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MARKET NOTES: Beware of rallies that fade out quickly
MARKET NOTES: Beware of rallies that fade out quickly.
GOLD:
Last week I wrote this on Gold.
“Note the 161 area on the GLD SPDR chart on the right edge. This corresponds to the 200 DMA $1660 area on the metal’s chart. If we are in an impulse move down, and therefore in Wave III, this happens to be where we could expect the gold to breakout in the “false” direction before moving down eventually. In such a move the 200 DMA could be nicked. This would not be a bullish breakout though.”
As you can see from the chart above, Gold did break out upwards and over the next week could test its overhead resistance of $1660, which also happens to be its 200 DMA area.
Unless the 200 DMA is decisively taken out, this will not be a bullish breakout. I remain bearish on Gold in the long term.
Dollar Index:
This is what I wrote on the Dollar Index last week.
“The dollar has had an extraordinary bull run from the level of 73 in May 2011 to 83 in June 2012, spanning almost an year. While the bull-run is by no means over, we are now into a cycle where some correction or sideways drifting must be expected. The question is when and from where does that correction begin?”
During the week the Dollar corrected from 84 down to 82.71, just above its 50 DMA at 82.54. It may find support in that area and rally up. The prognosis remains the same as that of last week. Over the next 2 months, expect the Dollar to consolidate in the 82 to 85 range with an upward bias. Buy the supports & sell the rally tops but avoid shorts.
Euro$:
This is what I wrote last week on the Euro.
“You have to be a very brave heart to call for a stop to the Euro’s slide in markets. But it is time to note that the latest slide from the level of 1.350 since 24th February this year is now overextended and due for correction. But for that the slide has to end first. Where will it end?
A good place for the slide to end would be 1.19, the bottom made in June 2011 and a good time to make the bottom would be end of July. In short we are very much towards the terminal stage of the current slide and should look to cover shorts on dips.”
The Euro made a low of 1.2040, [just above the 1.1900 that we expected as the turning point] and rallied smartly to close last week at 1.2281 after having made a high of 1.2390.
Once the Euro$ clears the overhead resistance at 1.2400, it will be time to be cautiously bullish on the Euro. Until that happens, a whipsaw or two to retest the 1.20 floor should be expected. Long-term, the Euro is not out of the woods yet. The ensuing rally is reactive in nature though likely to be violent.
WTI Crude: This is what I wrote last week on WTI Crude prospects in the medium term.
“WTI crude’s 200 DMA currently stands in the $95 area while crude is positioned at $91.56. Over the next few weeks I expect crude to drift upwards, with corrections of course, to test the above-mentioned DMA. In fact crude could move up all the way to $100 before a significant correction though it won’t happen over a week.”
During the week, Crude reached for its 200 DMA overhead resistance currently positioned at $93.5, and corrected from that area after hitting a high of $92.94. Crude made a low of $86.84 during the week, which is its 25 DMA and then rallied to close the week at $90.13. With this, to my mind, the brief correction is over and we can expect the crude to rally towards its 200 DMA during the ensuing week.
The long-term prognosis remains the same. Crude will remain a buy at dips commodity for hereon for a couple of years.
Crude has the potential to severely deflate and derail the Indian economy in the next 2 to 3 years. Indian policy makers have been pretending ostrich like that crude will revert to “normal” levels since 2012. Meanwhile crude has gone from $20 to $100 and we have made no significant effort to either price in the commodity properly or to reorient the economy towards more efficient use of the product. Unlike other countries like Pakistan and Bangladesh, out fragile middle class demands fuel subsidies, which is very strange.
Unless our pusillanimous political class wakes up soon, we are heading for a major disaster on the oil front. Petroleum subsidies, which largely go to the rich & middle class, now total 1,90,000 crores, a sum twice as large as that expended on food and unemployment mitigation schemes which together consume only 90,000 crores.
Silver: This is what I wrote last week on Silver in a then falling market.
“Silver closed the week at $27.24. Silver is due for a correction to the upside after a fairly long slide down all the way from $37.50 in February 2012. It appears to be creating a base for such a rally at just above the $26 level.
I am by no means bullish on the metal. The correction to the upside will be volatile and may not stretch beyond $31 in the near term. Cover shorts but avoid long trades.”
Silver has multiple overhead resistances spanning from $28 to $31. If Silver is in a long-term bearish market, a view I favor, then a rally to $31 is the most likely scenario from hereon but with fairly violent corrections. A violation of $26 would negate this view.
$-INR:
This is what I wrote last week on the $-INR.
“Over the next two to three weeks, expect the $ to be capped at R56 and to generally trend down towards R54 region. Before the next major move up, the $ has to retest its new floor in the 53.5 to 54 region in the next two to three weeks time.
I expect the floor will hold at 53.50 as before.”
The $ rallied to just over 56 during the week and then headed down to close the week at 55.24.
The scenario hasn’t changed. I still expect the $ to retest its floor at R53.50 over the next weeks or two before heading up. It will not be a one-way move though. Expect corrections even as it moves towards the R54 area.
Shanghai Composite:
I think the Chinese nicked the floor at of their index at 2130 just to prove me wrong! Here is what I wrote last week.
“The index stands at 2168.64. In the ensuing week, the market could retest 2138. If the floor holds, the floor at 2130 will be confirmed and Chinese stocks become a buy once SHCOMP breaks above 2200, which is its 25 DMA area.”
The fact is that I expected 2130 to hold but it did not. The Index made a NEW LOW 2120.63 AND closed below 2130, the exact close being 2128.76.
Technically, this violation of 2130 [not decisive yet, so I could still be right in my original view] opens the way for a drop to November 2008 lows of 1680. There are multiple resistances on the way, a major one being 2050. While the Chinese markets are known to test the extremes of their turning points rather rigorously with frequent violations, I am not convinced the fall will in fact continue.
I expect a rally from here to the 2230 region before the market comes back to retest 2130 again. In terms of time, the market can do this right up to the end of August. So barring a collapse from here, my prognosis may well hold.
I would buy here with a stop-loss place just under 2050.
S&P 500 [SPX]:
And this is what I wrote last week on SPX.
“While not ruling out another shy at the next overhead resistance at 1390, I remain skeptical of the rally. Over the next week SPX could take support at its 25 DMA and attempt another rally to the 1390 region.
I would sell rally tops.”
As you can see from the chart, SPX did exactly that. It took support around 1330 and took another shy at 1390 closing the week 1385.97 after having made a high of 1389.19 on Friday.
Upon a violation of 1390 to the upside, a challenge to the previous top at 1422.65 becomes a possibility. Going by the wave counts, that is a possibility. But it would be an event that would completely change the “nature” of the correction we are in. It is a bit too early to anticipate that but it is something to be borne in mind. Aggressive shorting should be avoided at this stage.
