Indian Economy is not going into ICU – have belief, have patience – and the stage is being set for a robust growth

Low GDP growth, negative IIP numbers, low automobile sales and struggling businesses are some of the hot topics of discussions – more in urban India and to some extent in rural India. Concerns seem to be increasing, people seem to be losing patience and hope seems to be fading. away Some of the often heard statements are “Modi is just not able to manage the economy”, “things are now eventually getting out of control” and “we have given too much time to this government”.

I want to ask one question – How do you convert a multi storey building into a high rise tower – simply by adding floors or demolishing and rebuilding it with a stronger foundation? And if we rebuild, then the existing owners are unsettled in the interim, for those few years, but what they get is a far superior, contemporary and sustainable product. Our economic situation is pretty much the same – structural changes leading to cyclical slowdown.

In our selfish quest to aspire for our own welfare and well-being, most of the times we tend to overlook the bigger picture. The purpose of my article here is to try and highlight the complexity of the eco-system and how Indian government is trying to resolve in the shortest possible time, some of their priorities and efforts put in so far and when do I see growth coming back. In a normal scenario, most of the governments try to resolve the issues sequentially. This is probably the first time in the history of independent India that any government is taking up such diverse and multiple agenda items simultaneously.

Being a large democracy, every constituency has a view on every decision that gets taken, and why not. However, it is important to segregate the various constituencies and understand what role they are playing and their expectations and grudges. I will restrict the discussions in this article on the economic front to avoid any distraction from the main topic. However, I am trying to simplify this for people from the non-finance world to better understand the complexity – and if possible try to think what else can be done better to change the pace of reforms.

Just imagine we are living in a very large joint family / community of about 300 people. We have members with varied interests and abilities. Let us classify them into following constituencies. As you read the following paragraphs, try to visualize yourself in one of the constituent categories of this large joint family.

1. C1 – 5 family members are doing businesses which have no or minimal government intervention. These businesses are generating huge free cash and they have not borrowed from anyone. Mostly credible and satisfied people. Just want to ensure they keep doing things right.
2. C2 – 3 family members are running multiple businesses for generations. They have seen many ups and downs. They are in no hurry to scale up their businesses. They neither get perturbed by bad cycles nor get euphoric in good times. Credible and satisfied people. Will continue to grow their businesses as and when opportunity arises. Largely avoiding any harsh and aggressive decisions.
3. C3 – 4 family members are successful entrepreneurs. Credible. However, greed overtakes rationality. Start taking over ambitious, unrelated business calls. In fact, going to an extent of even pledging their existing wealth in hope of wealth multiplication. If tide is in their favour, wealth may multiply but if it turns against them, they may lose even their existing wealth. But then they claim, entrepreneurship is all about taking risk (forgetting that risks should also be calculated).
4. C4 – 8 family members are genuinely running their businesses but are very dependent on either government policies or government as an off-taker of their products / services. Even when their intentions are noble, black swan events keep hitting them.
5. C5 – 10 family members are running large businesses. But their focus is not to make money from business. They are more interested in setting up new projects, taking loans from lenders and don’t mind diverting funds and creating disproportionate personal assets. Businesses may lose money but their personal wealth is increasing multi-fold.
6. C6 – 80 family members are running small businesses. They may find it difficult to compete with other family members. So they try to manage by either compromising quality or by arbitraging on loop holes like tax evasion.
7. C7 – 50 members are employed by entrepreneurs in constituencies 1 to 5. They are relatively less influential and mostly don’t have much say in the family matters.
8. C8 – 100+ members are those who are doing small jobs or are unemployed, living in a very unfriendly environment, most of the times don’t have access to even some of the basic necessities of life like water, toilet, electricity, cooking gas, etc.
9. C9 – 5 people have lots of wealth and they like to make money by becoming partners with any of the above entrepreneurs. This constituency is now getting expanded by some extremely wealthy outsiders who don’t stay with them.
10. C10 – 5 people have money but they don’t have risk appetite. They cannot afford to lose money by becoming partners. However, they are ok to ‘lend’ money for some return. While they don’t have risk taking ability, they believe that just by changing the nature from equity to debt, their capital will be safe and hence end up losing money for different reasons – aggressive decisions by C3, unfortunate events for C4 and / or fraud by C5.

From the above, it appears that everything is going well – members are employed, people are buying and selling goods, investors and lenders are making money. Why can’t this fairytale situation continue forever?

It all appears good till the time we bring in another character, and that is a ‘Caretaker’ of this joint family, selected by the majority of these family members. While the stated duty of this caretaker is to take care of the overall well-being of every member of each constituency of this family, somewhere all become very narrow-minded and end up keeping the self-interest above the family interest. The ‘haves’ want to contribute the least to the pool of funds while the ‘have-nots’ want to extract the most from this pool of funds. As it is the Caretaker always is short of funds (in economic terms, this is called ‘fiscal deficit’). And to add to this, if the Caretaker himself is involved in either taking away money from this pool of funds or colludes with some influential family members, either of the two following outcomes will be disastrous for the entire family i.e. (a) either the have-nots don’t get what they deserve and / or (b) caretaker borrows money to give to the have-nots (while continuing to take away the funds). As he keeps borrowing, the liability of future generation of this family continues to increase.

