Without
a doubt the flavor of the season is “economic slowdown”.
Sir
Isaac Newton was an English mathematician, physicist, astronomer, theologian,
and author who is widely recognised as one of the most influential scientists
of all time, and a key figure in the scientific revolution. Unfortunately, he
has not been credited with propounding economic theories. You may argue, as
most persons of Science, he too was an economic illiterate. I would argue
otherwise. He discovered the two major principles that drive an economy.
1. The theory of “free
fall”. Remember the story of Issac N’s encounter with the falling apple. Yes,
economies generally go into a free fall when supports are withdrawn.
2. The theory of
“motion”. Allow me to recall
· Law 1. An economy persists
in its state of rest or uniform motion in a straight line unless it is
compelled to change that state by forces impressed on it
· Law 2. Force is equal
to change in momentum per change in time. For constant mass, force equals mass
time acceleration F = ma
· Law 3. For every
action, there is an equal and opposite reaction
The state of uniform
motion an un-satiated perpetual desire to own and use consumer durables and
non-durables, (remember “neighbour’s envy, owner’s pride” and “Uski sari
meri sari se zyada safed kyun hai?”) that spurred consumption in the last
two decades has been hit by external forces. To start with, private consumption
has taken a beating as consumers suddenly prefer to hoard cash or keep it in
the bank or invest in SIP instead of spending on consumer goods. In fact this
“uniform motion of consumption has been hit in many ways – One smart phone has replaced TV, lap top,
notebooks, outings (swiggy hai na?) and so on. In Bangalore whenever I
have to go to places outside my comfort zone (RSI, Golf course, et al) I find
it much easier to call in a cab. No hazzles. For emergencies ek car to hain
na? The pattern of consumption has changed as a result of such “disruptive”
forces acting on it.
There is a change in
momentum in the way people now spend money – or rather don’t spend money. One
may argue that many don’t have money to spend. Yes. But that was how it always
has been. There are many who have bought multiple houses while many can’t
afford even one. Now, a realization of the futility of owning multiple houses
has dawned on the discerning. One retirement home per family is becoming the
norm. If anything, taken in the larger context, there is more money available to
be spent but nothing to spend on. Though Newton’s F = ma says m is a constant,
in this case m is not a constant making the equation a bit more complicated.
Added to this is the
fact that most Public Sector Banks are saddled with high NPAs or Non Performing
Assets that have resulted in them tightening lending and instead, seeking
deposits and otherwise repairing their balance sheets by making provisions for
Bad Loans. This phenomenon is a classic case of bad actions attracting bad
reactions. Mallayas, Modis, Goels and Ambanis (Anil as of today) are standing
examples. As an illustration take the case of the Coffee Moghul from Karnataka.
Like many successful business persons, Siddharth had access to easy loans from
banks. The loans vanished due Inept ways of handling such easily gotten money.
All these NPAs saddled on the many Banks and NBFCs are a reaction to unbridled
lending.
Roll out of GST, other structural reforms (corporate tax, labour
laws and such), Global slow down and retreat of globalization accentuates the
slow down.
Having said that, I must confess that economy is not a science
which follows empirical laws or edicts. Every economist will have different
views of what is and what will be. The only definitive aspect of an economy is
what was. At times corrective actions have to be taken on a trial and error basis,
especially in the present day when there are far too many disruptive forces
(technology, geopolitics, climate change, deglobalization, terrorism et al)
acting on economies of the world. The slowdown is also part of a longer-term
structural shift wherein the Economy is changing from the high investment era
to a low investment era as well as a transition from being cash-driven to a
digitally enabled economy.
It looks as though that the combined effect of all these factors
means that the Indian Economy is likely to remain in a free fall for some time
to come. The only option is for everybody to ride out the storm.