On the other hand, even a violation of 1390 to the upside will not signal an end to the correction but only change its scope and nature. More on that in the next blog.
Meanwhile I advise stay out of the market for a while. This is one bull-bear war best watched from the sidelines. When the big guys war, we get slaughtered. So watch them fight and pick the winner at your leisure!
Sensex: This is what I wrote on the Sensex last week.
“Note the Sensex is fast approaching a golden cross with the 50 DMA poised just under the 200 DMA in the 17,000 region. It is hard to miss its significance.
The Sensex is correcting down to the 17,000 region and will surely test this region over the next week. I expect the index to hold above 17,000 and thereafter rally to 18,500 barring the usual corrections. However, I would not pronounce myself bullish on the Sensex just yet.”
Lesson learned: The punters on Dalal Street don’t think too highly of golden crosses or 200 DMA!
The Sensex corrected as expected but paid scant attention or respect to the 50 & 200 DMA knifing right through both as if they didn’t exist. Well not exactly. They did hesitate a bit before taking out the 200 DMA.
The 17,000 now becomes an overhead resistance. The Sensex could test the area a couple of times before moving down.
I expect the index to drift down over the next few weeks to retest the 15,500 area. That said, these are times to buy as prices crash; at your own pace, at your prices.
NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions.
Was the dip in State level GSDPs during NDA rule an aberration?
Was the dip in State level GSDPs during NDA rule an aberration?
To my surprise, some of my friends were greatly upset by my reference to the dip in growth rate of state GSDP under NDA rule in my last article with Shaelja Sharma. Since UPA is such a mess, how could have I have criticized the NDA, runs this argument.
Criticizing or defending either the NDA or the UPA is not a moral imperative for me. I think economic and social reforms are critical to India’s growth. I will support any party or person pushing economic reforms. Likewise, I would flay anybody hindering them. So to me the shabby performance of UPA on a number of issues doesn’t make NDA a holy cow.
What happened during the NDA rule? Well the data below shows that India shining or not, economic growth rate, as captured by national GDP data, slowed down significantly in the years that NDA presided over the Central Government. Here are the hard numbers:
| Period | For 5 years before NDA, 1993-94 to 1997-98 as CAGR | For 6 years during NDA rule, 1998-99 to 2003-04 as CAGR | For 7 years after NDA rule, 2004-05 to 2010-11 as CAGR |
| GDP growth [%] | 6.52 | 5.93 | 8.47 |
Please note we are dealing with averages over 5, 6 and 7 years and these are not subject to as much random variance as annual data. As you can see, India’s national growth rate of GDP dipped from 6.52% to 5.93% during NDA rule and recovered to 8.47% thereafter.
As Shaelja and I suggested in our article, you can read what you like into these numbers depending on your politics. But as we have shown, the key determinant of growth has been economic reforms or the absence thereof.
So where does this “golden age of NDA rule” hype come from? Why do we deride the UPA despite its demonstrable superior performance? Did NDA really push reforms or did it not? These are questions that need to be raised and debated. The numbers show that the distinct antipathy for UPA has more to do with something other than just economic performance.
On the other hand, as the economy slows following UPA’s policy paralysis, it is also clear that if the party doesn’t push reforms it too will head for a sound drubbing at the polls in 2014.
Anyway, the point of this post was to show that the dip in growth rate of states during NDA rule, including that of Gujarat, was no “accident.” The dip shows up very clearly at the national level as well.
Numbers and ideas shared with Shaelja Sharma. [@ShaeljaSharma]
Can Gujarat’s growth story be attributed to Modi?
Can Gujarat’s growth story be attributed to Modi?
In our article dated 11th July, Shaelja Sharma and I, made a simple point; viz., that Gujarat has been, and hopefully will always continue to be, one of the faster growing States in India. To portray Gujarat’s faster growth solely as a recent achievement owed to Shri Modi is simply a “poopganda” ploy by Modi Bhaktas not supported by statistical data on growth rates.
We drew our conclusions from what data was at hand. Since then, we have been able to collect more detailed data on annual growth rates and have regrouped and tabulated the same to cover the periods 10 years before Economic Reforms, 10 years after Economic Reforms but before Modi, and 10 years that Modi has been the Chief Minister in Gujarat. We have taken the same peer States as before adding only West Bengal to the kitty to provide a perspective on how politics impacts growth. And we have uniformly used Compound Annual Growth Rate [CAGR] over 10 years to make the comparisons. Shri Modi assumed charge of Gujarat in October 2001. So his first full year in office spans data for the year April 2002 to March 2003.
The data from the spreadsheet [hosted at Rediff.com] is summarized below for easy reference:
| Period | Before Economic Reforms [82-83 to 91-92] | After Economic Reforms [92-93 to 2001-02] | After Economic Reforms with Modi [02-03 to 11-12] | Growth Rate last 5 years [2006-11] |
| Gujarat | 3.67 | 7.41 | 10.28 | 9.34 |
| Maharashtra | 5.80 | 6.39 | 9.90 | 10.34 |
| Andhra | 5.36 | 5.41 | 8.23 | 9.18 |
| Tamil Nadu | 4.88 | 5.76 | 8.92 | 9.42 |
| Karnataka | 5.67 | 6.21 | 8.39 | 8.72 |
| W. Bengal | 5.36 | 6.42 | 6.75 | 7.46 |
After Economic Reforms, Gujarat doubled its growth rate from 3.67% to 7.41%. Most other States saw a more modest step-up in growth immediately rates after reforms. But they continue to accelerate their growth rate at a modest pace and will hopefully catch up with the leader.
After Shri Modi took charge as CM, Gujarat’s growth rate picked up from 7.41% to 10.28%, a step-up of about 40%. In the same period, Maharashtra, which has a GSDP that is 2.5 times greater than that of Gujarat, was able to step up its growth rate from 6.39% to 9.90%; that is to say by 55%, narrowing the gap with Gujarat. Most other States did just as well except Bengal. West Bengal was placed ahead of its peers before reforms, made modest progress immediately after reforms, but has stagnated since then, falling behind its peers.
For perspective, we added the CAGR for all the above States as per actual data with the Planning Commission for the years 2006-07 through to 2010-11 in the 4th column above. Over the last 5 years, Andhra and Tamil Nadu have more or less equaled Gujarat’s performance, while Maharashtra, despite a much higher GSDP base [2.5 times], has actually raced ahead at 10.34% to Gujarat’s 9.34%. W. Bengal continues to stagnate though it too shows a modest improvement.
Given the above story, narrated in hard numbers, it is clear that, [a] the big step-up in growth rates, across all states including Gujarat, came AFTER Economic Reforms and cannot be attributed to any particular individual Chief Minister, be it Modi or anybody else. And [b], in the decade that Modi has been CM, Gujarat has done well but so have other States. In fact some have closed the gap with Gujarat, particularly in the last 5 years. Maharashtra now ranks as the fastest growing State, well ahead of Gujarat.
