Can the Indian Economy Escape Another Recession?

Since the great crash of 2008, not much has changed. Economies around the world – in order to avoid collapse – have played every available trick in the book to convince consumers that the future was rosy. This played well until the future arrived and things seemed just the same.

While we weren’t looking, globalisation has turned from the “thing we all love” to “that crazy fad when we all thought we could work together”. Protectionism has crept up on us via a series of bad decisions. The most influential nations – including the US, UK, and China – are beginning to signal to the world that they’re not above undermining capitalism and its preaching of free trade if doing so allows them to safeguard their own economies. Even Europe – where any talk against the benefits of the European Union has traditionally been considered sacrilege – is seeing a resurgence of right-wing politicians that talk of disbanding the gang and going back to their respective currencies and insulated economies.

Amid all this, the Indian economy had slowly chugged along like a chowkidar with true purpose. While not completely immune to the outside world, India has somehow weathered the storm thanks to steady domestic demand. The auto industry – an at home pregnancy test for the health of the economy in general – had pottered on at a respectable seven per cent annual growth rate and this, not entirely a coincidence, mirrored our GDP growth (or at least, the GDP growth our government kept convincing us is true, thoroughly vetted and subject to change, as required). Nonetheless, overall numbers had suggested that despite Trumpian economics, demonetisation, and a China slowdown, India had managed to keep its ship afloat. A lot of this has been due to the emergence of a consumer class – albeit at a low-income level – that has allowed companies to continue to sell goods and services even while global demand faltered. It is also somewhat likely that two Ambani weddings in the same year have given our GDP a shot in the arm.

But how long did we expect this to last? There’s only one Ambani child left; we’re almost out of magic bullets.

In his wonderful book Sapiens, Yuval Noah Harari describes at one point the invention of “Credit”. Credit, as he illustrates, was one of humanity’s greatest achievements, as it allowed us to scale up rapidly by effectively borrowing from the future.

If this is confusing at first, think of how you take a loan from a bank to buy the house of your dreams. You’re effectively agreeing to pay EMIs for 15-odd years because you are confident enough on your future income stream to take that chance.

It is for this reason that credit, or an economy’s willingness to embrace it, is one of the clearest signals of economic confidence. It is precisely why most economists will point out that to gauge the health of the economy, it is the bond market and not the stock market that gives better indication.

So, how does this impact India?

Over the last few months, economists in the US have been pointing to what they call “the inverted yield curve”. While this is cryptic, what it basically says is that people’s long-term expectations are worse than their short-term expectations. In other words, your loan shark is happy to lend you money for a few days and expects he will get it back, but his optimism fades considerably when you request for a month-long or a year-long loan.

Back in India, however, the credit markets are somehow still holding their own. Banks may point to a steep decline in the number of loan disbursements for items such as consumer durables, but much of this is due to stores offering interest-free EMI options. Indians may be confident in their future income streams, but no Indian is willingly taking credit if offered a free option.

Recent news, however, has shaken our faith that all is hunky dory. When Finance Minister Nirmala Sitharaman stepped forward to present the budget, expectations were high. This was partly because, as a woman, we were hoping Ms Sitharaman would apply some of that fiscal black magic that has had people across generations wondering how their mothers managed to stretch a 1000-rupee budget to cover everything from groceries, to household help, and stationery.

However, there was little in the budget to really cheer. Fast-forward two months from the budget and things couldn’t look gloomier. India’s GDP growth rate number keeps coming in lower and lower, like the average daily collections on a Rohit Shetty film. As an economy that was used to seeing numbers like 7.5 per cent and 8 per cent, we’re now coming to terms with five per cent. At the same time, the government’s GST income is falling, the banking system is faltering, and interest rates have already been slashed to little or no avail.

A few hastily implemented stimulus moves and bank mergers put into force over the last 10 days have had the markets shrug and go “meh”, even as the auto industry continues to report numbers so terrifying, auto execs have been booking tickets to watch IT Chapter Two, just to lighten the mood a little. In the midst of all this, the RBI released ?1.76 lakh crore (or, roughly half an Ambani wedding’s worth) of funds to the government and the economy licked its lips thinking money was going to rain down on everyone. But in a move of fiscal prudence, the government is likely to use the money to offset the fiscal deficit instead. Think of it like using a lump some of money you received in paying off your credit card bill rather than buying a new pair of jeans. It is certainly the sensible option… unless you’re naked at the time.

So, how did everything start going so drastically wrong for the Indian economy? And is there any hope that things will swing around?

The answers are far from simple, sadly. Remember what we said about credit? It only works if we believe strongly enough about the future. The truth is that since the great crash of 2008, not much has changed. Economies around the world – in order to avoid collapse – have played every available trick in the book to convince consumers that the future was rosy. This played well until the future arrived and things seemed just the same. With very little wiggle room left to play, it’s unlikely that the world can escape another financial meltdown. India is simply getting swept away in this tide. Whether we can hold our own like we have done before depends entirely on whether our government is able to sell us a story worth believing.

This article was originally published on Arré