The Next Shale Oil Boom

For any O&G investment what matters most is what the price of oil will be after you spent the CAPEX and start pumping.

On one hand that depends on what is the fundamental price, by that I mean what Warren Buffett calls the “intrinsic value”, what International Valuation Standards calls the “Other than Market Value”, and what the Saudi’s call the “Fair Price”.

That’s when there is equilibrium, when the price is low enough so the customers can afford to pay without either (A) going badly into debt, or (B) abandoning their cars and riding bicycles; and there is of course a choice on that; although thanks the glories of fiat currencies most customers go with Plan A.

While at the same time providing sufficient incentives for E&P companies to develop new sources to replace the oil that is being used up.

It’s hard to judge what that (theoretical) number is; different people have different ideas. Five years ago the Saudi’s were saying it was $75 and so when the price headed up to $120 (Brent), they started saying, “guys, this is going to end in tears”. And that’s exactly what happened.

On the other hand, the price you are likely to get after you spent the CAPEX depends on what the rest of the world was doing while you were spending it. If they were all drilling like crazy then likely you or more likely your bankers, will be tearful when the time comes to open the tap, but if they were not, then you got champagne all-round.

What the Saudi’s were saying (five years ago), was that $120 oil would suck in drillers who could only make money if the price was a lot more than $75, particularly if central banks were throwing money at them and in the case of shale oil, Wall Street was happily writing derivatives hedging forward production at $100. And that’s what happened. So now there is a glut and there are tears all-round. Which was entirely predictable, what’s most surprising is why everyone was so surprised?

But something really surprising happened during the time that the oil price was more than $100, which was not predictable although not entirely surprising.

In 2013 the break-even oil price at wellhead for shale oil ranged from $70 to $95; average about $80. According to Rystad Energy in 2015 that had fallen to $40 to $50 (average about $45); what changed was the technology and infrastructure improved, in 2016 with two out of three drilling rigs stacked there are likely bargains galore for anyone brave (or foolish) enough to take a gamble which could push the breakeven down even more. That change is illustrated by the change in new shale oil brought on line per rig deployed (from analysis of EIA data).

In three years before the oil price tanked, new production brought on line per rig deployed, nearly doubled. Over the past eighteen months it has nearly doubled again and although that is likely due to an increase in a slowdown in bringing on line “drilled but uncompleted” (DUC) wells, there is likely an element of refracking involved.

Leaving aside what the customers can afford to pay, and clearly thanks to QE everyone had the means to take on a little more debt so they could avoid trading in the SUV for a bicycle, so that’s a hard number to judge; and in any case if the world could (thanks to QE) “afford” $100 oil it ought to be able to afford $30 oil or something in –between.

So, leaving that aside, the fundamental price is dictated by how much it costs to bring on more supply in any quantity, what changed is that cost changed, just like after the 1980’s oil spike, the investment in offshore technology provided the means to bring on new oil, except in that case they couldn't switch off the oil found during that bubble, so there were tears for years. Shale oil is different.

Looking at the likely “fundamental” price now another way; what happened when oil was $100 was a classic bubble, fueled like many bubbles by easy money, on one hand so that the customers could “afford” to pay the price, and on the other hand by derivatives that insured the future price at $100, just like the derivatives written by AIG propped up house prices. Then there was a bust.

Don’t believe what the central bankers say about how smart they are when they create bubbles; bubble & bust is (net) zero sum, they create no long-term economic value; so the amount of money paid out more than the fundamental (sellers won and buyers lost), must, mathematically equal the amount the buyers “won” when the price ended up below the fundamental (sellers lost and buyers won).

That’s what happened in the housing bubble and bust, and to stock-markets. Do the arithmetic, what that means is that when there is a bust, at that time the fundamental is roughly equal to the square-root of (the price just before the bust ($105) multiplied by the price at the bottom of the bust ($30)) = $56

That’s a second-guess for roughly where the price is headed, back to the fundamental after a period of bubble and then bust; intriguingly that price is similar to what looks like the price at which shale oil drillers can start to make money; and what gives confidence to that number is it worked out pretty much the same using two totally different valuation methodologies.