So does politics make no difference to growth rates of the States? We have tried to provide clues to the answer to that question at two levels. Firstly, the data pertaining to W. Bengal clearly shows that its economy was doing pretty okay in a rent-based economy that prevailed before reforms. Its growth has picked up after reforms but at a much slower pace because of CPM’s antipathy towards reforms.
At another level, we have examined the above State GSDP figures in light of the nearly 6 years of NDA rule at the Center spanning the period 1998-99 to 2003-04. The data is summarized below.
| Period | Growth over 5 years before NDA [1993-94 to 1997-98] | Growth over 6 years that NDA ruled [1998-99 to 2003-04] | Growth over 8 years after NDA [2005-06 to 2011-12] | Actual growth over last 5 years [2006-11] |
| Gujarat | 7.36 | 5.59 | 9.99 | 9.34 |
| Maharashtra | 7.06 | 4.91 | 10.53 | 10.34 |
| Andhra | 5.38 | 6.82 | 8.80 | 9.18 |
| Tamil Nadu | 7.51 | 3.78 | 10.22 | 9.42 |
| Karnataka | 7.03 | 6.31 | 8.80 | 8.72 |
| W. Bengal | 7.35 | 5.72 | 7.19 | 7.46 |
A cursory glance at the above figures shows that the growth rate of GSDP of all large States took a rather pronounced dip during the 6 years of NDA rule at the Center. Depending on your politics, you can read anything you like into the data but the salient fact is NDA took a reforms holiday while talking a lot about them. They actually rolled back petroleum sector reforms as crude prices took off in 1999-2000 from $15 to $40. No government has been able to fill the gap in price pass through since then. Our takeaway from the data is that the reforms process at the Center matter more for growth rates than any particular Government or Chief Minister at the State level.
Taking these two sets of data together, it is safe to say that if Modi is being hailed as India’s future savior by some quarters, it is for reasons other than his role in fostering Gujarat’s economic growth. At best he has simply maintained Gujarat’s performance in relation to its peer states to put it mildly. And Gujarat’s “high starting base” is irrelevant to the argument. Maharashtra has a GSDP 2.5 times the size of Gujarat and is well ahead of Gujarat’s growth rate over the last 5 years.
As promised earlier, we will return to this debate as we gather more data and assemble them into useful information. Our intention is not to run down Gujarat – may it prosper always – but to show that Gujarat’s growth story owes little to Modi and more to its people. Instead it is being used to promote a fascist ideology as if the two, Hindutva and Shri Modi, are a necessary condition for superior economic performance of the sort seen in Gujarat. That is a spurious argument not grounded in facts. Maharashtra’s growth story, equal if not better than Gujarat’s, shows neither fascism nor a cult figure like Modi is necessary for superior economic performance.
All other States are catching up with Gujarat and hopefully the trend will continue. West Bengal is a grim reminder that you must reform or stagnate.
Last but not the least, if India is looking to Modi as its next PM, we must examine his ideas about Economic Reforms [as distinct from his executive ability], and his track record in implementing them. If there is one salient fact to take away from the above data, it is that Economic Reforms, or the absence thereof, affects growth more than anything else. The current reform holiday by UPA2, and the fall in growth rate that has followed, is a stark reminder of the salience of Economic Reforms. What are Modi’s ideas about economic reforms? Has he promoted them? Or has he expanded “Big Government” in Gujarat over the last 10 years? We will return to that question with more facts and figures.
Growth b4 reforms, Modi and after
MARKET NOTES: 07-21-2012. Think India missed the bus on reforming its POL sector
MARKET NOTES: 07-21-2012. Think India missed the bus on reforming its POL sector
Gold [GCQ2 & GLD SPDR]: Gold has been in a price compression zone with a floor at $1526 and declining tops below $1640 since the middle of May. The price compression indicates a “breakout” from the tight range next week. Can the direction be predicted? That’s a tough call.
In the normal course, one would expect a breakout from a congestion zone in the direction of the major trend, which for gold is down. However, my wave count [not discussed in this blog] suggests a breakout upwards towards a retest of the 200 DMA, which is currently positioned at $1660.
Note the 161 area on the GLD SPDR chart on the right edge. This corresponds to the 200 DMA $1660 area on the metal’s chart. If we are in an impulse move down, and therefore in Wave III, this happens to be where we could expect the gold to breakout in the “false” direction before moving down eventually. In such a move the 200 DMA could be nicked. This would not be a bullish breakout though.
On the other hand, a move below $1520 would signal a further downside to gold prices in a rather tame fashion.
Either way, I remain bearish on gold until a decisive breakout above $1700 is triggered.
Dollar Index: [DXY & $USD]: The dollar has had an extraordinary bull run from the level of 73 in May 2011 to 83 in June 2012, spanning almost an year. While the bull-run is by no means over, we are now into a cycle where some correction or sideways drifting must be expected. The question is when and from where does that correction begin?
Over the period of next 2 months, I expect the dollar to maintain its bullish bias and consolidate above 83 but below 85. Note the currency is well supported around its 50 DMA on long-term charts and this spans the 82 to 83 area currently.
A good place for the dollar to test its 81.50 support level would be towards the end of August. Until then, the dollar is a buy around 82.50 levels and a sell around 84 but with an upward bias.
Euro$ [FXE & EURUSD]: You have to be a very brave heart to call for a stop to the Euro’s slide in markets. But it is time to note that the latest slide from the level of 1.350 since 24th February this year is now overextended and due for correction. But for that the slide has to end first. Where will it end?
A good place for the slide to end would be 1.19, the bottom made in June 2011 and a good time to make the bottom would be end of July. In short we are very much towards the terminal stage of the current slide and should look to cover shorts on dips.
No time to short the Euro at current levels unless the floor at 1.19 is taken out decisively. That possibility is fairly remote.
Not buying the Euro just yet. The upside is likely to be capped at 1.24 in the immediate future.
WTI Crude [$WTIC]: WTI crude’s 200 DMA currently stands in the $95 area while crude is positioned at $91.56. Over the next few weeks I expect crude to drift upwards, with corrections of course, to test the above-mentioned DMA. In fact crude could move up all the way to $100 before a significant correction though it won’t happen over a week.
Barring a brief correction from the $100 level, it is safe to say we won’t be seeing crude below $80 for another year or two.
As expected, the Government did not move in time to grab the fleeting opportunity for POL sector reforms. We just don’t get markets and end up fighting them like foolish amateurs.
Silver [$SILVER]: Silver closed the week at $27.24. Silver is due for a correction to the upside after a fairly long slide down all the way from $37.50 in February 2012. It appears to be creating a base for such a rally at just above the $26 level.
I am by no means bullish on the metal. The correction to the upside will be volatile and may not stretch beyond $31 in the near term. Cover shorts but avoid long trades.
