The science of economy is something which I don’t understand, seriously! Noble laureates give their theories, experts write essays, but an engineer like me understands only physics. Whatever goes up must come down! It is the theory of gravity. Sometimes it goes up slowly and comes down fast with a thud. Sometimes both speeds are similar. Economic growth goes up swiftly and comes down slowly sometimes. India has been lucky that it came out of the 2008 recession reasonably unscathed and bounced back for the last eight years to a decent growth rate of 6 to 8%.
Many factors lead to growth. Similarly, different factors slow down the economy. These factors are market sentiment, buying power, and so on; the Indian economy since independence did not show correct growth due to a parallel economy. The parallel economy, in the local language, is called Black Money. What is black money, and how does it get generated? Many businesses like construction, land dealings, trade pay each other by cash. Cash payment is made to avoid Income Tax. A part of business activity is never shown on paper. When there is “no business” there is no profit hence no Income Tax. The parallel economy also grew because of unprecedented corruption activity. Nobody takes bribe by cheque, so spending is also done in cash.
In some cases, corruption is in kind by gifting condos, high-end cars, or items which can be bought in cash. Such gifting is done in the name of non-earning spouse or a relative. In Many cases, such assets are “Benami” assets in the name of one’s sweepers, peons and drivers. In a recent interview, Mahindra & Mahindra Chairman Anand Mahindra said that the economy has been going through a process of ‘detoxification’. Since the negative impact of disruptions is now over, the economy is expected to see an upside in FY21, Bloomberg TV reported Chairman Mahindra as saying at an event in Davos, Switzerland. “The prime minister has been quite obsessed with the kind of growth he wants, and that is transparent, free of corruption” Mahindra also said. He also felt that the upcoming budget is expected to be watched closely by different quarters of the economy amid the slowdown.
The Indian economy is seeing a slowdown for some time now on account of a fall in consumption and demand. The government announced a slew of measures in the past few months to revive growth ranging from bank recapitalisation and boost in liquidity.
The perception right now is that government actions caused the slowdown. But on the other hand, if you are going to detox yourself, you always have a process of cleansing before you start recovering and running again. Demonetisation and GST were the part of disruptions that have now ended, and the economy is already seeing signs of life. From the next fiscal, India will surprise the world on the upside is the general market sentiment.
The International Monetary Fund (IMF) recently slashed the growth estimates for both the Indian and the global economy. The global growth is expected to reach 3.3 per cent in 2020, compared to 2.9 per cent in 2019, the slowest pace since the financial crisis a decade ago. The Washington-based international crisis lender revised downward India’s GDP growth projection to 4.8 per cent for FY20 and 5.8 per cent for FY21. “India’s domestic demand has slowed more sharply than expected amid stress in the non-bank financial sector and a decline in credit growth,” the IMF report said.
Detoxification had to be done. It has not eliminated black money. But the reports say that it is reduced to some degree. The government is relentlessly after the businesses and businessmen who have cheated their customers and banks. People like Modi and Mallya are in jail in Britain. Other business people like Sahara Subrata Roy, D S Kulkarni, Wadhawan are in prison. Unitech projects have been taken over by the government to give homes to 21000 people like you and me. The authorities did not have the guts to detoxify the banking system in olden days. The detoxification process has started bringing out huge NPA’s (non-performing assets) of many banks. These NPA’s were created with the help of bank employees sometimes. But many times, the businessmen cheated the banks. Under the garb of hidden NPA’s our economy was “doing well”. When the cleansing act began a few years back, the loan sanctioning processes became a little tougher. The result of more scrutiny was that credit availability came down. When the available credit comes down, business activity slows down. It is a spiral that any economy dreads. But system correction was a must.
Growth any any country cannot be perpetually high. As the base increases rate of growth is bound to come down.
On one side, the automotive industry has slowed down, but there are reasons like availability of Ola’s and Uber’s of this world. But there is a surprise that the SUV introduced by KIA is selling like hotcakes. There is going to be one more hurdle here; the government is pushing for Electric Cars or initially more efficient IC Engine Hybrid cars. These cars will be more expensive than current IC Engine cars; the young generation is now changing their thought process. They don’t buy cars, but prefer Uber and Ola; they rent homes instead of buying homes. India has now become number two in the world behind China for the Smart Phone market. Spending ways are changing.
I am happy about this downturn for another reason. Gita Gopinath from IMF explained that the Indian recession has caused a 0.1 % reduction in the growth rate in the world economy. It indicates that India is not a small cog in the world economic wheel. At the same time, she has also said that the worst for the Indian economy is over, and it will start the upward movement in growth rate from this year 2020! The statement will disturb some people because they hoped that bad times would continue. Each group has his/her agenda! Some for political reasons and others for TRP reasons! The lousy news is THE news!
Indian economic experts had made similar predictions and statements! But we believe in someone who sits in cool climes; even if the person is desi, it is okay! Old habits die hard!
I have observed an interesting thing in international diplomacy. Turkey and Malaysia had no business to poke their nose in the internal affairs of India. They made some statements which were not necessary. When India protested, they continued in the same vein expecting the docile Indian response of yester years. But they must have got a shock of their life. India kicked them where it really hurts. India had ordered one ship worth US $2.2/ billions, on Turkey; it was put on hold. For Malaysia, India was the most significant customer of refined palm oil. A few hints here and there, the purchase pattern changed within a few months. Indian traders switched over to Indonesian palm oil. Malaysia was shocked, and they have no option but to accept it. Their prime minister accepted that Malaysia is too small to retaliate. They are trying to offer some sweet deals to India. But India is ignoring them.
Friends, in the economy of any country and for that matter world, there are always cycles of growth and downturn. A downturn can be because of market sentiments, inflation and sometimes the combination of two, stagflation. The experts of every country find ways that suit their economy. Japan for years is not doing great because of their efficient methods of working. The Japanese markets are too small for some of their giants like Toyota, Honda, Docomo. They have no option but to export and open plants in different countries. The German case is also like Japan because its economy is entirely dependent on the exports of superb engineering products. The economies of different countries are now changing from a global open market to the one which is suitable for own requirements. The US has become a leader of such self centered thoughts.
It is going to be a game of diplomacy where each country will look for ways which will be to their benefit only. Brexit is a latest classic example of this thought process. In each country, the opposition plays the political games of troubling the incumbent governments. Whichever is the government in any country, they can make mistakes, but they all put the interest of the country ahead of everything else.
For commoners like you and me, it is necessary to be remember that economic activity is a cyclic process. It goes down and then it bounces back; we need not worry about these issues.