If things are so good, why do we feel so bad?
“There are two competing economic narratives on India at the moment. They sit uneasily with each other. But both are correct.”
So begins an op-ed by JP Morgan’s Sajjid Z Chinoy published by Mint on 19 July. The piece is titled Indian Economy: A tale of two narratives .
For those who haven’t read Chinoy’s op-ed, here’s a quick summary: India’s macroeconomic numbers are the best they have been in years, so much so that “India is considered a safe haven among emerging markets.” And the government has done its bit with what Chinoy calls “four transformational pushes”: “Aadhaar, the bankruptcy law, the goods and services tax, and the codification of the new monetary policy framework.” (I would have included the push-in-the-making, the new fiscal policy framework and made it five). But this is offset by a “… second, more sobering narrative: of a near-term slowdown that may be hard to reverse using traditional fiscal and monetary policy.” He goes on to list some of the reasons for slowing growth: a fall in exports; the stabilization of oil prices; the debt on the books of companies (and the corresponding poor assets on the books of banks); the stress in agriculture; and the incomplete recovery after demonetisation.
Chinoy’s article—there’s more good stuff in the piece; do read it—is a great answer to a question many people have been asking: If the macro is good, why isn’t the micro reflecting it? Or the question I posed in the headline of this column: If things are so good, why do we feel so bad?
There’s more to it, though. There are reasons beyond structural ones, or short-term disruptions (such as demonetisation, the new real estate act, even the implementation of the Goods and Services Tax) for slowing growth in India. A significant one is the fundamental shift in the dynamics of some industries that has resulted in the narrative turning negative—at least as far as the incumbents in that industry are concerned. For instance, energy companies that invested huge amounts of money in coal-based thermal power plants a few years ago are suddenly realizing that solar energy, which was oh-so-expensive a few years ago, now costs less than coal power. Indian information technology (IT) services companies are under pressure because they haven’t adopted artificial intelligence and automation as quickly or as well as they should have. And incumbent telcos have had their businesses wrecked by an aggressive new entrant.
And some industries have been laid low by extraneous factors. India’s once-booming generic pharma business has been hard hit by actions taken by the US drug regulator. To be fair, none of these actions are motivated by protectionist tendencies, but that doesn’t change the fact that a once-thriving business is now not-so-thriving. The IT services industry has been affected by a similar extraneous factor, namely the new US visa regime. For both IT services and pharmaceutical companies in India, the US is the biggest market.
Finally, the predominantly negative sentiment among Indian business leaders can’t be ignored. Some of this is understandable. For instance, demonetisation killed demand for several products and services. But some of it is also prompted by the inability to adjust to the rules-based regime the current government is trying to move towards. When the National Democratic Alliance (NDA) came to power in 2014, most businessmen expected it to be business-friendly. For at least some of them, though, the definition of this term was restricted to whether or not the government was willing to make an exception (or maybe more than one exception) for them. Whatever else you can say about it, the NDA has been loath to oblige on this front.
So, what now?
Is there some magic wand anyone, including the government, can wave and make everyone feel better? Chinoy says the government should “hang in” till the benefits of such things as GST kick in. He argues that neither fiscal nor monetary interventions will help.
At another level, over time, Indian companies will get used to the new dynamics of their businesses, the extraneous factors that are currently worrying them, and, perhaps, the new rules of doing business in the country.