This was the situation that India was in till about 2013 and one managed with the chaos. But  India has now entered into a critical 3^rd stage post-independence. Let’s consider 1947 to early 1990 (about 55 years) as the first stage of setting up basic infrastructure. By the end of 1990, we had a population of about 850 million. In the second phase of about 25 years (1990 to close to 2015), India added a whopping 450 million (50% increase) and entered an era of high growth.

Today, India accounts for close to 18% of world’s population but only less than 3% share in GDP. Unless India gets the house in order, it runs a tremendous risk of high unemployment and wide infrastructure disparity which on the worst extreme can translate into civil unrest. On the other hand, if India gets its basics right, it can see extraordinary demand, huge willing private investments and a position in world economy which others would envy of. And getting to even 5-6% share in global GDP, India will end up growing at 8-10% per annum for the next 20 years.

I therefore go back to where I started from – if India needs to transform from a multi-storey building to a high rise, it requires some dramatic ‘Structural’ changes – which may have some cyclical repercussions (and this is exactly the phase that India is going through).

The current government started work on three most important things viz.,

1. Trying to ensure that every constituency referred in the example above contributes to the fund pool (‘Tax Compliance’) and
2. Funds are channeled to minimize the infrastructure divide and
3. There is minimal leakage in utilizing the funds.

The process for first is initiated in both direct and indirect tax front. As far as second and third are concerned, the numbers are astonishing to see what this government has achieved in less than 6 years. Opened 351 million bank accounts and affecting Rs 2.00 trillion of ‘annual’ subsidy payments through direct bank transfers (crossed a cumulative of Rs 9.00 trillion till date), translating into annual savings of approximately Rs 70,000 crores to the government.  This money can now be used for something better. More importantly, these funds are reaching to those for whom this is meant for. Some other areas of focus have been increasing the sanitation coverage from 38.7% to 59.5% by constructing 92.5 million toilets, increase in LPG coverage from 55% to 95% by providing 80 million LPG connections, issuing 100 million e-cards under Aayushman Bharat insurance which is now covering almost 500 million people with an annual family coverage of Rs 5 lakh. 100% Rural electrification was achieved in 2018 and by December 2019, 10 million of the 11.2 million homes under ‘housing for all’ scheme are approved. What this means is that this government has ‘meaningfully’ touched the lives of almost 40-45% of the Indian population. One time, humongous effort, but would transform the standard of living forever. How many of us don’t believe that this is an extraordinary achievement by any standards. No other country except China has even a total population of 500 million people. In fact, this is more than the entire population of South America (422 million) and a little less than North America (580 million).

The next question then is how and when will the investment cycle return? Currently, there are too many ready assets which are changing hands. Businessmen in the past had the ability to hold on to their assets in all circumstances. The Insolvency & Bankruptcy Code (IBC) has taken away that privilege. Entrepreneurs with strong balance sheets are busy buying these ready assets and hence they are still growing their businesses.

At the same time, due to the disruptions caused by several measures taken by the government to get the revenue side of its statement right, the confidence and the resultant demand for every asset has been adversely impacted. The capacity utilizations across several sectors is hovering around 70%. This is giving time to the entrepreneurs for making fresh investments.

Typically there are 4 drivers of growth viz private investment, consumption, government spending and exports.

At close to 5% growth in ‘real’ GDP, the capacity utilization over the next 2-3 years will start touching around 85%. This will also be the period where a large part of asset transfers would have happened, and buyers of these (entrepreneurs) assets would have integrated and stabilized the operations. Thus, by FY22-23, one should logically witness, first a pickup in investments, followed by higher employment, increase in demand and higher GDP.

We hope that since then, several tax widening collections in direct and indirect taxes will start yielding results. Government’s one time push for social infrastructure also would be largely done. Thus higher income and lower expenditure should provide room for fiscal maneuvering and higher government spending. Government has in the interim already been working to monetise its several assets through InvITs and other innovative models.

Global economic outlook and trade discussions could have some impact on exports, but then exports account for less than 10% of India’s GDP and hence the overall impact should be nominal.

In my mind, the current situation is more a ‘cyclical’ slowdown having ‘structural’ changes which would be the basis to sustain a far longer and durable growth than the growth witnessed in FY09-13 period, which was more artificial and was standing on the crutches of inflated costs. Inflated project costs were inflating investments and thereby GDP numbers. Policies were being made to benefit the few. The current scenario appears to be far more inclusive, objective and sustainable.

Finally, the last question is, is the economy really heading towards recession, towards hard landing, towards intensive care unit? I think by no stretch of imagination is it moving in that direction. IIP numbers would appear negative, electricity consumption would appear lower, demand for consumer and non-durable goods is bound to be low, and big investment in automobile or real estate would require confidence booster – and none will come overnight. But if you believe even 50% in the above argument, next 6-18 months should be a good time for bottom fishing.