The Economic Slowdown of India-2020

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India has been hailed by many economists, politicians and thinkers as ‘the experiment’- one that holds the fickle balance among democracy, freedom, spirituality and all-round development. And amidst all this lies the thread of consumption and demand of 1.3 billion people- the thread to become one of the largest economic powerhouse the world has ever seen. However, India is still a work in progress, not only in terms of the ideal democracy and freedom but also along the lines of economic prowess- and that is a good thing. 1.3 billion people working on the belief of being the best can yield some extra-ordinary results!

But every once in a while, like all humans, even large, vibrant, growing economies stumble and fumble to a slower pace of growth and development. While the world of economists, accustomed to Keynes, start shedding light on key economic parameters and adjudge the sense of Government stimulus, most individuals are in the dead of the sea to make comprehension of what trouble is afoot. While I personally have never heard a lot of economists being enthusiastic investors or businessmen, most economists have never been able to take the evens of a slowdown and show a weary investor what to be wary of in the times of perilous economic stinginess.

While I have been trained in the arts of finance and economics during my time at business school, I still think like a ‘common man’, with common sense and middle-class values! And that kind of always helps me come to terms with what financials chicanery is afoot and what I must avoid to keep a distance from financial pain.

The fiscal year 2020 has been a rough year for India. While Prime Minister Modi returned with a resounding mandate of the people to the parliament of India, and with it a bull run in the month of May 2019, the markets have thrashed investors, threatened everyone’s saving of rate cuts, pinched all of us with super high inflation rates for staple food products and general sluggishness in the labour market during the rest of the year. However, I firmly believe, with my limited understanding of the world and its mysteries, that three broad strokes of the Indian economy can help an investor, an ordinary invest like you and me, figure out the safer roads from the treacherous ones.

Let us look at what’s wrong in the present health of the Indian economy. And no, it has not got to do with the Government and all other stuff you keep hearing in the evening ‘masala’ news!

The first broad stroke of the economic slowdown is in the automobile industry. You have heard and read a lot about it on the same, with the most common being the super slow offtake of cars from showrooms and the piling up of inventory, leading many manufacturers to cut down production. And this is where the slowdown is most visible. The automobile industry is a major driver of developing and developed economies, feeding three other industries- steel, power and labour. Any slowdown in the automobile industry hits the core industries of steel and power very hard and cuts down labour requirement.

India over the last two decades hasn’t experienced much of a backlash from the automobile industry owing to the single favourable condition, upward social mobility. More and more people have been migrating towards the upper echelons of Indian society with the passage of time. More people are entering the strata of ‘middle class’ Indian than have ever before in the history of the sub-continent, all thanks to the super high rate of growth that India has been belting out year over year. The more people move into the middle-class section of the society, the more are they driven towards consumption, because of higher discretionary expenditure. A purchasing a car has been the quintessential symbol for the middle-class Indian to report his social progress to the society.

Till this point I believe, you have been able to figure out the underlying demand that has been fueling the growth in the automobile industry. However, there I one more link that is seldom highlighted in the analysis of the industry.

How often have you heard people say that they purchased a car with full payment in cash or saving the whole money first and then going to make the car purchase? Most probably never. Most people simply make a small token down payment and avail the remainder as a debt. In recent times, there are companies who even lend the token down payment to you, making car purchases a no-money-from-my-pocket affair. And that is where the fundamental flaw in the model lies.

People have responded very differently to the reports of an economic slowdown in India. Instead of keeping the pedal of debt and consumerism grazing the floor, people have diverted discretionary income towards saving and investments. While car sales slumped, the industry to be worst hit by the slump, is the second broad stroke of the economic slowdown, the lending industry. More and more people have diverted money from discretionary expenses towards investments, as is evidenced by the flow of money into Mutual Funds. And this should not be surprising at all. More and more people have access to information, and the newer set of earners are more educated than the former generation. Hence when the knell of economic slowdown was rung, people postponed their expense into the future to keep the present far more secure. And that is something to be really happy about. Because while the automobile sector and the economy at large might feel the sting of a slow economy, it's way better than a super leveraged and subsequently bust economy!

The second broad stroke is lending institutions. With the strict supervision of the RBI and the Government towards banks, there has been a shortfall in easy credit in the market. And that has given rise to smaller lenders who lend at exorbitantly high-interest rates, in the range of 13%-15% p.a. to ordinary people to fuel their consumption drive. The NBFC crisis stands proof that the supervision mechanism of the credit was adequately poor, by all means. Lenders in the liquid market and the non-regulated market were pushing consumerism and feeding the middle-class with undue expenditures. The same is pretty evident if one compares the rate of credit growth and sale of cars or apartments or other consumer products in India. While having credit lines to help people make small steps towards higher living is good, push sales of credit is pure poison. And credit risk management is definitely a challenge for a consumerism driven mindset, which incurs expenditure from short term source in illiquid assets.

The dearth of credit lines since the NBFC debacle fuel the accelerated slowdown of the automobile Industry and broad consumerism in India. And much has been done by the Government and other entities to ease the pain, I am of the opinion that the pain is a better lesson, than a forcefully eased monetary push in the ordinary people’s wallet.

Finally, we come to the third stroke of the slowdown, litmus test of a stressed economy- the flight to safer capital. I have always come to the conclusion that the rally in gold is always caused by fear rather than a good investment strategy. Gold returns remain dormant for years, till the economic soundness of the market tips into partial loss of sanity. And gold my friend has been booming! From Rs.3,400/gm to Rs.4,300/gm, gold is high and mighty as we speak.

Considering the above three strokes of the Indian economy over the last 9 months, I am of the opinion that the slowdown is real and for the aforementioned lapses in the assumption taken in the estimation of future performance of India Inc. But all is not lost. The moderation, slowdown and the eventual turn of understanding of the economic mindset of the newer generation is most likely to yield an extraordinary harvest for all that who invest in ‘the experiment’ called India. I am sure, while the time at hand may be hard, recovery and better times are afoot.