NaMo India – Step Change of Barclays & Shiller’s Tale Risk


A sustained growth economy is like a step function in Mathematics. It is like a ladder with which you take one step up, then you walk flat for a awhile & then you take the next step up. This is the most sure-footed path to sustained long-term growth. Some people, especially media-decorated pandits, scoff at each long step and begin trash talking about stalled progress. 

We saw that in August 2014 when Pratap Bhanu Mehta & Bibeka Debroya, two media-decorated Indian pandits, talked trash about India’s economy under PM Modi in a NYT article titled Modi’s Quiet Beginning Dims India’s Hopes. Mehta’s quote was “Mr. Modi’s government had frittered away its honeymoon period..” while Debroya’s quote was “Ennui has already set in“.

How wrong were they? Within days of their trash-talk, the Financial Times of London published its article titled India’s economy expands at fastest rate in two years. The FT was talking about India’s 5.7% growth, a figure that was the “best quarterly economic figures in more than two years“.

This made perfect sense & served as a demonstration of the “Tale” Risk concept put forth by 2014 Nobel prize winner economist Robert Shiller of Yale. We explained this concept & its application to PM Modi in our August 30, 2014 article titled Indian Economy, Shiller’s Tale Risk & Narendra Modi – FT vs. NYT.

These “best economic figures” released in August 2014 were already one step above the March 2014 forecasts of smart veteran investors & pandits in America. Recall what James Grant of Grant’s Interest Rate Observer, a widely respected pandit & market historian, told CNBC’s Kelly Evans in March 2014:

  • Narendra Modi, a.k.a. NaMo, has vowed to put his vast, poor and comprehensively mismanaged country on the road to modernity. Now under way is a financial travelogue whose terminus is optimism. China is yesterday’s growth story, India might be tomorrow’s.””

This week, we witnessed the third step in the step-function of India’s economy.

Read the summary of Barclays’ new report on India titled A Step Change:

  • Synthesis: A step changeIndia is potentially entering a virtuous cycle with improving growth and softer inflation.
  • Growth: Stepping upWe think India can repeat its growth performance of 7-8% in the next decade, with potential upside coming from the renewed focus on manufacturing and urbanisation.
  • Inflation: CPI at 6% – Mission possibleThe central bank faces entrenched inflation expectations, but recent decline in oil prices and a potential correction in food prices could see inflation fall close to 6% in one year.
  • Current Account: On a stable and healthy trackThe current account has turned around, and we forecast it will remain a comfortable 1.5-3.0%. We expect foreign reserves to increase to USD450bn by FY19.
  • Fiscal policy: On a consolidation pathFiscal policies are already on a course correction, with the subsidy bill falling and tax revenues rising. The GST rollout and infrastructure push are the next key milestones.
  • Household financial savings boost to kick-start a virtuous cycleWe estimate that household financial savings could increase by ~4% of GDP by FY18, helped by positive real interest rates, rising incomes and poor returns of physical assets.
  • Sovereign credit rating: High BBB in 2017 – within reach – We think the India sovereign rating can move to high BBB (from current BBB-) by 2017.
  • Bonds set for a secular bull market; 10y headed to 7% by 2017 – We expect the benchmark 10y local-currency government bond yield to fall to ~7%, from 8.25% currently, by 2017.
  • INR: A constructive storyThe INR is far more resilient than perceived to rising US yields and risk aversion.
  • Indian banks: Capital needs are sizeable; but can be metWe estimate the Indian banks will need about USD100-110bn of capital by end-FY19.

Barclays bottom line?

  • “India’s real GDP has doubled in the past decade from cUS$700bn to US$1.4tn (2013) and from cUS$650/capita to US$1,200/capita GDP. Following the changed political scenario this year, expectations have risen that the country could again double its GDP over the next decade.”
  • “Our economists believe India can achieve average real GDP growth rates of 7-8% over the next 5-10 years. This will likely be on the back of a gradual cyclical recovery and policy initiatives, which accord priority to: 1) boosting the manufacturing sector; 2) planned urbanization; and 3) improving the effectiveness of public services.”

Isn’t PM Modi is just beginning his tenure? So why all this already? That is the essential tenet behind Shiller’s “Tale Risk” – the impact on a nation, on an economy of a leader who, “inspires confidence“. As Shiller wrote in March 2014:

  • “Nationalism, after all, is intrinsically bound up with individual identity. It creates a story for each member of the nation, a story about what he or she can do as part of a successful country.”

Whether you call it “Tale Risk” or a Step-function, the real message is NaMo India


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