All across..

In the last few weeks, I have been thinking about the e-commerce space and the impact on the economy. India for instance has developed in the last half-decade a US$3+ bn e-commerce market (excluding travel). This has replaced the typical brick and mortar retailing which means retailing space worth an equivalent amount has been taken out of business (assuming 10% rental cost and 10% cap rate). This has spawned a another industry on the other side of warehousing and logistics which may be taking almost an equivalent proportion of e-commerce cost but delivering customer through an alternate, more convenient, channel. Whether this has made the economy more productive is an altogether different question but it has surely reduced cost to the consumer which at least yet seems to be been paid for by VC firms and the vendors.

*****

This gets me the next aspect of how the current expected recovery in savings (despite reduced cost of ecommerce purchase which is very small) and form of savings will impact the Indian economy. The economic identity to remember in these discussions in savings (imported or domestic) is equal to investments. In the past decade while we saved at 30%+ rates our capital formation levels have been 200-400bps higher which meant we needed to import savings, a large part of this came through portfolio investments and NRI deposits both susceptible to short term movements. The last year Indian savings has dropped to below 30% levels to ~27%. Savings levels have been severely impacted by the incessantly high inflation levels in the last few years. This should recover as inflation comes off with a decline in food inflation.

But the bigger question is as the new government comes in in May 2014 and tries to push the overall growth levels in the economy for which recovery of investments is critical, Indian savings is woefully short. This will require a massive concerted effort to attract and manage foreign capital as the gap between investments and savings will become much wider in the initial timeframe. And, channelling of foreign capital into the infrastructure sector will enhance the long-term trend growth of the economy. The other aspect is that a large part of the savings in the last few years has gone towards real estate. This should change as real interest rate recovers providing more productive usage of capital.

While household savings have declined, income inequality levels have also risen. The rich do not consume the same in proportion to their income is a fairly well-known fact which means continued pressure on overall demand.

We will continue to have bright sparks in the economy (even Spain has its Zara clothing brand) but the macro needs some able management. In a savings glut world with easy money, problem of under-investment is relatively easy to solve than over-investment in case of China.

*****

It is almost that the centre part of Eurasian landmass has come to political life all at once…

Russia has annexed Crimea whether the west likes it or not and little it can do about it. NATO is a non-functional organization which leaves US alone to respond. US given its weariness of the last 15 years is finding it difficult to get its bearings but it has no choice but to build a new containment strategy for Russia before we see further capitulations across eastern Europe or Balkans.

Turkey continues to convulse under the factionalism in the Erdogan’s grand coalition with the Gulen movement turning away and multiple scandals breaking out. In the end, Turkey’s elections are about finally controlling the key city of Istanbul which is the economic life-blood (40-45% of Turkish economy).

*****

Finally, the BJP in continues to be among the favourite to win the election with >220 seats but not by itself (or its pre-election alliance) have enough seats to govern India. While this trend has held for the last few months parties which have been in power with the Congress in the last 2 governments are finding this prospect increasingly difficult and given their support base they will be unable to participate in the next government. This is resulting in the Congress and these parties making more and more acidic attacks (i.e. chop Modi etc). Second, UP and TN seems like the most likely states which will make the difference between a 220 and 240 BJP position. And, politics at the center can be very different based on the distance from the 272 mark. If the BJP misses the 220 mark by a margin then be prepared for a massive dent in investment sentiment.

This one said by Lincoln may sound familiar to Modi governance style, “I do the very best I know how, the very best I can, and I mean to keep doing so until the end. If the end brings me out all right, what is said against me won’t amount to nothing. If the end brings me out wrong, ten angels swearing I was right would make no difference.” So be prepared for the new style..no remorse no recourse..