The inter-dependencies & uncertainties of growth...

Macroeconomics deals with the structure and behavior of a nation's and increasingly, the world's economy as a whole. It is a fascinating field that every working professional should have some knowledge about since it affects our lives in more ways that we can truly comprehend.

A series of models are used to answer questions such as what determines a nation's savings? What determines how much a given economy can sustainably grow at and how much it actually grows at? How is this equilibrium maintained? What determines a nation's foreign reserves and its competitiveness in international markets? And increasingly, the growing international integration of all markets, commonly called globalization is complicating the national economic equilibria, inducing an increased level of uncertainty. Indeed, there is no such thing as a pure national economy any more.

Case in point: Oil is the most valuable natural resouce in the world today for the health of the global economy. Over 40% of all energy needs are fulfilled by oil. Oil prices had been relatively stable at USD 15 - 20 for several decades until a few years ago. Since then, oil prices have tripled.

Given that the US, for example, imports large quantities of oil, this would presumbaly have destroyed its Net Exports function, leading to a dramatic reduction in output. Instead, the world as a whole is growing at 5.1%, levels never been seen before. This has happened because most developed countries have been able to offset the oil impact, more or less, by importing inexpensive manufactured goods from China and outsourcing once "non-tradable" activities to countries like India. Partly thanks to this and I stress only partly, Alan Greenspan will always have the legacy of having met his country's low inflation targets whilst also maintaing low interest rates!

Which is also why the ball is now squarely in the developing world's court. China and India in a sense, have it made. The growth potential is there to be taken. So far, China has done an impressive job of improving its growth sustainability level by investing in infrastructure and human capital. India lags well behind, but probably has marginally better institutions. Either way, both countries have an historic opportunity to lift themselves and the plight of their people. The next few years are crucial and its going to one hell of a ride!

India Overheating?

The Economist is currently running a series of articles on whether India's economy is showing signs of overheating; eco-talk for demand outstripping the country's productive capacity, leading to inflationary pressures.

Its been interesting for me to see some of my classmate's reaction to this. Some are convinced and others aren't. Even more interesting has been to see some of the reactions in the Indian media and blog community, much of which as one can imagine has not been very receptive to the articles.

My 2 cents on this is the following. It is too early to say at this point in time whether India’s economy is over-heating. There is no doubt that several sectors today are facing severe inflationary pressures. In fact, over the last 3 weeks, the RBI has raised interest rates twice, but with increasing inflation, real interest rates are still quite low and the economy will continue to remain flush with liquidity. This certainly raises the prospect of an overheat, at least in the short-term.

However, I dont think this is the bigger concern. The large concern is going to be how we bridge this demand-supply divide in the long run. India is a developing economy, but our current GDP per capita, even when adjusted for PPP, is low. This is a boon today as it will allow us to grow for the next 5-10 years, in spite of the crippling infrastructure, poor education and health levels, etc. Once the GDP gap begins to narrow, further growth will need to be squeezed out, basis-point for basis-point. And this will only come from increased productivity --> tighter governance, better public services, a massive education drive, infrastructure investment and strong and independent institutions. This perhaps, more than any immediate inflationary concern, is our biggest challenge.

"Crack the Case"...

I spent this Saturday afternoon today working though a "Crack the Case" exercise along with 50 other students conducted by the reputed Strategy Consultant firm, Bain & Co.

This was an exercise at working through a case wherein a Private Equity firm is considering the buyout of a hardware company that manufactures grids and false ceilings.

The two divisions had vastly different dynamics in terms of existing market share, profitability, future growth prospects, distribution inefficiencies, etc.

We had to work through essentially two questions:

1. Should the PE go ahead with the buy?
2. If so, what steps should it take to increase sales and reduce costs? Essentially, how can it improve the firm's competitive advantage?

A total of 2.5 hours were given to analyze significant quantities of data, arrive at a set of key value drivers and finally, a set of recommendations to address the stated questions.

The evening ended with a 5-minute presentation on the fruits of our labour followed up by a 5-minute Q&A session. Overall, a very good experience.

The larger gain however, was a peek into the daily workings of an established strategy consulting firm. This is what they do day in and day out and the biggest take from the exercise is that each of us gets to go back and ask ourselves: Do I really wanna do this? Do I want to work with firms and industries such as waste management, that I really care little about?

The motivation to work for a Strategy Consultant firm, I have concluded, comes primarily from the thrill of the intellectual challenge. No question about it. 'Course, the great renumneration doesn't hurt. One also has the power to preside over the strategic direction that companies take. The drawbacks involve working with industries that you neither know nor care much about. Also, one does not get to execute one's charted strategy and coming from the telecom industry, where I sent most of my time executing, this is a significantdifference and one that I must think long and hard about.