When it gets there is hard to predict, perhaps OPEC and other producers who have conventional oil will throw in the towel, in which case that will be soon; and until they do, they will suffer more than the shale oil drillers. They have failed to make shale oil go away, they can keep pumping as long as they are able, but their wells are depleting too, and most can’t afford to go after new oil unless the price goes to $75 or more.

If they don’t slow down and continue to pump as much as they can, the shale oil drillers will have to wait until about two-million barrels per day gets depleted. Depletion of conventional supplies is running at about 300,000 barrels per day per year. Shale oil is depleting (net) at about 85,000 barrels per day per month; that will rise a bit perhaps to an average of 100,000 per month over the next twelve months; so rough numbers, perhaps 15-months to go until $56 is reached.

If the shale oil drillers can bring in the goods at about that price, not just in USA, but also in Argentina and Australia, the next ten years will be all about shale oil.

Rupee Bolstered by Indian Growth Prospects

Exchange rates, among other things, might reflect the relative fundamentals of the economies included in the currency pair, as well as the potential substitution effects from adjacent currencies.  In the case of the Indian rupee (INR) and the U.S. dollar (USD), the long-term drivers related to divergent demographic patterns – the youth of India and the aging of the United States – could not be more striking or important.  And while the demographic divide frames the primary challenges, the substitution effects of how India fares relative to other emerging market economies can also play a very large role in determining the INR/USD exchange rate – in the short-term and long-term.

India has strong growth prospects, benefits from low commodity prices, and offers relative political stability. As such, the Indian rupee may stack up well against other emerging market currencies...

In this report, we start with a concise discussion of the demographic divide between India and the U.S. which raises the possibility of long-term economic growth differentials colored by substantial political and economic risks.  Then, we turn to substitution effects in foreign exchange.  Just because an exchange rate is a currency pair, in no way does that mean what happens in adjacent markets cannot have a huge impact on exchange rates, including the potential for “contagion” effects when global risks are rising appreciably. Indeed, in this era of very low or even negative policy rates from major central banks, at some point the global search for yield may find emerging market currencies, and the Indian rupee, more than worth the additional risks.

Policy Challenges of the Demographic Divide

Demographically, India is young and very large.   There are 680 million people under the age of 30, or over 50% of a population topping 1.2 billion – the second largest in the world after China.  Less than 6% of the people are over 65, meaning very few people leave the labor force each year.  And, over 20 million young people arrive at the age for entry level into the job market every year.  Creating jobs is absolutely key for political stability.  Failure to grow the economy can cause huge disappointments and raises the risk of political uncertainty.

                By contrast, U.S. baby boomers, born roughly between the late 1940s and early 1960s, are now retiring.  Just over 14% of the U.S. population is already older than 65 years of age, and that percentage will be rising steadily over the next decade.   Retirees do not consume as much per capita as they once did in their peak-earnings years.  The baby boomers, indeed, were known for their embrace of leverage and consumption, and many are now realizing their savings are insufficient for retirement.  In their retirement years, boomers may become increasingly frugal.  And, the economic drag from the aging baby boomers is not going to be offset by the millennial generation, at least not for next decade or two.

Moreover, while there are more young people arriving at the age of entry to the U.S. work force than people hitting retirement age, the net annual job creation required to keep the unemployment rate stable might be as low as 1,000,000 to 1,250,000.  That does not mean that creating jobs is not important for the U.S. economy, but the job creation challenge in order of magnitude is less than that for India.  India has no drag from retirees, while enjoying an extra push as the average age of workers rises toward their years of higher productivity and incomes.

Figures 1 & 2: Population Pyramids for India and the US for 2020

There are some basic exchange rate drivers that emerge from this economic divide.  Economic growth differentials are expected to favor India by a large margin, albeit with considerable economic and political uncertainties about the government’s ability to steer the economy.  Our analysis suggests that the potential real GDP growth rate for the U.S. has dropped to about 2% annually, while potential real GDP growth in India is probably in the 5% to7% range annually.  In our view, this wide and persistent growth differential swamps any risks associated with trade imbalances.