$-INR: The $ closed the week R55.32. It generally spent the week in a narrow range consolidating for a move either way.
Over the next two to three weeks, expect the $ to be capped at R56 and to generally trend down towards R54 region. Before the next major move up, the $ has to retest its new floor in the 53.5 to 54 region in the next two to three weeks time.
I expect the floor will hold at 53.50 as before.
Shanghai Composite [SHCOMP]: The Chinese index last bottomed out in June 2012 at a level of 2132 when I had indicated that despite all the bearish doom & gloom in China, its equity markets may have put in a bottom at 2130.
From 2132, SHCOMP rallied to 2476 in March 2012 just under its 200 DMA without nicking it. Since then it has had an orderly correction and made a double bottom last week at 2138.
The index stands at 2168.64. In the ensuing week, the market could retest 2138. If the floor holds, the floor at 2130 will be confirmed and Chinese stocks become a buy once SHCOMP breaks above 2200, which is its 25 DMA area.
S&P 500 [SPX]: SPX closed the week at 1362.66 after making a high of 1375.26. To my mind, the series of higher tops and bottoms formed since the point 1273.83 on 5th June are too volatile to qualify for anything other than a pullback to the top.
While not ruling out another shy at the next overhead resistance at 1390, I remain skeptical of the rally. Over the next week SPX could take support at its 25 DMA and attempt another rally to the 1390 region.
I would sell rally tops.
The next formidable resistance after 1390 is 1400.
SENSEX: Note the Sensex is fast approaching a golden cross with the 50 DMA poised just under the 200 DMA in the 17,000 region. It is hard to miss its significance.
The Sensex is correcting down to the 17,000 region and will surely test this region over the next week. I expect the index to hold above 17,000 and thereafter rally to 18,500 barring the usual corrections. However, I would not pronounce myself bullish on the Sensex just yet.
The Sensex needs to come down and retest the 15,500 region again. So while I would buy my blue chips at my prices with a view to hold I would not long to trade even if 17,000 holds up next week or the week after.
Markets may fall out of their usual sync for sometime. Time to be very careful.
A brief look at world agricultural commodity prices:
A brief look at world agricultural commodity prices:
Quietly, agricultural commodities have been inching up on world markets for quite some time and are now poised close to breakout levels over previous all time tops.
The matter has drawn scant attention in India outside a circle of commodity traders. Long-term trends indicate that the extremely high world agricultural prices are not an aberration but will soon become the new normal.
These trends have humongous policy implications for India’s economy. I am therefore putting out a commentary on the emerging price trends largely to create greater awareness about agricultural commodity markets.
Corn [$CORN]: Corn [maize in India] began its latest bull run in February 1987 from a level of $142.45 per 5000 BU [Bushels]. The first leg of the bull run peaked at $518.97 in June 1996, some nine years later.
From the peak of $519 in June 1996, Corn corrected down to $185 in November 2005 in a classic A-B-C pattern over a period of roughly 10 years. The bull run we now in began from this low of $186 in November 2005 and made a high of 749.75 in July 2012. From that point, Corn corrected to a low of $325in June 2010. Rallying from there, Corn made a high $793 in July 2011, significantly higher than the previous all time high at $749.75.
Corn is now poised at $755.75. The current bull run has a lot of time to run. In fact the cycle could well extend into 2015 with a few shallow corrections in between.
One can expect a breakout in Corn prices over the next few weeks that is likely to be sustained over time. Watch out for Corn prices. China is the world’s largest importer of Corn and I don’t understand why we don’t export the commodity at all.
Note the pickup in volumes traded as the price has surged in recent weeks.
Soybeans [$SOYB]: The $SOYB long-term chart is a technicians delight and I recommend it for study to all would-be technical analysts. It is also typical of most commodity charts.
Soybeans began its bull run at $413 per 5000 BU in July 1999 and made the top of $1065 in July 2004. From there it corrected in a rather odd but very bullish manner making a higher top in the correction but also the low of $776.25 in December 2008. From there, we are into the C part of the up move that will likely extend.
$SOYB has already made a new high of $1680 and yesterday closed at $1642, well over its previous all time high of $1636 made in July 2008. With that break out, we are now in uncharted territory for $SOYB. This happens very rarely in commodity markets. It is something of a once in 50 years event.
Again, note the pickup in volumes at the breakout. Expect much higher prices in the future as we are nowhere near the end of the bull run. Soya has been a huge success story in agricultural exports for India, largely due to private sector efforts. We need to replicate the model in Corn and other agricultural commodities. Most of our exports of Soya are to the US. With China emerging as the biggest importer we need to step up production and create a new market in China.
Wheat [$WHEAT]: Wheat began its current long-term bull run in June 1987 from a price level of $263.25 per 5000 BU. It made a top of $720 in April 1996 in the first leg of its run up. From there it corrected down to $288 in March 2005 at the end of a 7-year correction that saw many lows in between.
The third leg of the bull run began from $288 in March 2005 and topped out at $1349 in February 2008, which was its all time high. It has since corrected from the peak to a low $427.75 in June 2010 that marked the end of the correction.
We are in the wave C of C up that could extend. Wheat closed last Friday at $842, not far from $893 that was the top in wave A of C. A breakout atop that level will surely see wheat reach for its previous all time high.
Note the volume hasn’t supported a surge in wheat as in other commodities and hence the price is vulnerable to sharp corrections. Nevertheless, I am bullish on wheat as well.
Cotton [NYSE]: Not been able to locate a chart for Cotton on my charting service. Will make other arrangements shortly. Meanwhile, here is a brief commentary.
Cotton is correlated to Agricultural commodities but has a distinctly different time cycle from them. Cotton began its latest bull run October 2001 from a price level of $28.25. From there, the price topped at $89.25 in March 2008 at the end of the first leg of the run up.
Cotton is actually in Wave B down from there, which continues. After making a low of $42.83 in the first leg of Wave B down, Cotton took off to make high of $217.77 in March 2011 and corrected down to a low of $68.55 from there.
Cotton closed last Friday at $89.26, just under its top in the A leg of the bull run. Considering the highly irregular and violent correction in the B leg so far, making price predictions is hazardous. Nevertheless, we now into wave c of Wave B and that means the price could at best consolidate around the $90 level. Cotton isn’t all that bullish for the moment although like others it is also positioned at a breakout point. Best avoided for now.
Sugar [$SUGAR]: Sugar chart is rather sweet to read. Consumer may find the price turn bitter pretty soon.
Incredibly, Sugar began its bull run from a price of $2.28 in June 1985 making a top of $15.22 in December 1994 on completing Wave A. In the B down, Sugar made a low of $5.27 in December 2004. From that level it launched into Wave C, which we now straddle.
