The Freefall, what and how?

I still remember just a couple of years back; it was being talked everywhere that India is the fastest-growing economy Globally. Even though in about the past couple of years, the GDP or growth potential kept dropping lower and lower from 6% to 5%. As conspicuous as it may seem India as an economy would emerge carrying an unprecedented amount of Fiscal Deficit and a substantial Public Debt in addition to the looming twin balance sheet problems ( TBS is essentially Ever-increasing NPAs of Public Banks and an excessively indebted private sector.

Though we might be blaming the Corona Crisis for maiming our economy, the Economic woes started long before we hit the iceberg. India's GDP was growing well between 7% to 8% when by the third quarter of 2019 the GDP Contracted to a mere 4.5% the slowest in those recent times.

Institutions like IMF, World Bank and OECD all talked about the dire state of India's projected growth and trimmed it down to 6.1% for 2019-20. This trimming was based on the freefall in consumption(Private) and weak growth in Services and industries. Despite the repetitive cuts in the interest rates the forecast was again dropped down to 5%

What went wrong Pre-Corona

The economic languor before the pandemic had multiple factors to it.

When BJP came into power with Prime minister as Narendra Modi in 2014, it inherited an almost broken, weak and fragile banking and financial sector saddled with burgeoning NPAs, bad debts and frauds, thus making lending even more difficult and impended a decline in consumer spending, business investment and exports. 

The government tried playing with reforms to rejuvenate the economy by providing banks with additional capital and putting up new bankruptcy rules to add a layer of protection to the lenders, further dominating the sector by consolidating public banks. Having done that Banks remained fragile, adding to the public perception that the reforms were not strong enough. The problem for banks was not inclusive of just this; the demand for credit was being called for by the NBFCs who were becoming responsible for about a fifth of the entire lending in the Country. NBFCs had their fair share of problems by becoming overextended and issues with their funding model. This made getting auto and home loans even harder. The knock-on effect of this was inclusive but not limited to the slump in Real estate Property Market( or as Residential Property Market in the west). However, again the government had to step in to recapitalise the banks.

Counter-intuitively PM's plan to increase the economic contribution of manufacturing from 15% to 25% of GDP was unfailingly not making any progress. Make in India( the flagship plan to attract foreign companies into manufacturing ) did nothing but disappoint.

BJP reforms such as GST system in 2017 partly held it back too due to the cumbersome nature and unfriendliness for business( No shocker there!). GST requires companies to file separate returns for each state they are present in. 

India's lacklustre performance at that time was also fueled by the Global economic Downturn and an ongoing international trade war and disputes between US, China and the European Union. The growing Protectionism declined India's Export. India's current account deficit, which is the measure of imports vs exports, widened from 1.8% in 2017-2018 to 2.1% in those recent times, the highest in 6 years.

Meanwhile, unemployment sneakingly soared a record high of 8.5% in October 2019 with Labour Participation rate falling to barely 50% of adults. These mounting concerns lead to slight political instability.

In the start of his second tenure as PM in 2019, he initiated various reforms inclusive of lowering of corporation tax rates from 30% to 22%; slashing of corporation tax rates for investments in Greenfield manufacturing plants from 25% to 15%; raising FDI (Foreign Direct Investments) restrictions in various sectors; and also sanctioning cuts to interest rates. BJP administration also successfully cut the red tape for doing ease of business which made India Jump from 134th to 77th in the World Bank ratings.

Corona hits

Things seemed to get back on track slowly. However, then Corona Pandemic hit the Indian Sub Continent pushing India's GDP from +5% to a -23.9% in Q1 2020.

Calculations of an Economy's GDP or Growth potential can be simple writing ( Investment Rate divided by Incremental Capital Output Ratio) Or could be further complicated with additional underlying assumptions. It is quite inherent and intrinsic to a data-poor economy that the GDP numbers and statistics would be soft, not hard India Suffered from all sorts of deficit inclusive of aggregate demand deficit. Still, no one fathomed that the growth rates would go lower than that of the 1980s and 1990s. Per Capita income adjusted for inflation rupee in 2022-2023 is not going to be any better than what it was in 2019-20, pushing us three years back. Simplifying it, this means Surplus in all directions with a collapse of new investments.

Earlier this year Economists kept talking about Shapes of graphs of recovery which was assumed to be V-Shaped. V-shaped is a quick down and then shooting up. Few of them assumed it to be U shaped ( Recovery after some time) or W or L.

Sadly all of them could be wrong had it been a case of V, U or W or even L we would not see millions losing Jobs while the Stock Market is getting healthier and recovering. The rising gap between winners and losers in terms of countries, business and economic sectors and people, could be shaped like two lines diverging from a perpendicular or simply K shaped.

Indian Capital markets are in Clover while private consumption is collapsed and jobs hammered, (Does not make sense) 

Businesses Services Distance-working or distance and E-learning are having the time of their lives( increased number of unicorns and followed by it sudden wealth). Large Sectors are eating small ones like anything. This extraordinary situation goes beyond Schumpeter's textbook concept of "Creative Destruction" take on Capitalism( Textbooks not so helpful now, eh?) the Basic question arises is how can large scale destruction help if it maims the banks. Sector leaders have been accumulating profits like they are richer than gods( History has not been kind to entities who play god) to unprecedented levels. Stacking against places like Australia and Europe Market Regulators are in a comatose.

How can a mere pandemic stir a Trillion Dollar economy?

The impetus causing this growth slowdown and burgeoning inequality has been present even before pandemic hit but are just getting accentuated now.