A Multi-Variable Regression Model for GDP Growth Rate Prediction in India

Abstract:  This paper attempts to build a multi variable regression model to predict the GDP growth rate in India using key macroeconomic indicators such as CPI inflation, manufacturing and services purchasing manager’s index, interest rates and the price of crude oil. The relationships between GDP and these parameters, as well as their inter-relationships are studied in this paper using linear regression models. An attempt is made to understand the relationships and understand the key driving factors for growth.

Keywords: GDP Growth Rate, Crude Oil Price, Inflation, CPI, Interest Rates, Rupee Exchange Rate,
Regression Model, Multi Variable Regression, Macroeconomics

Link to the paper: A Multi-Variable Regression Model for GDP Growth Rate Prediction in India Using Key Macroeconomic Indicators

Why India Needs The Presidential System

I came across this book recently and since the title sounded so interesting, I decided to buy it. In his book "Why India Needs The Presidential System" author Bhanu Dhamija writes about what's wrong with the present Parliamentary System of Democracy in India and how and why the Presidential System can solve this problem.

The Presidential System is the US Presidential System and the Parliamentary System is the British Parliamentary System . India's governance was modelled around the British Parliamentary System which is quite unlike the US Presidential System. The author believes that the US Presidential System can solve this country of some systemic problems and presents a fact based analysis of his arguments.

In this and subsequent blog posts I will try to analyse what the author presents in his book. He starts with the 4 laws of power:
1. Power tends to corrupt and absolute power corrupts absolutely.
2. Power consolidates when it is more than essential
3. Power dissipates when it is less than sufficient
4. Power co-operates only when it is encroached upon

-If powers are properly assigned, government serves the people, otherwise, it becomes their master.

-The author believes these laws are confirmed in the US Constitution. James Madison had found that governments failed to serve not only when they were too powerful, but also when they were too weak. Madison had also stated that "Unless these government departments be so far connected and blended as to give to each a constitutional control over the others, the degree of separation.. essential to a free government, can never in practise be duly maintained."

This is how the above 4 laws were addressed in the US Constitution:
1. To deal with powers tendency to corrupt, they separated the powers. They separated the powers in local governments, state governments and the central government - leading to a Federal System of Governance. In India, the GST Bill, which has been stalled in the Rajya Sabha, aims to give the states the power to levy a tax and collect a tax. The Constitutional Amendment required for passage of GST Bill requires a 2/3 majority and not a simple majority.

2. In order to ensure that the Federal Government did not become too strong and tyrannical, they set up a system of powerful state governments. Each government, national and state, was assigned only limited and essential powers.

3. To solve the problem of co-operation, they created a system of 'co-ordinated' departments through checks and balances. This gave each department certain constitutional rights over the others.

Indira Gandhi, who came to power with less than 44% of the votes, instituted a state of Emergency in this country in mid-1970s, giving her unfettered powers and converting the Parliamentary system into a dictatorship. She amended the Constitution with retroactive effect and replaced the Chief Justice of India. The forty-second amendment by Indira Gandhi still stands which states that "There shall be no limitation whatever on the constituent power of Parliament." In six months of the Emergency, Indira Gandhi drafted a massive amendment to the Constitution which was 20 pages long. It added 59 clauses and 9 new articles to the Constitution and amended 50. One of her amendments gave Directive Principles precedence over Fundamental Rights, providing the government the right to deny individual rights for state purposes. The courts could no longer handle election disputes. They were not allowed any jurisdiction over tribunals. The Supreme Court was barred from considering the constitutionality of a state law, the high courts from those of Central Laws.

There was now a complete lack of any oversight on the Government. Corruption became endemic in the system. Transparency International's Corruption Index dropped India 11 places in 2011, ranking her 59th in the world.  The practice of establishing commissions of inquiry to scrutinize specific government activities was also downright impractical. A government was expected to start an inquiry against itself, and then to reprimand itself.

[All facts in this blog post are quoted from the book "Why India Needs The Presidential System" by Bhanu Dhamija.]

Rupee Exchange Rate Dynamics from 1993 to 2011: A Study of Factors Driving the Exchange Rate

Abstract: This paper attempts to study the factors driving the Rupee exchange rate and reasons for its sustained depreciation over the period since 1993. A statistical analysis is carried out to identify significant factors and regression models are developed to validate the assumptions. Solutions that can mitigate the depreciation of the Rupee are presented

Link to the full paper on IOSR Journal of Economics and Finance

Is Socialism bad?

