The speed at which the anti-Citizenship Amendment Act (CAA) agitation is engulfing cities and campuses across India has been unprecedented and this could be a cause of worry to the Narendra Modi-led National Democratic Alliance (NDA) government. However, the emotional outburst over the CAA has helped mask the bigger issue of the economic crisis that the country is going through.
The economy has refused to come under the government’s control as it continues to emanate symptoms of a life-threatening clot in the system. Demand has evaporated in all conceivable sectors of the economy, which has forced production cuts on the major industries. Job losses are continuing unabated, driving high already serious unemployment levels. The shadowed banking sector has gutted consumer credit, corporate loan growth, rural demand and property prices.
According to the government’s own figures, the second quarter GDP growth rate fell to 4.5 per cent, the lowest in more than six years, compared with 7.1 per cent in the same quarter of 2018-19. More importantly, there are no signs of an immediate turnaround.
Economic growth prospects for 2020 have been slashed by domestic as well as global agencies, including the Reserve Bank of India (RBI), Moody’s, the IMF-World Bank, Asian Development Bank and others. Estimates go down to as low as 1.5 per cent. If this situation persists, there is no way India can achieve the target of hitting a $5 trillion economy by 2025.
The worst part is that none of the problems of the Indian economy has been caused by external factors, as was the case with the financial crisis of 2008, in which the affected economies had little choice.
The current economic situation is something that has been bargained for by the government. It is the result of a succession of shocks delivered to the economy: demonetisation in 2016, the half-baked implementation of the GST, draconian penalties for tax evasion in 2017 and the collapse of the shadow banking chains in 2018. The crisis imploded India’s ‘Lehman moment’ after IL&FS, Yes Bank, Indiabulls and their ilk vaporised billions of investor wealth.
Millions of Indians have been cheated by overleveraged and now bankrupt property developers. Property prices are in a free fall, and there is no hope for a formidable number whose money is sunk in stalled projects. The government’s efforts so far to rectify the situation have been too late too little.
The Union government prides in its credentials as pro-business. Yet money is flowing out in greater numbers. A Dubai-based investment banker, whose tips are closely followed by wealthy NRIs to make their additional millions, confides that domestic Indian groups are showing a feverish pitch in opening offshore trusts and family offices in the Swiss Alps, Malta, Singapore and West Asia to save their assets from arbitrary tax demands back home.
The view of the Indian stock market from outside is not at all encouraging. The country has grossly underperformed the MSCI global emerging market index, up 12 per cent in 2019. India was once the favourite emerging market with global fund managers as a hedge against a US-China trade war and a slump in manufacturing exports because its growth was derived from domestic drivers. However, the Sensex’s current valuation multiple is considered absurd at 29 times earnings since the earnings per share (EPS) growth has been mediocre.
The Sensex today has been likened to the S&P 500 Index’s 30 times earnings valuation just before the tech bubble burst in late 1999. The 10-12 per cent melt up in the Sensex/Nifty indices is attributed to the $12 billion in financial flows that have gone into a handful of mega-cap Indian index corporate giants from Foreign Institutional Investors (FIIs). However, the mid-caps are in a savage bear market.
A possible exodus of global money could mean 30 per cent downside risk in the Nifty from what is considered as stratospheric levels, given that the macro storm clouds will only darken in 2020. A vicious bear market can gut the inflated stock market indices.
However, these are minor problems when compared to the danger of a ticking time bomb of spiking youth unemployment in India where two-thirds of the population is below 30. So the real threat may not be from stepped up flow of refugees from across the borders, but from within.
K Raveendran is a senior journalist. Views are personal.
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