision of the data points is illusory, and it should be seen more to appreciate the trend.

Piketty divides the 2000-year-old journey into two epochs. One ranges from year 0 to year 1700 and then from 1700 till now. Why 1700? It is the year when the world start seeing the advent of industrial revolution (read an era of productivity growth). As per him the average annual world output growth for first 1700 years was 0.1% and that was totally due to the population growth which was also 0.1%. There was no productivity growth during these years. Now from year 1700 to year 2012 (the year when the book was released) the average global growth per year was 1.6% with share attributed equally to population growth as well as productivity growth, 0.8% for both. Point to note here is that post-industrial revolution not only the productivity rose but the population also started growing at a faster clip. Even in the industrial era, Piketty writes that the last century (1913-2012) has been exceptional with the average global growth of 3% (population growth 1.4, productivity growth 1.6%).

The point essentially is that high growth rates are a recent phenomenon and their sustainability over a longer-term period has not been tested. For example, world population in the year 1700 was around 600 million which grew at the rate of 0.8% to reach a population close to 7 billion in 2012. If this growth continues for next three centuries, then the world’s population will exceed 70 billion in year 2300. Hence, we should be cautious while dubbing any growth rate as low. Being cognizant of the time frame apart from the base on which this growth will happen is important.

Now one last empirical point is that as any nation becomes more prosperous the population growth falls. Its population ages and theoretically its propensity to take risks goes down. Fixed income (fixed being the operative word here) comes in vogue and pension funds become the market pivot. This ultimately drives the asset allocation and income distribution among society. This in a sense is Piketty’s thesis. Some days it is good to take a long-term view.

Have a good weekend.