The Outlier Indian

What’s the status of the Indian economy? Well, it is in the doldrums. It was slowing down even before the COVID-19 pandemic started. The half-baked lockdown caused a free fall. And, now it is in the recovery mode. Migrant workers, the self-employed, jobs in the formal sector – all, have taken a severe hit. This is one half of the picture.

Here is the other half of the Indian economy. The share market is at a record high. Land prices are on a high. None of the commodities is showing any price weakness. Companies are reporting healthy profits. Least of all, the inflation is also at a high, with everything blamed on to supply-side disruptions as a cause. Meaning, the demand-side is assumed to be strong.

Both the halves of the Indian economy are in complete contrast to each other. Ideally, they have no reason to co-exist. But they do, and to make matters worse, both the halves keep diverging with each passing day.

The consequences of asset price inflation

Say, a company wants to start the operations. It needs to buy/lease land and raise capital. Land prices are through the roof. It is nowhere near to fit into any break-even calculations. On the capital front, the RBI has presumably reduced the interest rates to a record-low. Just that, nobody would lend at those rates.

There is enough and more liquidity in the banking system. Yet, the capital for productive purposes is scarce. Meaning, one has to pay a premium, formal and informal, to avail this capital. The transport costs are high. All the commodities – cement, steel, iron, sand etc are going strong. The electricity costs are high. Even the communication costs are rising.

With all the input costs higher and increasing further, the payback period for fresh investment gets stretched further. To complicate the matters, existing companies have enough ammunition with them in the form of profits to influence the pricing of products/services in their favour. And, they do this without increasing their capacity, as they also don’t want to incur capital expenditure.

In such a scenario, who would want to start a new business? Or even expand an existing business? With all the asset prices at record-highs, there is just no incentive/place for a fresh opportunity to take shape.

On the face of it, the Government is announcing one sop after the other for attracting investments. What the Government is not getting is that till the time the asset price inflation softens, there is no way that the real Indian economy will fire on all cylinders. It can only splutter, and that is exactly what it is doing.

The reasons for asset price inflation

The reason for India having achieved this rare distinction of all the indices, including the inflation, going through the roof with the real economy touching new lows is only one. The Reserve Bank of India (RBI) under Shaktikanta Das.

Please read about this here – how the RBI Governor has dismantled the real Indian economy one step at a time (publishing next week).

The way forward

To take corrective action, the Government of India will have to admit the dichotomy of the Indian economy. The Government will have to accept that the policy decisions taken and the current situation are harming the prospects of the real economy. To do this means that all the indices, that have got nothing to do with the ground reality, will come crashing down.

The Government will not be in accord with the idea of share market coming down. To be honest, this doesn’t mean a thing to anyone. But, the companies will raise a stink. The dubious foreign currency flows will recede. And the Government that has got used to measuring its success by the rise in the Sensex will feel doomed.

The pricing power of the middlemen can be curbed. All the unsold inventory of houses should get cleared off. The land mafia should get destroyed. The abnormally high taxes on diesel and petrol can be put to good use for environmental purposes. Least of all, no Diwali bonus for Government employees.

I know I am in a fool’s paradise. Neither the Government will admit the bipolar aspects of the Indian economy nor will it to doing anything substantial to correct it.

To be honest, there is no way forward.

The Future

Inflation is measured year-on-year. So it will show some moderation here and there. The pliant RBI and the sly Government will show it as their success and follow it up with another interest rate cut. Rest all other indices are absolute – share market, land, commodities etc, so they will keep rising and we, a gullible citizenry, will keep cheering.

In the meanwhile, the real Indian economy will die a slow death by the thousand cuts of asset price inflation.