While the COVID Pandemic has broken every country’s back, India’s economy was breaking down post-2015 November demonetization. The GST rollout was another blow to small businesses. While the stock market celebrated GST because they anticipated that the unorganized sector will be sucked out dry by the organized sector, everyone forgot that the unorganized sector is the backbone of India.
I will go back to 1930s America. When the depression caused a reduction in tax revenue, the government increased tax and that did not help the economy. If you think about the demon and then GST rollout which killed the small industries then you will see some similarities. The small industries dried out and a lot of people lost their source of income or saw their income stalled or reduced, which converted into lower demand. And as a result, we can see India’s big companies are using around 60-70% capacity. Until a company hits 90% capacity, it usually does not go for expansion, that is why nobody saw any new projects for a while. While the economic growth rate was spiraling down, the COVID pandemic was the last straw on the camel’s back which broke the back and the economy dropped vertically.
Can India See V-shaped Recovery?
Definitely not. Initially, the tourism sector, hospitality, entertainment sector saw job losses. I think a lot of those job losses are going to be permanent. I will quickly touch upon one point. How this government is impulsive and their decisions do not show any planning. During demonetization, we saw that nothing was ready. GST rollout was so bad that while 1.5 lakh crore was target GST revenue per month, it barely reaches 1 lakh crore, and then during the lockdown, we saw that again the government did not plan much.
Although I think most of the daily laborers will eventually get a job in MNREGA or road construction sector. As the government is pushing a lot of capital in those areas. Some of them who decide to stay in the village might actually take an income cut as they join farming. But the customer-facing sectors might actually see job losses, like retail jobs in malls, shops will lose revenue as a first cost-cutting step they will reduce the workforce. As more labor becomes available in the market, people who get a job might have to take a pay cut. Simple supply-demand, as more workers become available they will get less pay. And the most industry has figured that retail locations are vulnerable and they will try to move online whenever possible. As people lose jobs and take pay cuts that will mean less demand in “wants” or discretionary spending. And I rest my case here, there is no way India is going back to the previous demand level in the next 2 years.
Why Government Is Not Doing Enough?
The Indian government is not resourceful. GST collection is not reaching anywhere near the target. Next question we need to ask what the government should do? The healthcare maybe? Since we are facing a medical crisis world over. But then with so many people, it is impossible to develop an adequate health infrastructure overnight. Even if you get everything, how will you train doctors and nurses?
While providing food grains and transferring some cash to buy oil and salt might have been a good idea, but I personally think, creating job opportunities for the long term is a better idea. MNREGA is a good start. We need more infrastructure projects all around the country. Now we need to remember that will not solve all problems.
While the government is pushing liquidity, which is mostly loans, but with so much spare capacity, who will set up a new factory? And even if the capital is easily available, or the cost of capital is not so high, in India still labor laws and land acquisition laws make India a difficult place to start manufacturing. And another huge problem is Indian courts, so it is difficult to execute contracts. Who do you go to get prompt justice?
And that is one reason why small industries are not coming back anytime soon. Large industries have spare capacity. But if the government can start contract manufacturing and defense manufacturing, which will help develop new manufacturing sector and use existing manufacturing capacity.
What Could Possibly Take India Out Of Economic DownTurn?
American presidential election is coming up. And regardless of who wins, Biden or Trump, the China policy will not change. And the USA with so much unemployment looks inward to create jobs for unemployed.
In this given condition, one situation can help India. If a hot war starts that involves China and the USA. That will bring India and the USA closer. But India still needs to do labor reform, land reform, and judicial reforms. While the centre has created a land bank, which might help, and the reduced corporate tax will help companies come. But the strict labor laws and judicial laws, high power tariff, high logistical cost and political policies, corruptions make India uncompetitive. India needs to do reforms to address all these issues.
I strongly believe India will benefit from the infrastructure project. Great high ways, dedicated freight corridors, riverways, will reduce logistical cost in the long term, in the short term, these will create jobs.
The opening up of the agriculture sector will help with food processing and I think it might develop a village/ rural economy. Increasing income of farmers and reduced dependency on government.
Commercial or residential real estate is a sector I have a lot of questions about. Will we have so many people in offices like before? Or work from home culture will pick up for the back office and support jobs. There is one problem though, electricity and stable fast internet. Which are problems in India, but solvable? In fact, renewable projects will bring down power costs and create more jobs.
And I have questions about manufacturing too. India is not big on innovation and I already said what challenges we have. I am sure I have missed many more challenges any entrepreneur faces. I think a US-China conflict might actually help India. And India will push for in house defense manufacturing.
In 1960s India used to live ship to mouth, USA used to ship wheat, India had massive food grain shortage. In 1991 India almost defaulted. In 2013 – 14, India did not have much forex reserve. And look at the outcome. We export food grain. We have enough stored food grain to feed everyone in India for 2 years. We have half a trillion worth forex reserves. And now both the manufacturing and agricultural sectors are deregulated. India needs a crisis to reform. Now we have the Chinese military at our doorstep.
I do not think we can go into long term war against china. They have massive scale manufacturing and we won’t be able to keep up with them in the long term. And we are fighting pandemic without much of health infrastructure. And this gives me hope that next time ( in a few years time) we will be ready with more than enough firepower to welcome our enemies. Mark my word, in the next 10 years, India will have the best possible infrastructure, health, and otherwise. and with the 5th generation (due in 2026) in house fighter jet will become a military superpower too. but before we can go to 2030, we need to endure the economic storm, political problems, and China – Pakistan might start a 2-way conflict, we will need to fight them off these first.