Sugar has traversed an orderly 5-wave impulse formation in wave C of which we are currently just beginning wave 5. This count can change if Wave C extends as is very likely. Nevertheless, Sugar is certainly bullish and the first major logical target remains $35 followed by its all time high at $45.
Note Sugar has just broken atop its 200 DMA on weekly charts with an upsurge in volumes and is headed for a golden cross. You can’t argue bearish with that formation!
MARKET NOTES: Major markets are marking time before making major moves either way
MARKET NOTES: Major markets are marking time before making major moves either way.
$ INDEX [DXY/$USD]: As noted in the last post here, the breakout point for DXY was above 83.50 which it pierced through rather convincingly on 6th July.
The 83 level now becomes the new base for DXY. The $ turned down from just a few pips below 84 and should come down to retest the new base 83 in the next week.
On a more long-term time frame, the $ first major overhead resistance lies at 85.50 and the new floor at 83. We can therefore expect the $ to reach for higher levels after thoroughly testing the new floor at 83. DXY will remain a buy at all major dips unless 83 is taken out which is highly unlikely. Remain bullish on the Dollar.
Gold [GCQ2 & GLD SPDR]: Gold is approaching an interesting point on the charts where the market will have to reveal its hand in one of several ways. So far, Gold has sailed through a fairly orderly correction from its all time high of $1920 without tipping its long-term intentions. The correction so far could be just normal pause in the long-term bull market or it could be the beginning of a long-term bear market. We do not know as yet. But the clues should start coming in over the next few weeks.
The critical level on the downside is $1515. A breach of this level will signal a long-term bear market. This level corresponds to $148 on the GLD SPDR chart above. On the other hand, Gold could bounce from the $1550 region to test the downward sloping line through points 1920 and 1790 on the GCQ2 chart.
The odds favor a long-bear market but with a bounce from the $1550 region to somewhere between $1680 to $1700 region in the intermediate term. A pullback above $1630 will be the first indicator that such a bounce is in the making.
Consider staying out of the Gold market for a while. The price compression between $1550 and $1630 presages violent moves either way, which is not worth tracking considering the risk. I would rather wait for a breakout on the downside or for higher level of $1680 to $1700 to sell. Long-term remain bearish on gold.
For now the probability tradable rally that I mentioned last week remains very low.
WTI Crude [CLQ2]:
As mentioned in earlier post, I favor a wave count for crude that holds the current bearish trend as a correction to the move up from $32 in December 2008 to $115 high in April 2011. If that count were true, time-wise the correction in crude should end by end of July [earliest] or by end of November 2012 [latest]. Between these two dates I favor the earlier date. In other words, while I don’t rule out a further phase of consolidation, for all practical purposes crude is unlikely to breach its floor at $75. So crude becomes a buy at all dips.
$90 on the charts remains the critical breakout point for WTI crude. We are currently positioned at $87.07. I expect a few more weeks of consolidation between $80 and $90 before a breakout to the topside.
Euro$ [EURUSD & FXE]:
By breaking below 1.26 on 28th June 2012, the Euro$ confirmed a full 5 wave impulse move down whose ultimate target could be 0.95, or near parity with the $.
In the near term, having made a low 1.22, the Euro could rally back to 1.24 to test its overhead resistance. Its first logical to the downside is now 1.19. Sell Euro at every rally.
India needs to be very wary of the Euro moves to the downside. RBI must realize that the move down by the Euro is a strategic move by EU in connivance, if not tacit support, from the US to shift the burden of adjustment in world trade and job cuts to China and India. We must avoid allowing the Rupee to rise along with the value of the $ against the Euro. Else we will place our entire software services industry in jeopardy. People in India have no idea how lean, mean and hungry the East Europeans are and how rapidly they are picking up proficiency in English.
$-INR:
Quite clearly from the chart, the $ is in a short-term correction from its recent top of 57.30. Next week, the correction could continue and retest the low of 54.20 made on 3rd July which incidentally was the previous top for $ for very many years. So its repeated testing should come as no surprise. Unless the floor of 54.20 is decisively violated, the $ can only move up against the Rupee.
In a longer time frame we are possibly in wave 4 of 5 for the $ against the Rupee that ends middle of August. This could see the Rupee dip as low as 53.50. What will follow then is wave5 of 5. One possible target on the upside is 60.50. Although small, the probability of the rise being capped at 57.50 exists. Given RBI’s trading restrictions, one may not see a full display of the awesome power of a wave 5 of 5. Keep fingers crossed. [Note my PC dropped 4 months of data from charts in updating, an error that went unnoticed causing me to indicate 60.50 by middle of August. The error is regretted.]
S&P 500 [SPX]: SPX continues in its deceptive ways showing strength where one expects weakness. The trick is to see through the deception.
There are several ways to do the wave counts for the correction here. The point to note is that point 1374 on 3rd July can be seen as a wave iv top of which sub-wave 2 was the rally we saw last Friday. Clearly the pullback is reactive and should be followed by another leg or two down. The logical down target remains 1260.
The clincher as far as US equity markets are concerned will come in the strength of the rally that follows after the current down move exhausts itself. It is only then we will be able to more or less confirm which way the markets is headed in this correction. Note strong $ is usually not a good reason for US equities to rally.
Remain bearish on US equities.
Sensex:
The Sensex’s major trend remains down. It has seen a sharp upward rally from the 15,750 region that looks like a breakout. The rally saw a high of 17,650 and has since corrected sitting just above its 200 DMA 17,150. A breach of the 200 DMA will surely confirm a false breakout that could propel the index lower. On the other hand, the Sensex could continue to consolidate between the 200 DMA region and 17,650 for some more time before breaking out either way.
The probability of a breach of the 200 DMA is much higher than that of a breakout. Usually such things almost always resolve in favor of the major trend, which in the case of Sensex is down. Having said that, we are in the process of bottoming out in Indian equities and hence one needs to look out for buying opportunities without chasing rallies unnecessarily or out of a sense of panic.
NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions.
Modi’s myths about Gujarat’s growth and other hype
Modi’s myths about Gujarat’s growth and other hype
I have long argued that Gujarat state was one of the top economic performers much before Modi took over as the Chief Minister in Gujarat in October 2001. Modi by himself over the last 10 years has made little difference to the State’s Gross Domestic Product. How can this be proved? Well, let us take a look at the numbers and the dates below.
Rates of Growth of gross GDP:
State 80/81 to 90/91 90/91 to 97/98 02/03 to 11/12
Gujarat 5.08 9.57 10.28
Maharashtra 6.02 8.01 9.90
Tamil Nadu 5.38 6.22 8.92
Karnataka 5.29 5.29 8.39
Andhra 5.65 5.03 8.23
The figures in the first 2 columns are taken straight from the Planning Commission [State Plans: Performance on Problems, Chapter 30] while the figures in column 3 are our calculated CAGRs taken from Planning Commission’s annual data for 9 years spanning 02/03 to 10/11 and an estimated figure for 11/12.
