Monday, May 11, 2009

How the growth comes

Growth actually comes only when the consumers buy more products. With the population increasing at a steady rate, higher rate of money growth ensures that people buy more. It is this increased propensity to consume that creates overall growth. We would need more electricity, more turbines and more mining. So, if the consumer spend does not increase, and assuming that there is no existing unfulfilled demand, any other indicator measuring industrial growth would be pure a pure illusion.

Check this link -
In a survey conducted by CII for March April 2009, they have said that there is a slight improvement in the manufacturing sector. They have created some categories like negative, moderate and high growth and have said that most of the sectors have inched up in the March April period.

For first, the measures of classifying industries in the three segments have not been specified. I am sure that the survey must have had some measures, but the CII press release or the reporter, assuming a reader of limited intelligence, spared him of details. That these details would have allowed him to make his own unbiased judgement is a different story.

Inn many cases many surveys with an aim of proving growth. Their aim is of course something very noble - maybe to lead to an increase in the sentiment. They use, abuse and twist standard measurements to prove the hypothesis that they had started with. This is a major reason to give categorical data and avoid specifying the survey method and assumptions in reports. The company chieftains having an access to the complete report are of course too busy to go in to the nitty gritty issues.

As far as growth is concerned, without an increase in consumer spending all growth would either be for two reasons -
1. A buildup of inventory
2. Data / Method manipulation
An inventory buildup is nothing but postponing the slowdown. Besides blocking capital, it could have disastrous results of building up stocks that may not sell. Data and method manipulation is like a self fulfilling prophecy. It keeps the firms happy till the time they suddenly have to shut shop. This may be partly due to the psychological behaviour that says that humans create self belief worlds to avoid recognising situations that are potentially dangerous.

A good measure to measure the automobile sector growth would be to trace the out flow of auto loans issued by the finance companies. Finance industries are highly regulated and getting this data would not be a problem. Measuring gowth on the basis of factory dispatches would be skewed by the change of pipeline inventories with the dealers.

In all this circus I can conclude that companies are intent to hide the real growth or fall. They use selective measures at different points of time to prove the point they want to prove. Maybe in some other post I will discuss the motivations for this.

My simple prescription - macro indicators like growth can be measured by very simple and straight indicators. To make real use of the published growth indicators it is very important to investigate the method used and the assumptions. Any jubilation or a planned course of action without this simple probe would be a dangerous step.

1 comment:

Anonymous said...

hi sir,
the article on " how the growth comes " is really insightfull. very nicely you expalined the thing how growth comes from preassumed notions and motivations and the vice-versa. Plz write the reasons for the these motivations you talked about in the article. Also, please increase the frequency of posts in your blog as they are really worth reading.... bharat