                There is also an inflation divide, as economies with a compelling need to create jobs also tend to have a policy bias toward a modestly depreciating exchange rate and allowing for more inflation than mature industrial economies would prefer.  From an exchange rate perspective, relatively high economic growth potential favors the Indian rupee, while low inflation favors the U.S. dollar, but this is before considering monetary and fiscal policy or factoring in global currency portfolio substitution effects.

Monetary and Fiscal Policy Considerations

Monetary and fiscal policy matters a lot.  The U.S. Federal Reserve generally feels that 2% real GDP growth is substandard, and that an absence of inflation pressure is not desirable.  Hence, the Federal Reserve (Fed) has only recently abandoned its zero-rate policy in favor of a small 0.25% rate increase in December 2015, and offered guidance that as many as four incremental rate rises might come in 2016.  The market consensus differs from the Fed guidance, however, and expects future rate hikes to be long-delayed, possibly with only one small rate hike in 2016.  This accommodative monetary policy stance largely removes the positive influence of low relative inflation for the U.S. dollar.  And, fiscal policy, which might be used for tax reform or structural spending, both of which offer some potential to encourage U.S. economic growth, appear off the table in these times of highly-polarized U.S. politics and Presidential-Congressional gridlock.

                From a policy perspective, India stands in stark contrast to the US.  Not long ago, Indian inflation was touching 10% and has now declined to just under 6%.   The decline in inflation was due, in no small part, to India being a major beneficiary of lower energy and commodity prices globally.  Although we must note, in India’s case some of the benefits of low commodity prices accrue to the Government in the form of lower energy subsidy costs rather than to consumers.  The Reserve Bank of India (RBI) has taken advantage of the reduced inflation rate to lower its policy interest rate to 5.75%.  Of note, like the U.S., the RBI’s policy rate does not offer any premium over the current inflation rate.  This results in a relative neutral impact on the future exchange rate from a comparison of U.S. and Indian monetary policies.

Risks and Portfolios Substitution Effects

Interestingly though, while bilateral comparisons of economic fundamentals are important for exchange rate analysis, a better appreciation of possible risks and currency portfolio substitution effects may well be the determining factors for the INR-USD exchange rate over the coming year.   For example, emerging market currencies as a group have tended to be under stress since May 2013 when then U.S. Fed Chairman Ben Bernanke initiated the debate about when quantitative easing should be withdrawn.  From 30 April 2013 through 29 February 2016, emerging market currencies have declined across the board versus the U.S. dollar.

Emerging market currencies may be entering a very different phase in 2016.  While the U.S. Fed may choose to hike rates all of 0.25% in 2016, it has become clear the lack of inflation in the U.S. and a lowered potential economic growth rate will keep the Fed far away from considering any form of aggressive removal of monetary stimulus.  And, other major central banks from the European Central Bank to the Bank of Japan are expected to continue their quantitative easing programs, which along with negative or penalty interest rates for deposits held at these central banks, have led to negative yields along much of the Government bond maturity curve.  In this low-rate financial environment in major countries, one can expect investors to increase their search for yield wherever they can find it – and that would include taking another look at emerging markets.

Figure 3.

 This brings us to a discussion of relative risks among substitute currencies.   Of course, one could buy a basket of emerging market currencies and diversify the risk (and the return) or one could examine the relative risks among different currencies and be more selective.

India is not without some obvious risks.  Droughts have hurt farmers and some are protesting government policies.  Fiscal subsidies for energy, electricity, and water have created large budget deficits and disrupted market price signals leading to poor resource allocation.  And while the Government of Prime Minister Narendra Modi was elected in 2014 amidst enthusiasm for reform, real change has proved very slow in coming and political protests are on the rise.  For all these risks, though, India still looks very good on a comparative basis.  India is a clear beneficiary of low commodity prices, as noted above in the discussion of relative fundamentals, and lower commodity prices are helping to reduce the cost of Government subsidies.  And while there is plenty of political uncertainty in India, it is hard to argue on a relative basis that India is in any way unique from other emerging market countries, from Brazil to Turkey to Thailand – not to mention the uncertainties related to the U.S. Presidential election in November.

