The Dichotomy of the Indian economy is puzzling and intriguing at the same time. In a slowing economy, the security markets are flying high. Prof. Rajendra Bharti, a retired banker and an acclaimed academician and researcher, elaborates and explains this divergence between the decelerating real economic growth and the bull run in the security markets phenomenon.
Globally the average pace of economic growth has been slow. Overall economic momentum has remained subdued. While China and South Africa are witnessing an economic slowdown for past 3 quarters in a row, Russia and Brazil are optimistic with some acceleration in the growth activity. In the largest economy of USA, though the GDP growth is positive in the 3rd quarter, the industrial production has witnessed a decline for several months. In this scenario, India’s economic performance and prospects call for immediate multipronged measures to resurrect the economy and to build resilience. In India gross domestic product (GDP) growth moderated to 4.5 per cent year-on-year (y-o-y) in Q2:2019-20, extending a sequential deceleration to the sixth consecutive quarter. Real GDP growth was weighed down by a sharp slowdown in gross fixed capital formation (GFCF), cushioned by a jump in government final consumption expenditure (GFCE). Excluding GFCE, GDP growth would have been at 3.1 per cent.
But there appears a dichotomy in the Indian economic scenario. In a slowing economy, the security markets are flying high. This dichotomy appears to explain the market behavior like that of an emotionally charged gambling. This divergence between the decelerating real economic growth and the bull run in the security markets is a phenomenon which needs to be understood. This article attempts to investigate the possible reasons of this dichotomy and to recommend a few measures that can give a fillip to the economic momentum and bring a situation of economic balance which is a requirement for building trust of the people in a large democracy like India.
It may be appreciated that common citizens cannot see any logic behind this situation wherein the stock markets are excited to see the future values in their buying decisions while the GDP growth as a whole is going to hit 11 year low in 2019-20. All major sectors of economy viz; agriculture, industry and services are experiencing an alarming slump. The Central Statistics Office has projected the economy’s growth rate for 2019-20 at 5 per cent, the lowest in the current series with 2011-12 as the base year. This projection is a 11-year low. The most worrying sign is from the manufacturing sector, where the projected growth rate is just 2 per cent as against 6.9 per cent in the previous fiscal.
THE ECONOMIC STRESS
The 2019-20 union budget had projected a nominal GDP growth of 11%. Recognising the sharp decline in the first half, the government revised its nominal GDP projections downwardly to 8%. This fall to single digit growth was caused by the worrisome downslide in manufacturing sector alongwith subdued trading activity. On such a drastic fall in the nominal GDP growth, D.K. Srivastava, Chief Policy Advisor of EY India has rightly commented “This translates into a fall in tax revenues and an increase in the fiscal deficit, both detrimental to growth”.
A potentially strong government at the centre has aroused the expectations of the people. Moreover in a democratic nation like India, the trust deficit, if any, can be logically managed by arresting the continuing slump in the economic activity. On the current situation, Mythili
Bhusnurmath of Economic Times has brilliantly commented, “Economic distress brings dormant social fissures out into the open. This is true of all societies, more so of a poor country that is also a fledging economy”.
Sometimes I wonder how richness is on a rising trend in relatively poorer nations. India known for its poverty and home for 364 million poor people (28%) is ranked at 129th position as per the HDI 2019 released on Dec. 9, 2019, out of a total of 189 countries. In contrast to this grave situation of poverty, the number of billionaires in India has more than doubled to 119 between 2013 and 2018, according to Knight Frank. The market value of firms is rising several fold because of this dichotomy. To create an equilibrium in the growth dynamics, India needs to aggressively work on poverty alleviation programmes and on disguised underemployment and unemployment.
WHY MARKETS ARE OVERSHOOTING?
FIRST. We notice that stock market boom is not spread over the entire market. There are some scrips which are attracting high bidding. The new highs created by the market action confine to a section of the market because the mid cap and small cap shares are remaining 25% and 40% below their all time high. The shares which are leading the bull run are not more than 15-20% of the major indices. Bull run is therefore not a broad-based phenomenon and can be attributed to the hype and hopes of market players that the government’s radical measures to restore trust of people in the economy, will firstly benefit these selected large-cap stocks.
