The stock markets have crashed, as they do from time to time. Each time it is for a different reason; this time the immediate reason is coronavirus, which started as a Chinese epidemic sometime in December but now has quickly escalated into a global scare. Since the problem is severest in China, it means a simultaneous global demand and supply shock. China
not only does a lot of the world’s manufacturing for export but is also a big importer. Strong linkages in manufacturing, trade, and travel across economies, following 30 years of globalisation, mean that trouble in one part of the world is easily transmitted across thousands of miles. Hence, from December 19, the S&P has crashed by 12.4 per cent, the Nikkei by 9.65 per cent, and the Nifty by 7.5 per cent.
But the real worry is not the market crash or the impact of coronavirus
on India. A far bigger worry is the further weakened state of our economy.
Evidence is getting grimmer by the month. On Friday, the government announced that India’s GDP growth dropped to a 27-quarter low of 4.7 per cent YoY in Q3 FY20 against 5.1 per cent (revised) in Q2 FY20.
First, the manufacturing sector is already in recession, having registered two consecutive quarters of contraction. Second, the utilities sector posted its first contraction in the new data series. Third, the construction sector recorded no growth. Fourth, exports have contracted for the second consecutive quarter. Fifth, capital investments posted a second consecutive contraction; it was -5.2 per cent YoY in Q3 FY20, a record low. All this will be a shock to market players, who had shrugged off the disastrous Budget and pushed market indices back to nearly their all-time highs.
Data revisions of the previous quarter denote further weakening of growth. Set against the virus scare and a global market crash, the latest economic numbers presents a scary scenario, especially since the December quarter in a given year is one of the strongest.
Weak economic immunity
Clearly, the Indian markets were running on fumes and coronavirus
has simply exposed the weak immunity of India’s economy
to external impact. This weak immunity is due to poor policymaking at the highest levels over the past six years. From the Prime Minister’s Office downwards, babus have not only perpetuated gross errors of the past, but committed egregious new ones. They not only failed to repair the old crumbling superstructure, but made the very structure weaker still. Hence, we stand more vulnerable today than we have had at any time in the past six years. These are what caused the economy
One, the Modi government has found no solution for the grossly unproductive public sector. There has been no meaningful disinvestment or significant strategic disinvestment; only sleight-of-hand, such as getting one public sector company to buy the shares of another; meanwhile, billions of rupees have been taken out of government companies as dividend. Some companies don’t have the money any more to pay salaries. Within the public sector, the biggest cesspool of corruption — public-sector banks — remain as they were, except for some silly mergers. Their ownership, corruption, and lack of management accountability remain as is, with the result that hundreds of billion rupees of taxpayers’ money has to be injected into them just to keep them alive.
Two, there is no end to Budget giveaways. Prime Minister Narendra Modi changed the names of UPA
schemes and expanded them; he added a few more of his own to the list of giveaways to various privileged sections. Taking a leaf out of previous Congress governments, the government announced a loan mela called MUDRA.
The resultant bloated fiscal deficit is hidden by gimmickry.
Three, not only does tax terrorism continue unabated, driven by “collection targets”, it is now enshrined in the law. The high tax rates, glitch-ridden systems, and the draconian rules of goods and services tax have not helped increase government revenues but have surely created enormous aggravation for businesses. According to a Reuters story of last week, “with revenues falling, taxmen rake up three-year-old demonetisation
cases. Jewellers have received tax notices asking them to turn over money they made from gold sales during DeMo … About 15,000 Indian jewellers have been sent tax demands …” Remember these words of an ex-director of Infosys? “Tax officials seem to think of everybody as evaders and themselves as vigilantes! We have filed returns in over 30 countries, but no country treats taxpayers as badly as India does.”
Besides, the Central government has launched a series of expensive countrywide projects that have caused strife and harassment. One is Aadhaar, which promised to be a miracle identification project to cut wasteful subsidies but is now just another big wasteful scheme, hurting those it was supposed to help — the poor. The second project that has created enormous fear and social tension is the Citizenship Amendment Act and National Population Register (a brainchild of P Chidambaram). Meanwhile, the bureaucratic and flawed bankruptcy architecture has descended into chaos and will soon resemble previous bankruptcy resolution efforts.
Put together, instead of minimum government, maximum governance we got just the opposite: An even more expansive, intrusive government while Achche Din have disappeared as vote-catching political slogans. With coercion, bans, tax terrorism, arrogance, and a continued decline of institutions running through most policymaking, the immunity of the economic system has naturally turned weak and, therefore, defenceless against external attacks. If coronavirus
hadn’t caused a market crash, an anaemic economy would have extracted its price anyway.