As you will observe from the growth figures from 1981 through to 1998, Gujarat was the top performing state in terms of economic growth much before Modi took over as CM in October 2001. The facts speak for themselves. In the period 91 to 98, over 7 years, Gujarat’s growth rate was 9.57%, a good 156 basis points over its nearest rival, Maharashtra. Over the 10 years that Shri Modi has been at the helm, Maharashtra has closed the gap from 156 basis points to just 38 basis points. The other large states have done even better relative to Gujarat under Modi in closing the gap.
Second, note that the big step up in Gujarat’s growth rate came after economic reforms at the Center and before Modi. Before reforms, over 10 years, Gujarat clocked 5.08% growth. While in the 7 years following reforms, Gujarat’s growth jumped by 449 basis points to 9.57%. In contrast, under 10 years of Modi, Gujarat’s growth rate has improved from 9.57% to 10.28%, by 71 basis points. So who should be credited for doubling Gujarat’s growth rate from 5% in the 80s to 10% now? Economic Reforms by the Center that stepped up the growth rate by 449 basis points or Modi under whose 10 years, the growth rate climbed a mere 71 basis points?
Lastly, note that other states are performing just as well after reforms in stepping up their growth rates.
Hence my three points:
- Gujarat was one of the better performing states in the 80s, much before Modi came on the scene.
- Gujarat’s economic performance went up because of economic reforms, almost doubling growth between 1991-98, again before Modi took over in October 2001.
- Modi’s tenure over 10 years hasn’t done much to step up Gujarat’s growth, either in relation to its own past performance, or relative to the performance of other similar larger states.
Why is that so hard to believe? That disbelief is entirely due to the efficacy of Modi’s PR machine. Modi is trying to steal the credit that should rightly go to economic reforms and the alacrity with which the people of Gujarat seized them to their advantage. Modi was nowhere in the picture when that was happening.
In his blog in the Economic Times dated 8th July, Bibek Debroy noted that poverty reduction happens largely though trickle down from growth. While that is no doubt true at the macro level, at the level of States poverty reduction is more directly related to the efficacy with which poverty schemes are administered. This is because the decision to allocate resources for poverty alleviation and the funding therefor is done by the Center not the States themselves. Mind there can be no poverty alleviation without growth because when there is no growth it simply impossible to get people to part with their money for the poor.
Lets us take a look at how the 5 States have done with regard to poverty alleviation. We have taken the figures that follow straight from the Planning Commission data that used 2004-5 and 2009/10 as the base years to measure poverty using Tendulkar methodology.
State Total poor 04/05 Total poor 09/10 Reduction
Gujarat 31.60 23.00 8.60
Maharashtra 38.20 24.50 13.70
Tamil Nadu 29.40 17.10 12.30
Karnataka 33.30 23.60 9.70
Andhra 29.60 21.10 8.50
Straight off, Gujarat with one of the highest growth rates at 10.28%, ranks on par with Andhra with one of the lowest growth rates at 8.23%, as far as reduction in poverty is concerned. Maharashtra, Tamil Nadu and Karnataka have done much better at poverty alleviation in the 5 years spanning 2004/5 to 2009/10 when Modi has been at the helm in Gujarat. Note Gujarat’s poverty rate is not significantly different from that of other larger states.
As mentioned earlier, states do not either fund or decide on the total money to be allocated to poverty alleviation. They merely implement centrally sponsored and funded schemes. So the differences in poverty alleviation rates do not reflect priority given to poverty alleviation but mere administrative efficiency. Even there, Gujarat apparently lags behind its peers.
We will return with more facts and figures and more arguments as we dig deeper into the Modi’s PR machine’s myth building. Gujarat’s success story deserves all the credit that good performance demands. However, the credit for Gujarat’s success owes to economic reforms and the entrepreneurial tradition of Gujarat. As we have shown, the big step up in Gujarat’s growth rate from 5% to 9.5% came after economic reforms of 90/91 and much before Modi became the Chief Minister in October 2001.
MARKET NOTEs: Most markets are poised at crucial turning points
MARKET NOTEs: Most markets are poised at crucial turning points.
Major markets are poised at crucial turning points. These will unfold over the next 2 to 4 weeks. I have therefore concentrated on explaining the setup in each case and tried to identify the earliest signals that may point to the future direction the markets may take.
Gold [GCQ2]: As expected in the last post, Gold tested but did not pierce the “triple” top positioned at $1640. After rallying from $1550, Gold turned down again from just under $1640 to end the week at $1582.29. As I have mentioned many times earlier, the first leg of gold’s correction ends sometime mid-July, and in fact could end next week. The critical level to watch in the ensuing week will be $1520.
If over the next two weeks, gold does not break its floor at $1520, an intermediate tradable rally in gold can begin. The possibility of a break below $1520 should not be ruled out. Such a breakdown in price would imply a fairly long-term bear market in gold, which could see the metal trade far below current levels.
On the other hand, a bounce back from $1520 or above will signal a tradable rally that will take a shy at the previous top of $1920 over a 6 to 9 month period. The probability of either outcome is more or less even at 50:50. Traders should watch price action between $1550 and $1520 to see which course the market takes. Interesting & nerve wracking time ahead for gold traders.
The first confirmation of a breakout to the topside will come on price piercing $1640.
Dollar Index [DXY]: This blog had the conviction to be a $ bull for the last 1 year or so when all expert commentary was bearish on the currency. The buck hasn’t disappointed by its performance either, having rallied from 73.26 in May 2011 to a close of 82.9420 last week, just under its previous high at 83.6700. Can the $ rally higher?
We are in the very early stages of a $ Bull Run that has a long way to go. Some strategic pundits may find that strange but the message from the markets is that the $ will make big waves.
After making a high of 81.06 in January this year, the $ should have gone into a correction which it dutifully did. But the correction since has been very shallow and brief. Even so, the short time spent below 80 has resulted in an explosive break above 82, not just 80, and a very brief correction from the high of 83.67 and we are back challenging the highs again. Few currencies exhibit that kind of strength where the market expects a correction instead of new highs.
The comments above don’t mean the $ is on a one-way trip up. It could break atop 83.67 before a significant correction or could turn down again from that level to make another assault later. Either way, the $ is a buy at every dip. Don’t short the mighty buck.
Euro$ [EURUSD]: As expected in the last post, Euro turned down from 1.2700 to go into a virtual free fall, closing the week at 1.22869, exactly at the previous low made on 1st June. The price action is distinctly bearish.
The next logical target for the Euro is 1.19 though it may rally a bit from present levels before making its way to that region. In terms of wave counts, the fall in the Euro has much time & distance to go. In fact indications are we may be in a full 5-wave impulse move down on the Euro. We are only into the wave III of that move down. The first confirmation of this scenario playing out will come on a decisive violation of 1.19.