On net, our perspective is that when one does the homework on the various factors that could impact the Indian rupee (vs the U.S. dollar), the striking fact is that there are very few countries able to grow consistently at 5% real GDP annually in this low-commodity price, slow-growing world.  Among global financial markets searching for yield, India is likely to find growing enthusiasm despite some considerable risks.  India has strong growth prospects, benefits from low commodity prices, and offers relative political stability. As such, the Indian rupee may stack up well against other emerging market currencies and this may help explain why the Indian rupee depreciated less than other emerging market currencies during the “contagion” phase.

Figure 4.

Nifty.

NO FRESH FIGURES FOR NIFTY TODAY AND TOMORROW BEING AN EXPIRY WEEK!!

Gold In India

A tarnished appeal

India’s government tries to curb imports of gold—again

• 
  
• 
  

A SMALL room on the eighth floor of Mumbai’s former cotton exchange is where jewellery goes to die. At the Master Bullion Assaying & Hallmarking Lab in the heart of the gold district, superheated crucibles melt elaborate bangles and earrings into bars a central banker might recognise. This alchemy is being promoted by the government under a new “monetisation” scheme designed to reduce India’s imports of gold: the melted bling can be traded for a bond which will return the same amount of gold several years down the line, with interest of up to 2.5% in the interim.

Gold is the bane of India’s exchequer. Indians vie with Chinese as the world’s biggest consumers, buying just under 1,000 tonnes a year and stashing it in anklets, safe-deposit boxes and Hindu temples. As all but a few bangles’ worth is imported, only oil accounts for a bigger share of India’s trade deficit. To put it another way, the imports cost India more dollars every year than it attracts from foreign institutions investing in stocks and bonds, points out Ajit Ranade, an economist.

Although Indians have traditionally used gold as part of a bride’s dowry and as an offering at temples, demand has ballooned in recent years. In 1982 they consumed just 65 tonnes of the stuff. Decades of inflation and a much-debased rupee have pushed savers towards what is, in effect, a convenient way to insulate their nest-egg from the poor decisions of India’s policymakers (and, just as often, from its tax inspectors). In rupee terms, in other words, gold has been a stellar investment.

Getting Indians to forgo gold for weddings and religious offerings is probably a non-starter. Easier to target the portion that is bought as an investment, especially in rural areas where banks are scarce and mistrusted. The government hopes it will gather 50 tonnes of gold through its bond scheme—a modest target given the country’s 20,000-tonne pile. Yet four months in only three tonnes have been gathered.

That is hardly a surprise: government schemes to collect gold have disappointed since at least 1962, when Indira Gandhi, then the prime minister’s daughter, handed over her own finery to finance a border skirmish with China. Though gold and a government bond backed by gold are much the same on paper, they do not hold the same appeal for those who favour gold as a store of value. Indians who are comfortable with paperwork and banks simply aren’t big holders of gold, points out Gurbachan Singh, an economist at the Indian Statistical Institute. By the same token, most Hindu temples, many of which have hoards of gold donated by the pious, have steered clear of the scheme, despite pressure from the government.

Policymakers have other ways of making gold less appealing. A modest excise tax in the recently unveiled budget has kept jewellers across the country on strike for a month. Gold sellers were already furious at import duties and rules forcing them to identify customers buying more than 200,000 rupees’ ($3,000) worth. In addition, the central bank is discouraging lending to buy gold.

Several trends suggest gold may eventually lose its lustre. Inflation has fallen dramatically, reducing its value as a hedge. A government scheme is giving hundreds of millions of people bank accounts for the first time, providing them with an alternative way to save. Young people are said to be less interested in wearing gold jewellery than their parents.

If the government really wanted to accelerate this shift, it could change its own ways. Various laws steer a big share of bank deposits into low-yielding government debt and agricultural loans. That, in turn, means that Indians earn little interest on their savings, enhancing gold’s relative appeal. Such financial repression helps the government fund itself cheaply. But it means that Indians are sitting on gold equivalent in value to four months of economic output. That could be financing productive investments instead.

