Indian Economy 2019 Crisis : The Crisis of Consumption

Indian Economic Crisis 2019

  1. With GDP hitting 5%, there is mushrooming of experts with views as why economy has slowed down. Interestingly majority of them agree on one point thats is demonetisation and GST are the root cause of this crisis.
  2. Nothing can be father from truth and here here is counter point. If it was not for demonetisation, economic crisis would have hit us 2 years back. Demonetisation created a push of almost $11 bn to rural households (through money laundering) and kept rural consumption high – ex Escorts posted 5x profit growth / Britannia saw 23% revenue growth in Gujarat 
  1. It snot that GST / Demo didn’t do damage. The did huge damage due to botched execution of the whole exercise by officials. Unfortunately no action was taken to control/ manage it.
  2. Govt despite talk of minimum govt and control of bureaucracy, ended up being fully housetrained by it. back to economy – so what has killed the economy 
  3. Well if we go back to 2008, during world economy crisis, India survived world economic crisis not because of some genius. It was sheer dumb luck of 7th Pay commission arrears which created a windfall for Govt employees and in turn triggered house and auto sales. The real act by Govt to handle crisis was rescheduling of NPAs and imagining them to be normal loans. This continued greening of the book has to end some day and it was ending in 2017 but saved by demonetisation. 
  4. Like any other economy, Indian economy has been killed by Housing. Today unbuilt houses inventory is anywhere between $30 billion to $50 billion based on various sources.
  5. $30 bn to $50 bn capital locked! Interestingly this reported figure is only from formal side what about numbers on informal side.
  6. A household with a loan of 60 lakh for a house which is never going to happen, is not looking to buy a new car or another house or doing another capex. It is trying to recoup the loss and this is being done by rescheduling or moderating the consumption. This missing $30 bn odd money has triggered all the downstream lack of consumption.
  7. On other spectrum of this real estate melt down means that so many vendors / suppliers from cement to steel to small item manufacturers are without any hope of recovering this sunk money. 
  8. Thus $30 bn / $50 bn shock in liquidity given the velocity of money can easily translate into $ 60 bn to $150 bn shock money ( depending on as how you wish to look at it) 
  9. Interestingly Real estate was killed by two great men – 

      a) Dr Manmohan singh when he kept it artificially inflated by evergreening the books rather than using that opportunity to fix the sector. Dr Singh is probably the only economist in the world who tried to run a country with high inflation rate (10%+), High NPA and high interest rate and yet considered a great economist.

   b). Dr RaghuRam Rajan who stopped capital flow by stopping lending/ reducing bank exposure to solve NPA   without fixing the real problems of real estate. In a way, Dr Raghuram Rajan is that doctor who will solve   issue of blocked arteries by reducing blood supply.

12. Unfortunately Govt is doing everything other than solving this lock up of $30 bn usd in real estate. Indian Govt will have to come with something like STUTI ( Steel sector bail out in 2001) or US Govt bail out of financial sector in 2008 (TARP) to reignite the flow of capital and create sense of money in general public.

13. But these are short term band-aids. To fix economy in long run, Indian Govt will have to do out of box thinking like China did in 1990s.

14. But even before that, Indian Govt will have to come out of this black money syndrome and stop measuring India‚Äôs data with OECD countries. If you wish to have OECD countries Tax to GDP ratio, first get that OECD level per capita income and then that quality of life and then come to Tax GDP ratio. Today Indian tax/GDP ratio is at par with China, Indonesia, Thailand etc ( all these are doing far better than us).

15. The signs that we are sinking slowly economically, have been around for some time ie trade defict with China. $60 bn of trade deficit but more importantly the trade mix. Complex engg items vs raw iron ore or agriculture or marine!

16. Problems are real and deep. band-aid solutions which this country has been trying for last 15 odd years wont work.

17. The only way India can become $5 trillion economy in next 6 years is by doing real reforms on ease of doing business, enabling small businesses, and build a culture which is favourable towards rick takers / entrepreneurs.

18. That means interest rates which are at par with China, legal system which resolves issues in 3 months rather than 30 years, cutting excessive regulation and red tapism. 

19. It is high time that this crisis is used as an opportunity to fix long term issues impacting indian economy.Time has come to escape from UPA led economy model and start thinking in NDA mould.

20. The definition of insanity is doing the same thing over and over again and expecting a different result. 

The End

Shailesh Vickram Singh

Shailesh Vickram Singh is an entrepreneur / venture capitalist with more than 20 years of exp.