ECONOMIC DISLOCATION of Independent India.
A Black Swan event is underway in India. May be worse than WW II
India does not have bureaucratic, political or institutional experience of dealing with such events. There is no rulebook to defeat this crisis.
A massive consumption shock is underway, and it can PERMANENTLY damage the foundations of our economy’s superstructure. This superstructure stands on the back of the service sector jobs created by small and medium businesses. And these (service sector) jobs created about 50 million consuming households who trickle spends directly or indirectly into the rest of the pyramid.
Over the last few years, India’s economic growth was mainly driven by consumption. But how consumption got this “horsepower” ? This was due to two main factors :
First, Confidence to save less and spend more and Second, Easy Credit Schemes — buy now, pay later.
But why India is facing this crisis? Growth hasn’t been “fundamental” or “secular” — i.e. we’ve not created productive capital assets, or created massive infrastructure or expanded exports by an order of magnitude to be globally competitive.
The “excessive and aspirational” consumption of the 50 million households has acted like a lever within our population pyramid which was driving the growth engine. They spend, and India earns, and then they earn and spend even more. And this goes on in a “loop”.
Now in this “loop” the small entrepreneur is “backbone” since they employ lions share of jobs which services the economy and with this employment the income contributes towards the earning in the “loop”.
Small firms have been reeling with multiple shocks over the years. First was a demand shock with Demonetization. Next, compliance shock with GST. A credit/working capital shock with the NBFC crisis and finally the GDP sluggishness with slowing demand over last 6 quarters.
SEVEREST Demand Shock
A new demand compression will wreak havoc and drive FAILURE of small and medium firms. And it will be devastating. Even before the virus hit, the water had risen upto their chin. Unlike individuals who save for a rainy day, and have family to fall back. Firms have nothing. Cash flow is like oxygen. Cut it off and the firm falls apart.
This sudden “cripple” to consumption can become a long-winded one. Why ?
This is the same India that has lived with less, consumed carefully and saved penny by penny over the last three decades (since 1991).
Living within means is a memory that is alive and kicking in every household. They can shift gear to living with less. They will simply travel /dine less, shop less and generally access fewer services. This will be devastating for small firms who were experiencing the consumption”boom” from last many quarters.
Reducing interest rates may NOT kick start demand. If your business/job is under threat, you will STOP consuming and defer it entirely.
If you are uncertain about the future, then you don’t want to replace your car, just because interest rates are now at 5% instead of 10% or the dealer is offering Rs. 2L discount. We don’t need another pairs of sneakers, or sandals anymore. Why drink coffee at Starbucks/CCD, make it in home.
These ATOMIC consumption deferment decisions, when multiplied across households can reverberate into a tsunami.
It is an assumption that large firms or banks will be immune. The moment the demand compression trickles down to India Tier 2 and 3— EMIs for two-wheelers, 4 wheelers and homes will stop. Personal loan repayments will stall and invincible private retail banks and NBFCs will suffer a contraction and NPA that will be unprecedented in scale.
Hence, we need direct sector by sector interventions — we need direct distribution of cash to the folks who will be unemployed. Through effective mechanisms transfer aid to people and firms in the agricultural sector and formal manufacturing sector.
TIME, unfortunately, is running out. For both — health of our citizens and health of our firms.