Nifty

Buy Nifty @ 7640

Stoploss 7540

Has China Really Reached Peak Steel?

The consensus view among commodities analysts is that China’s steel consumption peaked in 2013 at 735 million metric tons. That would be bad news for iron ore producers. But a recent analysis suggests that China’s “peak steel” moment may not come until 2040. Although China’s per capita steel consumption will likely fall in the next few years due to the country’s economic slowdown, the country’s urbanization shift continues, and urban populations use more steel than rural ones (cities need steel to maintain and expand infrastructure, and urban dwellers tend to have more vehicles and appliances than their country cousins). While  analysts believe China’s urban steel consumption will fall from a peak of 765 kilograms per person in 2011 closer to 600 kilograms, projections indicate that the percentage of China’s population in urban centers will rise from 54 percent in 2014 to 67 percent in 2030 and between 70 and 80 percent in 2040. As a result, China’s total steel consumption will likely approach 900 million metric tons by 2040. 

Nifty..

Buy Nifty @ 7710-7640

Stoploss 7600

HAPPY HOLI!!!

HAPPY HOLI WEEK TO ALL THE INVESTORS AND TRADERS!!!

ENJOY THESE FESTIVE OFFERS FOR YOU ON THE FESTIVAL WEEK!!!!!

Standard Packages

PACKAGES	ORIGINAL RATE (RS) ANNUALLY	HOLI OFFER RATE (RS) ANNUALLY
INDICES (NIFTY AND BANK NIFTY)	30000	25000
PREMIUM EQUITY FNO	180000	150000
PREMIUM EQUITY INVESTMENTS WITHOUT REPORT	180000	150000
PREMIUM EQUITY INVESTMENTS WITH REPORT	250000	200000
PREMIUM EQUITY FNO AND INVESTMENTS	300000	250000
COMMODITY PRECIOUS METAL	45000	35000
PREMIUM COMMODITY ALL	150000	130000

Customised Packages

Choose any scrip of your choice to trade continuously in Futures Equity or commodity

NO OF SCRIPS	ORIGINAL RATE (RS)  ANNUALLY	HOLI OFFER RATE (RS)  ANNUALLY
1	20000	15000
2	30000	25000
3	40000	35000
4	50000	45000
5	60000	50000

 

NO OF COMMODITIES	ORIGINAL RATE (RS)  ANNUALLY	HOLI OFFER RATE (RS) ANNUALLY
1	25000	20000
2	45000	35000
3	60000	50000

Remember

The Above Offers are only applicable for annual subscriptions. They are purely formed for the occasion of HOLI 2016 and is valid from 24^th March 2016- 30^th March 2016. The discounted offer will be discontinued immediately from 31^st March 2016. The subscription will start on 1st April 2016. The subscribers will get the same benefit which are given to our regular premium members but they will get cost advantage over our free flag members. If you are a daily trader then we are not the correct adviser for you.All the above rates are inclusive of the taxes.

India seeks to boost its manufacturing industry and cut the trade deficit.

The India-China trade gap

Arrive full, leave empty

·            

 

SHIPS leaving Nhava Sheva port, across the harbour from Mumbai, tend to ride higher on the water than when they arrive. India’s trading statistics explain why: steel and other industrial goods from China weigh down the ships as they come in, to be replaced on the way out by fluffy cotton bales, pills and—given India’s perennial trade deficit in goods—empty containers.

India’s economy grew by 7.5% last year, cruising past China’s 6.9% growth. Yet the deficit in goods trade with China continues to widen (see chart), to over 2% of GDP last year. For Indian policymakers this is an irksome reminder of the weakness of the country’s manufacturers. Halving the trade shortfall with China would be enough to eliminate India’s overall current-account deficit, and thus the need for external financing.