I have been following the debate over the US Presidential elections off late, and the fight between the Republicans and Democrats has come down to Capitalism vs Socialism, with Bernie Sanders being the most vocal proponent of Socialism, along with Hillary Clinton and Donald Trump and the Republican candidates being the most vocal proponents of Capitalism.

I have not seen a lot of people talk of the virtues of Capitalism on the media so far but I have seen a lot many attacking Socialism. If you find main stream media talking of virtues of Capitalism, please feel free to correct me. 

To go to the definition of Socialism, I would refer to the book "The Audacity of Hope" by U.S. President Barack Obama where he states that socialism is derived from an idea of there being a social safety net, to protect people and businesses from failure. The Wall Street bailouts in 2009, TARP bailouts for businesses such as GM around the same time, the health insurance plan proposed by Obama and the US Social Security are all based on this Socialist ideal.

The arguments against Socialism are based on the model of Greece, Portugal , Italy and Spain - debt ridden economies of the EU that have run such high government deficits from socialist policies that the tax levels needed now are unbearable for the businesses to survive.

I think the fair question to ask is what is the fair value for the cost of social good derived from Socialism? Clearly the EU model is too expensive. It will be for the governments to decide where they tax their businesses, but one thing is for sure - Socialism is not bad and just needs to priced right to make it marketable to businesses.

IT delivers on productivity

I think this needs to be said now more than ever. In the global macro environment, where there is a lot of demand uncertainty owing to lack of macroeconomic stimulii from various central banks, businesses can still deliver on results through the use of technology in general and Information Technology in particular. I would like to talk a little about this topic here.

There are a number of case studies listed on the Nucleus Research web-site that study the Return on Investment for Information Technology based investments, a lot of which are free. Here is a reference to an interesting case study from Nuclear Research stating that investments in BI and Analytics can give up to 1300% ROI.

Here is a link to another interesting case study from Nucleus Research stating that investment in Google Apps based cloud IT infrastructure gave 830% ROI to 2nd WIND. 

You will find a number of other examples on the Nucleus Research web page describing how investments in IT have paid good dividends to some of the most competitive companies. Through the strategic use of IT, businesses can take their operations to the next level of performance and deliver results.

Where to find growth in the post QE era?

The market turmoil over the last few weeks has indicated that businesses are uncertain where they will see growth, now that the QE has ended in America and the interest rates are on the rise. The Chinese economy which had overheated, is now cooling off and the demand for oil, iron ore, copper and other commodities are dropping along with their prices. China is suffering from an over-capacity problem right now.

I think in this environment, the input costs for manufacturers would be very low since the price of oil is at an all time low and the price of copper and iron ore are also close to their all time lows. This should boost the margins for the manufacturers if their sales are constant. So all else being same, the manufacturers should be able to report better profits. 

But the demand side is weak as the consumer is not spending a lot of money. This is due to the fact that they are cautious in this uncertain environment. In this situation, lowering the prices could be a good solution to increase sales. Considering the low input prices, manufacturers of goods should be able to sell their goods at a much lower price now vis a vis one year ago. Price of oil has dropped from the $50-60 range in 2015 to $30 per barrel today.   Iron ore prices have dropped to a third of where they were one year ago.  Copper prices are down 8% year over year. 

There could be demand for commodities from building heavy infrastructure such as a rail road in Afghanistan or solar power farms in Sahara in Africa. India, which is facing a power deficit right now, is planning to build 5 new nuclear reactors in collaboration with the French. I think there are business opportunities and investing opportunities present today that could yield dividends going forward.

Happy New Year 2016!

2016 started with a bang as the Chinese markets crashed 7% before trading was suspended. You can find a good account of the opening day volatility in the markets in this blog post by Caroline Hyde, a correspondent for Bloomberg News.

The weak PMI data that came out just before the crash is just the straw that broke the camel's back. US tightening and anticipation of further rate hikes could be the prime mover here. China relies heavily on US consumption for manufacturing exports and the impact of the US rate hikes should have been felt in China much sooner. With further rate hikes slated in USA, there is no hope of a demand side stimulus. 

On the question of interest rate increases in USA, it seems USA is not yet ready for more interest rate increases. The biggest loser on the rate hikes could be the US government, which could see a rise in bond yields as demand for low return assets would reduce corresponding to the higher cost of capital in borrowing from the Fed. However the market uncertainty from the rate hikes is so high that the risk adjusted return from government bonds is still attractive, as was evident in last rate hike, when the government bond yields actually reduced. Link to related Bloomberg story.

China is sitting on another time bomb right now which is the state and municipal debt. The state and local governments are under increasing pressure to raise revenues to sustain their high debt levels, and the weak PMI data maybe an indicator that this may not be an easy job. Link to related Bloomberg story.