SECOND. Big reason is the narrative about the decisive prowess of the government which made a resounding comeback in 2019 and made historical decisions like revocation of article 370 of the constitution. A large majority of people believe that government will be able to create brighter economic prospects that may boost productivity and corporate earnings will be growing exponentially thereby rewarding the investors who bet on these market leaders.
THIRD. Third reason is the role of behavioral finance. Most Indian people are emotional and impulsive in their decisions of buying and selling in the market. Indian stock markets are seen in a haste to create premium on market values out of a promising policy announcement that may dramatically brighten up the prospects of some related businesses. Such announcements are about ambitious thinking that will take a long time to work and deliver results. Market experts may justify the growth potential of market value of a scrip on the basis of price earning ratios of projections of several future years.
The current market action is also driven by the government’s grand attractive target of making India a $5 trillion economy by 2025.
FOURTH. In a global economy, the global comparisons and cues play an important role. In comparative terms, India continues to be a potential market with fast growing consumer base. Market experts at times, interpret the emerging global symptoms in such a way that speculators jump up to raise the market expectations or to bring down the momentum. Moreover in this environment when electronic and social media has revolutionary impact on the people’s thinking process, perceptions are getting influenced by many interpretations which may not be based on genuine research.
IMPERATIVES TO ACHIEVE THE BALANCE
Indian economy needs immediate supply of oxygen of economic and financial reforms and blood of flawless implementation of reform process. Govt. has to create and strengthen an ecosystem which encourages companies to invest, hire and expand capacities. Limited fiscal space available with the govt. is a matter of concern because any booster dose needs impactful increase in government spending. The government’s target of a $5 trillion economy needs an annual growth of approx 12 percent which looking at the current state of economic affairs seems to be a tough task. To make this tough task feasible, govt. has to actively focus on following imperatives:
FIRST. The government has to evolve multipronged socio-economic measures to alleviate poverty. Current populistic approach of distributing money and other freebies and subsidies is making the performing potential of the people dormant. Loan waivers are weakening the economy from its roots. The three Economics Nobel Laureates of 2019, Abhijit Banerjee, Esther Duflo and Michael Kremer have introduced a new approach to fight global poverty. They have recommended that fostering scientific thinking and carefully designed experimentation can open new prospects to fight poverty. In India, people have tremendous potential to make experiments, learn new things and work tirelessly. They can do wonders in coming out of the poverty trap, once the earning and development prospects are made visible and a system is created around them to genuinely support their endeavours.
SECOND. India, having an ever-growing consumer base, has a promise for improvement in demand which can be significantly accelerated by the making spendable money flowing to the pockets of large size of middle class population. Relaxed norms of direct taxes and further rationalization of GST can certainly improve demand. The financial institutions including commercial banks and NBFCs appear to be scared and shy of lending. Despite heavy expenses on advertising, the credit dispensation is very slow in real terms. Reserve Bank of India, in its role of supervision and development, has to come out with a comprehensive and robust framework of credit appraisal, disbursement, documentation and charging of securities to be followed by flawless monitoring and timely remedies for early symptoms of sickness. The gigantic size of NPAs and punishment of erring officers has created a threat to bankers. Several Indian banks are flush with funds but instead of lending to productive enterprises they are preferring to invest in govt. securities. This needs to be corrected so that the money flows in the economic productivity and adds real value to the economy.
THIRD. MSME sector has tremendous promise to strengthen the economy. This sector is suffering from many internal and external problems. Govt. and developmental organizations need to nurture effective support to MSME sector from ideation and formation stage to marketing of their products. Financial subsidies and incentives motivate and allure them to start their ventures but as they move forward, many of them are not able to enter into the growth trajectory either because of competitive pressures of market forces, or lack of managerial expertise particularly in the field of finance and risk management. Business schools need to design small duration courses to address to special training requirements of this sector. MSME boost has potential to boost domestic trade. The economic deceleration caused by the dynamics of external forces can be successfully reversed through the productive revolution of innovative start-up ventures and strong confident working of MSME sector.