I remain very bearish on the Euro in the intermediate term.
WTI Crude [CLQ2]: Oil rallied from low of 77.28 to just under $89 before closing the week at 87.20. Oil can see two scenarios play out over the next 6 to 8 weeks with more or less equal probability. As usual, we will let the market tell us where it wants to go.
The first, very straightforward scenario is a rally in crude that takes it beyond $90 level for a while in an attempt to close the gap between 92 and 105 that persists on the charts. This will imply an intermediate correction in the market that could see crude range between $100 and $76 till the end of December this year. The probability of this scenario is about 40%.
The second scenario is for oil to compress in price between $90 and $76 till the end of July early August before an explosive breakout, probably to the topside. In either case, oil price is not likely to stay suppressed for long.
Unless the $76 level is violated decisively in the next few weeks, the probability of a long-term bear market in oil is practically zero.
Silver: Silver closed the week at $27.05. The first leg of the correction in Silver ends by the 4th week of July. If the metal doesn’t break floor at $26 in the ensuing couple of weeks, it could be in for a substantial bear rally. Bears should cover shorts.
A breach of $26 on the other hand will see substantial decline in prices. However, the probability of the latter scenario is small. All told bears should cover shorts.
$-INR: As expected by this blog, the $ tested but did not breach the floor for the $ at 54.3. In fact the $ rallied sharply from that level to close the week at 55.40.
As noted elsewhere in the blog, the $ itself is set for a bullish run as measured by its Index DXY. Since the $ isn’t freely traded in the domestic market, price action alone doesn’t provide enough clues to determine where the $ is headed.
It would be foolish for RBI to let the INR chase the $ up both in terms of policy and the need to intervene strategically. Hence RBI intervention should not be expected below 57.5.
I expect the $ to breach its previous top at 57.50 before the middle of August to perhaps reach 60.50. The first overhead resistance to the $ lies 56, followed by its previous top at 57.50. The $ is a buy at every dip.
S&P 500 [SPX]: The rally in SPX from the low of 1265.40 1374.81 was almost certainly reactive in nature. A breach of 1335 will confirm that we are in for a longer and deeper correction in the equity markets. A clearer picture of the nature and shape of the correction to follow should emerge by the end of this month.
On a breach of 1335, the next logical target for SPX would be 1265.
Sensex: The Sensex closed at 17,521.12 after breaking atop its 200 DMA at 17,140 making a series of higher tops and bottoms. The 25 DMA is poised just below the 200 DMA and could break above it early next week. The break above the 200 DMA, the imminent bullish crossover and the series of higher tops and bottoms on daily charts suggests a bullish breakout that would be confirmed once the Sensex breaks atop 17,900. In fact, that might well happen and the index could race to 18,500.
However, in terms of wave counts, this is not the place and time for the Sensex to begin a bull run. On the other hand, it is the time & place for false breakouts and sharp bear rallies as we are in the last stages of a downward correction. By my reckoning, the index should keep correcting at least till the end of December this year. The wave counts also suggest the complex intermediate rally that began at end of August 2011 may actually be ending and a downturn could ensue soon.
Having said that, my reading would almost certainly be negated if the Sensex were to decisively break above 18,500 in the next week or so. Until then, I would not chase this rally.
I remain very suspicious of this “breakout”.
NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions.
A brief look at European Equity Markets: 07/07/2012
A brief look at European Equity Markets: 07/07/2012
European equity markets launched into a mega bear market roughly 7 years before the US equity markets. For instance CAC, the French index most widely followed, last topped out at 6927 back in August 2000 and has since made a series of lower tops. In contrast, the US equity markets began its current bearish phase in October 2007, a good seven years later. While the ebb and flow in world equity markets has a very high degree of correlation, they do not move in lockstep. Could European markets actually recover before the us equity markets? That appears a rather outlandish notion until you fully consider the crashing Euro against the $.
If the Euro were to crash to parity with the $ as some commentators are suggesting, could the EU markets rally because of cheapening of the currency?
To briefly see how EU markets are currently positioned I will take a brief look at the main indices one by one.
CAC: The French index peaked at 6927 in August end, 2000. After the peak, the index made a low of 2402 in November 2003, and then rallied along with the US equity markets to a high of 6182 in July 2007. Note the high was made before the peak in S&P 500, and the high was significantly lower than the high of 6927 in 2000.
From the high of 6182, the French index crashed along with the world equity markets to a low of 2552 in March 2009. The low of 2552 matched the low of 2402 in November 2003 but was higher. CAC rallied with the US markets from the low of March 2009 to a high of 4187 in February 2011 but the high was about 50% retracement of the previous fall. The rally was far weaker than the one in the US markets that nearly challenged the previous all time highs of 2007.
CAC has since been correcting. It crashed from 4187 to a low of 2810 in September 2011 and has since tested this low twice and made higher bottoms each time. Note the low in September 2011 was higher than the one in March 2009, which in turn was higher than the one in Match 2003. Can the CAC have made a bottom at 3023 in September 2011?
The case for such an interpretation is rather involved and I don’t wish to discuss my wave counts. Briefly then, CAC has traced out a major A-B-C corrective wave from 2000 to 2009 over nearly 8 years. Thereafter, it rallied from a low of 2595 in March 2009 to a high of 4187 in what could be construed as the first leg of a bullish Wave I. We are thus in Wave II of which the most destructive a part involved a retest of the bear market low of 2595. CAC made a low of 2693 on 23rd September followed by a higher low 2890 on 11th November, followed by a higher low of 3006 on 30th May. These series of higher low together with the wave count lead one to believe that CAC may have put in low of 2890 on 11th November 2011.
That doesn’t mean CAC is going to launch into a new bull markets any time soon. That depends on how the Wave II correction plays out and these are usually very subdued giving little hint of the explosive rallies to follow. The first tangible clue to the structure of the Wave II will come from a rally in CAC above 3500 in the next few weeks.
That said I am pretty confident that the low 2890 will not be taken out by any subsequent crashes.
DAX: In terms of wave structure, the DAX story in broad outline is much the same as that of CAC. The only major difference being the German economy is inherently more resilient than the French counterpart. Hence, the depth of corrections are relatively lower and recoveries correspondingly that much more robust.
DAX peaked out in March 2000 at 8095 and without much fuss crashed in a simple straightforward manner to a low of 2180 in March 2003. From there, DAX recovered along with the US equity markets peaking at 8095 in July 2007 once again without making a new high. Crashing from there in line with world markets, the index made a low of 3695 in March 2009. With that, the index completed a full A-B-C correction with the low of C being considerably higher than that of A.
From March 2009 level of 3695, DAX rallied to a high of 7552 in May 2011. It did not reach the previous two tops at 8095 but that is classic deception for Wave I of a bull move. The subsequent correction saw the index fall to 5032 from where it has rallied with two higher tops and bottoms. The first leg of Wave II correction may well be over at point 5912 on 6th June.
