India Shall Overcome…. I just hope
I just hope that India’s healthcare infrastructure does not collapse and this crisis blows over in weeks.
I just hope Life goes back to normal, Kids go to school, offices resume their routine work.
However, if this doesn’t happen then we are possibly going to face the biggest Economic dislocation of independent India.
Remember we don’t have any bureaucratic, political or Institutional experience of dealing such situation. With the current effect, This looks like World War III.
A massive consumption shock is underway, and it can damage our economy’s superstructure in a big way. This superstructure stands on the back of the service sector jobs created by small and medium businesses and about 50 million consuming household who trickle spends directly or indirectly into the rest of the pyramid.
Over the last decade , our entire growth has been driven by a rapid rise in consumption, which were mainly funded by –
1) Easy Credit- Buy now , Pay Later.
2) Confidence to save less and spend more .
Thus growth hasn’t been fundamental. This means we have not created productive capital assets or created massive infrastructure or expanded exports by an order of magnitude by being globally competitive. This is like flying a Boeing 747 on One engine.
The excessive and aspirational consumption of the 50M households has acted like a large lever within our population pyramid. — They spend and India earns and then they earn and spend even more.
They are the top 15% of Population.
If you stacked up a 100 Indians, here’s how our income distribution looks :
i) 1 Indian earns 30% of the total and makes over Rs. 1.5 Lakh/ month
ii) 14 Indians earn 30% of the total and make around Rs. 20K/month
iii) Next 30 Indians earn 30% of the total and make Rs. 8K/month
iv) The Poorest 55 Indians earn 10% of the total and make only Rs. 1.5K/month
The trickle down effect of this top 15% of Indians keeps the fires in the rest of the economy burning. They are served by countless small entrepreneurs, who employ millions of Indians and conjure up services and experiences for the rest of the nation.
These small entrepreneurs are the backbone, though they are invisible to us. Small firms have been reeling with multiple shocks over the years. First was a demand shock with Demonetisation. Next , Compliance shock with GST. Then A credit/ working Capital shock with the NBFC crisis and finally this GDP sluggishness with slowing demand over the past 6 quarters.
Now we are possibly going to face severest demand shock that economy has ever experienced. This new demand compression will wreak havoc and drive failure of small & medium firms.
Irrespective of the virus, they were under the hardship and water was up to their chins. Now the proverbial tide can rise over their ears.
Now Govt have to act decisively to minimize damage. Everyday of inaction can lead to hundreds of ancillaries vanishing. Unlike Individuals who save for a rainy day and have family to fall back , these small firms have nothing. Cashflow for them is like oxygen. Cut it off and the firm falls apart.
This sudden shock to consumption can become a long- winded one. Remember this is the same India, that has lived with less , consumed carefully and saved penny by penny over the last 4 decades. Living within means is a memory that is alive and kicking in every household. They can shift gear to living with less. They will simply travel less, dine less, shop less and generally access fewer services. This will be devastating with small firms.
Economists will know better but reducing interest rates may not kick start demand, Although it can reduce some burden off from small firms.
If your business/ Job is under threat, you will stop consumption and defer it entirely. If you are uncertain about the future, than you don’t want to replace your car. Just because interest rates are now 5 % instead of 10% OR the dealer is offering Rs. 2 Lakh discount.
This consumption deferment decision , when multiplied across household can reverberate into a tsunami.
“We don’t need another pairs of sneakers or sandals anymore . Why drink coffee at Starbucks/CCD four times a week, why not make it once a month.” — Our biggest challenge today is how do we stop the failure of these small firms and how to restore consumer confidence and inclination to spend.
Crude is down from an average of 45$ to nearly 25$ and with 110B$ oil import bill, India can save nearly 40B$. That’s 3Lakh crore annually. If we redirect 2 years of Crude savings into two initiatives 1) A total emergency lock down to stop Covid 19 in its track ( Covid is still in stages it was in Italy and France 2–3 weeks ago)
2) A massive demand stimulus to save firms and Jobs.
We need deep, calculated response to ensure they are able to survive the coming few months. Any firm with leverage is under danger of going under and so are the Individuals.Moratorium on principal and Interest are the minimum actions that is required.
Desperate times call for Desperate measures !