The government’s ideas for shrinking the shortfall have been sadly predictable. The minimum import prices it imposed earlier this month on various grades of Chinese steel, which it claims are being “dumped” below cost, come on top of other anti-dumping levies and taxes on steel and myriad other products, from raw silk to melamine dinner sets. No country has used such measures as energetically as India over the past 20 years, according to the World Trade Organisation.

The commerce minister, Nirmala Sitharaman, has called for a devaluation of the rupee to curb imports and boost exports. Yet the rupee has been falling against the yuan for years, with little effect on trade. And a weakening currency could revive inflation, which falling oil prices and sound monetary policy have helped tame.

The government looks longingly at manufacturing’s 32% share of China’s GDP, roughly double the Indian figure. It sees factories as the ideal way to soak up the million-odd young workers who join the labour force every month. So it is showering sops on various industries. It is handing out subsidised loans to small-scale and labour-intensive industries such as ceramics and bicycle parts. Lightly-taxed “special economic zones”, many of which are set up to benefit a single company, are in line for further handouts.

A “Make in India” jamboree in Mumbai earlier this month sought to present an image of openness to foreign investment, eliciting promises of multi-billion-dollar plants from firms keen to cosy up to policymakers. But India is trying to emulate China’s export-led manufacturing growth in a global economy that is now drowning in China’s industrial surpluses. It hopes to fill the vacuum left by its larger neighbour as Chinese wages rise, to double those of Indians, and its economy rebalances from exports to consumption. Yet so far it has struggled to seize that opportunity.

Indian firms grumble, with some justification, about their products being shut out of the Chinese market. Agricultural products, of which India is a net exporter, are largely excluded from China through various phytosanitary rules. Indian pharmaceutical firms complain that China’s growing aid to other developing countries often includes the provision of medicines—Chinese-made ones, of course—which means that the recipient countries buy fewer Indian-made drugs than they used to.

Why countries are so keen to agree new trade deals

India runs a global surplus in services, mainly by selling them to rich countries. But they are a small component of Indo-Chinese trade. China gets the best of tourist exchanges between the two countries: 181,000 Chinese tourists came to India in 2014, against 730,000 Indians who visited China. All this tortures Indians, for whom China is the biggest source of imports and third-biggest export market, but barely troubles China, for whom India is a second-tier trade partner. Indian policymakers are reflexively sceptical, for example, of China’s plan to build a road linking the countries, worrying it will only widen the trade imbalance.

If China’s consumers won’t buy Indian goods, perhaps its businesses could build factories in India instead? Some big projects have recently been announced, notably a $10 billion industrial park to be developed by Dalian Wanda, a Chinese property group; and a $5 billion plant proposed by Foxconn, a Taiwanese electronics outfit which mainly manufactures in China. Foxconn said last July that it might employ up to 1m Indians in 10-12 plants by 2020, despite suffering labour strife when it closed an existing factory last year. However, foreign investors’ projects often fall quietly by the wayside when bureaucratic obstacles prove insurmountable. Foxconn is already said to be rolling back its ambitions.

After years in the doldrums, India is enjoying its moment as the world’s fastest-growing large economy. That in itself will be enough to pique the interest of multinationals: Apple, for example, thinks a sales push in India can help make up for sluggish Chinese demand. Even so, it will be a while before its devices (whose assembly it outsources to Foxconn) are made in India. Instead, they will further weigh down the ships entering its ports.

Nifty..

Buy Nifty @ 7680-7620

Stoploss 7570

India is a light in a gloomy world economy

The country has shifted from socialism with restricted entry to capitalism without exit.

F

orty years ago I worked on the Indian economy for the World Bank. Ever since, I have been fascinated by the place. The ability of this huge and poor nation to sustain a lively democracy has been among the world’s political wonders. Yet its economic performance has fallen short of what it might have been. Despite improvements in policy and performance since the crisis of 1991, this remains the case. Nevertheless, India is now the world’s fastest-growing large economy. What might it be in future?

