INDIA ECONOMIC S(LOW)D(OWN) : Speed LOW OR Defining OWN trajectory

Shifting Gears of Elephant - Time to be cautiously optimistic

Mainstream economic news has been strongly negative over last few months in India. The markets have trailed off after the huge electoral victory of the ruling party earlier in the year. The mood is switching between pessimism and exasperation even within seasoned market watchers. Even the upcoming festival season which would normally perk up mood does not seem to have usual sheen.

Here, I offer my quick diagnosis of whats happening. My point is that the effect of technology on changes in the world are less easy to notice from economic statistics of yesteryears. Its obviously a whole new world, where inflation is contained in developed economies despite low/ negative rates for long. Similarly technology disruptions have become norm, almost continuous rather than historical nice cycles. Like a phone which keeps updating software version, the whole economy is on a treadmill of change. Clearly the old laws of economics no longer apply. My 5 reasons that explain the slowdown below indicate there is room to be cautiously optimistic, though it may take some time.

1) World is changing: Number of textiles stores in US and UK that have closed in last few years is quite large, and that's because of Amazon effect of e-commerce. Similarly, ride-sharing by Uber/Ola is taking toll on the vehicle manufacturers; as well as logistic efficiency is bringing the need for commercial vehicles down. All put, the economy is becoming more productive, with slack in capacity being shared across many players within an industry. In every sector, companies that are adopting new technology and implementing strategies to delight new consumer behaviour are doing well and the old falling behind faster than ever.

2) India is changing even faster: The scale of technology change in India is accelerating. With all the digital infrastructure in terms of UGUP (Uid, Gst, Upi and recently unveiled Depa for Data Empowerment & Protection Architecture) alongwith cheap data rates and spread of computing devices in terms of mobiles, computers & tablets, now getting embedded into physical creates a new ecosystem of connected world which is enhancing the output of the existing stock of assets. Gone are the days of massive inefficiencies across supply chains internally and externally which gave a semblance of huge activity, with limited output. Industries are getting leaner, smarter and ratio of output/input is getting better, which would indicate increase in productivity.

3) Global mega power shifts: The increasing tensions between US and China, while on one side is an opportunity for India for long term for attracting FDI, creates a temporary setback for export industries as well as china growth related industries such as commodities which kept the growth pot boiling. India needs to switch to high tech manufacturing for exports and domestic markets, the ecosystem of which is being set up. Some of the government sponsored initiatives in this are huge indeed, such as Gigafactories on scale of China and US to accelerate adoption of electric vehicles and increase renewable energy production. India's becoming more space faring nation would also increase industrialisation of allied industries over time. There is an expectation of massive fiscal stimulus likely to be announced soon. All this however takes time to percolate into growth at ground level, and the Government attention seems to be anyway more focused on other geopolitical and social issues than economy.

4) Past baggage continues : While all this shows a massive wave of productivity increase, the economy and geography of the country is dotted with excesses of past in terms of stranded assets that are no longer viable in the new economic environment across a range of industries. These are a drag on the balance sheet of banks, and till that is fully sorted out, the new capital investment cycle looks difficult to be funded unless Government stimulus gets rolling, as FII investments are low given global risk aversion. Apart from consolidation of banks and workout of loans, more concrete action is required on expediting legal lacunae which still exist despite lot of new bankruptcy frameworks. The lower credit availability due to risk aversion is probably the only factor that is fully in control, but unfortunately decision action is still found missing maybe due to complex dynamics. The strategy seems to be reflate the economy with new financing for millions of MSME backed by data, algorithms and tech, which will need to be carefully implemented to avoid another bubble down the line.

5) VUCA world : Last, but not the least, the uncertainty about future has never been so high. An index of Global Uncertainty based on big data measure of the uncertainty or IMF's global trade uncertainty index is currently at highest since 20 years that the index has been in place. AI, machine learning and other intelligent algorithms are increasingly become commonplace thanks to the big tech companies rather than being fancy words of venture capitalists.The rapid technology changes inducing changes in consumer behaviour are becoming difficult to predict. To some extent, the trade and technological uncertainties also build on each other. This has created a cocktail of fog that makes any long term capital expenditure investment decision frought with risks. The natural tendency would be for businesses to scale back expansions and conserve cash, till the fog clears.

To summarise, this is probably the first technology induced slowdown, which is exacerbated by past excesses in banking system and global risk off sentiment. This chakravyuh (intricate puzzle) will need careful untangling of multiple issues with a huge stimulus that takes the economy to a new growth path. The indications are that this indeed will happen, though the speed may not be to the liking of stock markets which expect action as of yesterday.