That doesn’t mean we are going to see a bull run in the DAX any time soon. Much will depend on how wave II unfolds. But the low of 5032 in September 2011 is likely a bottom that won’t be taken out again.
Let me be clear. DAX has still a long way to go as far as WAVE II correction is concerned. The C wave of Wave II can be quite destructive. But we are likely to have an upward bias in EU equity markets for the next 6 to 9 months that may look like a bull market albeit with very sharp corrections.
FTSE 100: The FTSE 100 story is much more like the DAX than the CAC. The wave structure following the high in December 1999 is much the same as that of DAX. Notice though that FTSE is not as strongly upward biased as DAX with low in March 2009 at 3512 not being all that much higher than the low of 3281 in March 2003. Likewise, FTSE did not equal the previous top of 2000 in 2007 although it came close. In all other respects, the wave count for FTSE is a replica of DAX.
From the low of 3512 in March 2009, FTSE rallied to a high of 6102 in February 2011. That to my mind completed the Wave I of a new bull move. The index corrected from there making a low of 4942 10th October 2011 and has since rallied and corrected again. For all practical purpose, the first leg of the Wave II was complete at 5382 on 8th June.
We could see an upward bias in FTSE with sharp corrections as the B leg of wave II unfolds. Again this is still a complex correction not a classic bull run. Much of the gains and more in the upward drifting in values in B leg and more are just wiped out in C that follows.
Spain Madrid General: Note the structure and correlations of the Spanish market are completely different from its continental cousins are more like those of the US market. If that appears strange, it is also true!
The Spanish market peaked at 1740 in November 2007 along with the US markets. It has been correcting since with no end in sight. Having made a low of 739 in March 2009, the index rallied to 1273 in June 2010 and then meandered down from there to low of 629 in May 2012. The correction is by no means complete and has room to run both in terms of price and time. That said, we might be into a Wave IV pullback currently though it is hard to see that reach above 780.
566 remains a possible target for wave V for the Spanish market.
It would appear from the foregoing that those economies in Europe that have export markets, will be able to take advantage of the falling Euro to export their way out of trouble. The others may continue to sink.
NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions.
The Hype over Gujarat’s Economic Performance
The Hype over Gujarat’s Economic Performance
Bibek Debroy’s blog post of 3rd July has been around on twitter as something of a rebuttal to the ET story on Gujarat’s growth. Bibek Debroy makes some excellent points on [a] the purpose of such an analysis, [b] assembling the necessary data set for it, and [c] laying out the argument for or against the proposition. Given the structure of government statistics, this is often a difficult task, as the following note will show.
The argument over Gujarat is not over Gujarat per se. The argument is really over Modi’s stewardship of Gujarat and his style of administering the State relative to his peers elsewhere. In particular, Modi fans have posited that [a] under Modi’s stewardship, growth in Gujarat has accelerated over the what prevailed before him, and [b] that post-reforms, Gujarat’s performance under Modi is head and shoulders above that of its peer States. Based on these two premises, a case is made for Modi to be some thing of a miracle economic manager, who should now be promoted as Prime Minister in order to enable him to repeat that performance, if at all it is so repeatable, at the center. That then is the crux of the political issue.
Modi took over as CM Gujarat in October 2001. The 10th Plan period runs from April 2002 to March 2007, both years inclusive. Likewise, the 11th Plan period spans five years from April 2008 to March 2012. The two together neatly capture the 10 years of Gujarat’s development under Modi. Therefore, this 10-year period is the key to testing the two key propositions posited by Modi fans. The question therefore is to see [a] if Gujarat’s performance during this 10 year period has been truly spectacular and [b] if its has been far above the that clocked by its peers.
Bibek Debroy has chosen the peer states to be Andhra, Maharashtra, Gujarat, Tamil Nadu and Karnataka. We stick to that group though a case can be made to include Bihar and perhaps the city states as well which have far higher growth rates.
Over the two Plan periods spanning 10 years, that coincide with Modi’s tenure in Gujarat from 2002 to 2012, what is the growth rate of these 5 States?
Bibek Debroy has used figures from the Planning Commission [PC] for the 10th plan period, and the “Expected” mid-term appraisal figures for the 11th plan period while citing Gujarat’s superior performance relative to its peers. The fact is, data for all the 5 years of the 11th Plan period is now available for Andhra, Tamil Nadu and Karnataka, while the data for 2012 is awaited for Gujarat and Maharashtra. So why not take the growth registered by the 5 states over the first 9 years spanning 2002 to 2011 as the basis for comparison? That would give a clearer picture of relative performance crystallized in one easily understood number for all states. That number should be the Compounded Annual Growth Rate [CAGR] calculated over 9 years using actual data.
Why use CAGR? Suppose a state starts the 9-year period with GDSP at some value X. Nine years later it’s GDSP grows to some value Y. What is the ONE growth rate R such that, when applied to X, exactly returns Y after 9 years? Solving the common annually compounded interest rate formula arrives at that rate and the rate is called CAGR. We mention it here because PC appears to be using a different metric when it talks of average growth rate over a plan period. Perhaps it is using an arithmetical mean, which is shabby practice. One doesn’t really know. Hence we have calculated CAGR for all 5 States using 9 years of actual data.
Here are the CAGRs over the 9-year period. Gujarat 10.35%, Maharashtra 9.95%, Tamil Nadu 8.87%, Andhra 8.39% and Karnataka 8.61%. Since data for 3 states for 2012 is available and the last 4-year CAGR of Maharashtra and Gujarat are known, we have used actual data and 4 year CAGR for Maharashtra and Gujarat to arrive at the 10 year CAGR. These are Gujarat 10.28%, Maharashtra 9.90%, Tamil Nadu 8.92%, Andhra 8.23% and Karnataka 8.39%. The difference between Gujarat and Maharashtra for both 9 and 10 year periods is miniscule and probably within the margin for error.
So where is the case for superlative performance from Gujarat under Modi’s stewardship? At best its performance is line with or slightly superior to that of its peer states. Note that Gujarat and Maharashtra have vied for the top slot before economic reforms, after economic reforms but before Modi, and after reforms, after Modi. Should Gujarat’s slightly superior performance be attributed to Modi? If so who gets the credit in Maharashtra or Tamil Nadu? Not to mention Bihar.
The question is politically important. Gujarat’s so called superior performance, relative to its own history, and its present peer group, is being used to assiduously promote a personality cult around Modi together with a fascist ideology. The idea is that an adoption of the two at the Center will lead to faster growth. There is no basis for such a case, but even if it did exist, would we be willing to succumb to such a proposition? That is why, hype or not, Gujarat’s and Modi’s economic performance need to put through a more detailed scanner than is possible here.
sonaliranade 