FOURTH. A fundamentally strong measure to reverse the economic down turn is employment generation. Unemployment scenario has attained dangerous dimensions. Lack of employability of educated youth is a threat to economic growth. Qualified engineering graduates attending coaching to become clerks in government departments and PSU banks is a serious drag on economic resources. Massive transformation is required in the education system so that education contributes to economic well being. India’s youth population provides a great opportunity. But their tendency to become a part of the long queue of seekers of government jobs and wasting a valuable part of their youthful years in this struggle is very worrisome and a big drag on generation of economic resources. Another threat to economy comes from disguised unemployment in many public sectors, government departments and research and development agencies. Govt. is fully capable of treating this menace and strengthening the economic growth.
FIFTH. India’s potential of exports to different parts of the world is grossly underexplored. A country rich with natural, mineral and craft resources, can become a leader in global markets and can earn a lot of foreign exchange to strength the economy. Within the WTO framework of foreign trade, there is tremendous scope for India to inspire export orientation through research and development. The challenge of course, will be quality standards and competitive pricing. Development banks like EXIM Bank, NABARD and SIDBI can also play the role of catalyst to boost the economy.
SIXTH. Sixth measure required to strength the process of economic growth can be availability of affordable credit so that entrepreneurship and business expansion may be encouraged. More liquidity is needed for manufacturing and services sectors. Business men look for lower lending rates and simplified lending procedures. If the nation has to achieve the target of $5 trillion economy, supply of credit on reasonably relaxed terms will certainly fuel the growth.
The above and related measures can help the nation create a balance and the economy will eventually become more resilient to continue the growth momentum even in the less favorable external environment.
ABOUT THE AUTHOR
Prof. Rajendra P. Bharti is Professor and Director (CEO) of Lal Bahadur Shastri Institute of Management (LBSIMT) Bareilly which is being consistently ranked amongst Outstanding B-Schools of Excellence in India. Graduated from University of Delhi, Prof. Bharti is an alumnus and resource person of IIM Ahmedabad. He has also been trained by WWQN London. After serving the banking industry in various managerial and training roles for more than two decades he has been leading LBSIMT for 19 years. He is an institution builder, thought leader, author, executive coach and facilitator of excellence by individuals and organizations. He has trained CEOs, managers, faculty members, civil servants and public leaders from approx. 50 developing countries.
For his outstanding contribution to the profession of Management, All India Management Association has conferred on him the AIMA Fellowship in 2005. Competition Success Review awarded him as Eminent Director of a leading B-School in 2012. A Fellow Member of the Institute of Directors, he has been elected as a Fellow of Royal Asiatic Society (England & Ireland). He is a member of British Academy of Management, U.K. Recently, he has been conferred the OUTSTANDING B-SCHOOL DIRECTOR AWARD by AIMS International (based in Houston, USA) and IRMA in an international conference at Ahmedabad. Recently he has been felicitated with Top Rankers’ Excellence Award for Academic Leadership, in a National Management Convention in New Delhi.
He is also a Certified Corporate Director with DIN 07406715. He has research interests in Corporate Leadership, Strategy, HRD and Innovation and has contributed to a large number of global and international summits and conferences in India and abroad as Guest of Honour, Key Speaker and Session Chair etc.
He has been a resource person for development of Corporate Directors and Chartered Accountants. He has addressed the London Global Convention and Dubai Global Convention as an invited speaker. One of his recommendations made during his address at London regarding importance of women directors on the corporate boards, has been implemented by several countries.
1. RBI Bulletin, Dec’ 2019 issue
Fifth Bi-monthly Monetary Policy Statement, 2019-20
2. THE HINDU Business Line, 8th Jan. 2020
“At 5%, GDP growth to hit 11-year low in FY20
3. The Economic Times, 6th Jan. 2020
“Is the Economy Beyond You” by MYTHILI BHUSNURMATH