The first estimate for the full year (i.e 2008-09) GDP came in at 6.7%. While this is lower than the government's projected 7.1%, it was higher than my expectation of 6.5%. A closer look at the number reveals that agriculture and government expenditure carried the day for the economy in the latest quarter. Agriculture, which showed a negative growth in Q3 (-0.8%) recovered in Q4 to register a growth of 2.7%. On the expenditure side, it is the government expenditure that stood out. During Q4, Government Final Consumption expenditure grew by about 21.5% YoY, leading to an increase of 20.25% between 2007-08 and 2008-09. The important question is, would both these stimulus continue in the current year. Quite unlikely. Given the extent of fiscal deficit and the likely tax incentives being talked about, the ability of the government to continue to provide the impetus is questionable.

On the other hand, what is a worry is the manufacturing sector, which contracted by 1.4% in Q4, while in Q3 the growth was a mere 0.9%. On the expenditure side, there is a clear tapering off of private consumption. The Private Final Consumption Expenditure (PFCE) grew by a meager 2.7% YoY in Q4, thereby dragging down the annual increase to only 2.87%. Even capital formation (Gross Fixed Capital Formation) has shown signs of tapering off. Problem is, domestic demand constitutes a large chunk of GDP and a slowing domestic demand is definitely not a good news for the economy. Even external demand is likely to be soft given the global scenario. While there are some signals that the US economy might bottom out, a closer look at the data does not give confidence that there will be a 'U' shaped recovery. There is every chance of another dip going forward. And the less said about Europe, the better.

Agreed, the new data point gives some scope for optimism for India, but I strongly believe that the market is banking too much on early recovery and maybe even more on the government's ability to take reforms to a newer height. I feel one need to wait and watch to see how much the government is able to deliver. Till then it is better to remain cautious.

Came across a news item today about oil price touching USD 60 per barrel. The report had a bullish undertone. It talks about analysts being bullish about oil prices because they expect a global recovery soon. What is more surprising is that they are talking about a 'V' shaped recovery.

I am not willing to subscribe to this view. I am not sure that they are aware of the magnitude of the global economic problem. While most of them are banking on US led recovery, fact is, it is not going to happen any time soon. An economy that so critically dependent on domestic consumers US is in a very difficult terrain currently what with their consumers being highly indebted. Despite some correction, the current US household debt to disposable income ratio is as high as 130%. This excessive leverage situation is nearly a seven year old phenomenon. It started moving up from nearly 100% to this level from 2002. This was aided by benign global interest and inflation scenario and huge flow of credit. This was aided by increasing wealth through rising house and equity prices. As the speculative bubble started to build up, the lending instiutions lowered the bar for their lending practices, as they relentlessly started chasing income. The risk appetite increased so much that soon price of risk fell to zero and anybody and everybody jumped into the bandwagon. Artificial demand for houses, jacked up the prices. With every rising house prices, US consumers started withdrawing equities in hude numbers, givnig them more (yet artificial) purchasing power. Easy availability of credit and rising demand boosteld corporate profits and hence the equity markets also went on an overdrive. All of these positive developments fed into each other and the bubble kept on building up. As long as this positive sentiments was there, the US household somehow managed the high debts.

But that was then and this is now. With house prices collapsing and equities hardly giving much comfort, the wealth effect has vanished. the problems in the financial market has crept into the real economy. Now, not only are the consumers virtually unable to repay their debts, their wealth has also been reduced to a fraction of what it was earlier. Added to this is rising unemployment as the economy is tanking. Hence they are dramatically cutting back on their spending.

However, all of these developments are quite known. What nobody is giving a thought to is the huge amount of deleveraging that is waiting to happen from consumers who are too much too leveraged. Fact is, dramatic rise in debt was accompanied by a steady decline in the personal saving rate. The combination of higher debt and lower saving enabled personal consumption expenditures to grow faster than disposable income, providing a significant boost to U.S. economic growth over the period. However, in the longer run, consumption cannot grow faster than income because there is an upper limit to how much debt households can service, based on their incomes. For many U.S. households, current debt levels are clearly too high, as evidenced by the sharp rise in delinquencies and foreclosures in recent years. To achieve a sustainable level of debt relative to income, households may need to undergo a prolonged period of deleveraging, whereby debt is reduced and saving is increased. After a long gap, savings have indeed started to increase. But the indebtedness is still very high and there should be a lot of deleveraging happening before things s The minimum that should happen is that, the debt to income ratio should atleast fall to 100% if not less. While this will lead to increased saving, what it would mean is that consumer spending would need to come off a lot to accommodate this. Corollary - the US economy would continue to falter in the coming years as this adjustment takes place.

Coming back to where I started, the oil prices are unlikely to move much beyond USD 60 per barrel purely on the basis of rising global demand. No 'V' shaped recovery is on the cards. Even when the recovery happens, it is most likely to be 'L' shaped before taking the shape of a shallow 'U'. Hence, the only way oil prices can go up is if there is a supply shock.

I am back after a fairly longish break. Was in Kolkata to chill off in peak summer. What a contradiction. What made my trip memorable was a reunion of our school mates. A number of Patha Bhavan alumnus ('85 secondary and '87 higher secondary batches or both) met up in Floatel, a great concept of a restaurant in Kolkata. Plenty of credit for making us unite goes to Facebook. Great to meet up with old pals after nearly 25 years. Even more humurous to see structural changes in most of us. I ended up greeting a few of my friends with embarrassed smile since I could not connect their name with their current structure. Thankfully, I was not the sole culprit. That's the only consolation though. Infact, my current structure hardly gives me any solace. Most of the girls of our batch though were in propah shape. Not surpisingly they danced with gay abandon while many of us guys huffed and puffed as we desperately tried to keep up with their pace. Knowing my limitation, I thankfully did not dare to venture into such rib shaking adventure. Discussing the glorious past itself was so very rejuvinating.

Talking of structural changes, the great Indian democracy put its indelible stamp last Saturday when they allowed the Congress led UPA to come to power. I was on a train then, on my way back to Kolkata. Recession takes its toll you see as train makes more economic sense than a flight.

As for the result, while I am not really enamoured with Congress, I am really happy to see a majority for a single coalition. As a Bengali, I am even happier to see a complete rout of the communists, though I am not convinced that Trinamool is a better alternative.

However, I was really taken aback by the market reaction, especially the movement yesterday. I see no fundamental reason for the market to react such. All of these views have been enumerated in my article which is likely to be published today at www.atimes.com. Once it's done, I will upload the same in this site in the articles section under 2009.

I used this opportunity to sell some shares today which moved up virtually 50% in two days. Of course I intend to buy those back soon.