It is with this question in my mind that I have visited Delhi in recent days. It is hard to judge what is happening in terms of immediate performance and policy. But four conclusions emerge. First, Prime Minister Narendra Modi’s Hindu nationalist Bharatiya Janata party government, in power since 2014, represents continuity rather than the pro-market transformation many supporters naively expected. Second, short-term performance and prospects appear favourable relative both to the immediate past and to what is happening almost everywhere else. Third, medium-term performance should also be decent, provided the government implements the reforms it has already outlined. This is partly because India retains so much potential. Yet, fourth, it also faces risks, external and internal. Success must not be taken for granted.

Consider, then, the character of the government. It is centralised in the office of the prime minister. Its orientation is more towards management than to markets, and more towards projects than to policies. It has shown no inclination towards radical privatisation or restructuring of inefficient public monopolies. It continues to spend large sums on inefficient subsidies. To be fair, the upper house, which the government does not control, has so far blocked legislation where the government wishes to do the right thing. A salient example is the services tax — a national value added tax that would accelerate integration of India’s internal market.

An MP, from neither the BJP nor the Congress party, told me the government was “above average”. When it is compared with those of the past quarter of a century, this seems right.

When the government came to power, the economy was suffering from rapid consumer price inflation and sizeable fiscal deficits. Helped by falling oil prices, the former is down from above 10 per cent in 2013 to below 6 per cent. The central government’s fiscal deficit is forecast to fall from 4.5 per cent of gross domestic product in 2013–14 (April to March) to 3.5 per cent next year. The economy grew only 5.3 per cent in 2012–13. This is forecast to reach 7.5 per cent in 2015–16. The Ministry of Finance’s latestEconomic Survey forecasts growth at between 7 per cent and 7.75 per cent next year, albeit with downside risks. This would not be stellar by India’s standards. But it would be stellar by those of the world.

Performance, then, seems satisfactory. Will it remain so? Probably, particularly since the central bank should be able to cut interest rates below today’s 6.75 per cent in the next few months. Furthermore, after two poor years, the coming monsoon rains may well be bigger. Yet the near-term optimism must be qualified: first, exports, stagnant for years, are now falling; second, credit growth has slowed sharply; and, third, gross investment fell from 39 per cent of GDP in 2011–12 to 34.2 per cent in 2014–15. It is vital this is at least stabilised.

India could sustain growth at something close to current rates into the medium term. According to the International Monetary Fund, its GDP per head (at purchasing power parity) is just 11 per cent of US levels, against China’s 25 per cent. This indicates substantial room for fast catch-up growth. The economy is also reasonably well balanced. Dramatic transformation might not be in the offing: in the absence of a crisis, that was never likely. But improvements are on the way. They include accelerated infrastructure investment; greater openness to foreign direct investment; more effective administration; consolidation and recapitalisation of public sector banks; a proper bankruptcy code; freedom for states to compete on pro-growth policies; delivery of public assistance by means of the system of unique identification numbers; and, not least, the GST.

Nevertheless, India must not be complacent. The country has shifted from socialism with restricted entry to capitalism without exit: closing down businesses and laying off workers is extremely difficult. The latter is one reason why jobs in the organised private sector amount to 2 per cent of the labour force. Markets for land, labour and capital are all highly distorted. High protection at the border restricts the ability to participate in global value chains. Important product markets are uncompetitive. Even the vaunted information technology sector seems to be losing its dynamism. The overall quality of education is poor. In all, a huge amount of change is still needed. Yet pressure from a rising middle class is likely, in the end, to force much needed reforms.

This leaves three other risks. One is outright conflict, most plausibly with Pakistan. This at present looks unlikely. Another is a global slump. But a slump big enough to derail growth in a nation of India’s size and diversity, as long as it is well run, seems a modest probability.

A final risk derives from the BJP’s “Tea Party” — its chauvinistic, intolerant elements. Muslims make up 14 per cent of the population. One of the miracles of post-independence India is the way people divided by religion, caste and opinion have managed to live democratically and mostly peacefully, side by side. This is a great achievement. If it is to last, responsible politicians must remember that they govern for all Indians, including those they dislike or disagree with. Tolerance of differences matters in all democracies. In one as huge and complex as India, it is truly vital.