Reviving India’s animal spirits

There is a huge disconnect between certain key political and economic macro facts and the real state of the Indian economy. We have a party in power, with a virtual monopoly in the Parliament and in the states, with the unopposed power to take the toughest decisions to initiate difficult reforms and revive the economy, but it is strangely unable to do so.

Our forex reserves are at a record high of USD 430 bn, inflation at about 3.2% is in control, India remains the fastest growing economy in the world, the government claims that then NPA crisis is receding and banks are free to lend, interest rates have been pruned, FDI inflows touched a record high of about USD 65 bn last year, if the World Bank rankings are to be believed then India’s ease of doing business has improved considerably, and the government says that it will spend Rs.100 lac crores on infrastructure projects and yet the ground reality is that India’s economy has been slowing down since 2018 and continues to do so.

This slowdown is best manifested and evidenced by the fact that fresh investment into new projects is at a 15 year low, with corporates preferring to retain their funds in banks, rather than risk it into new projects, corporate profits are receding, consumer spending is dipping and unemployment remains at a 45 year high. This state of the actual economy is also reflected in the tax collections, which are failing to meet their targets.

The irony is that in an economy with a captive consumer population of over 1.3 billion, which should give rise to huge demand, corporates are unwilling to take the risk and invest in new projects. There are no new large projects being announced as such and the budget failed to give any relief or revival measures. In fact in her zeal to trumpet the Modi government achievements like an election victory speech, the FM was indifferent to even the visible woes of the economy.

It is not just that corporate balance sheets are getting more and more stressed, but the larger issue is that the businessman is unwilling to risk his capital into a new project and is also thus unwilling to borrow money from banks to invest into new projects, even if interest rates are being cut and the government is prodding banks to lend and the PM is assuring bankers that they will not be hounded if their bonafide decisions to lend go bad.

The fact is that over the past few quarters, since the government refused to accept that there was any slowdown in the economy and it even gave doctored figures to prove its contention, the budding slowdown has now become a crisis, whose signs are now visible all over and cannot be ignored even by the government too. The reality is that till new private investment into new projects does not take off, the languishing economy will not be revived, because new projects mean an addition/growth in national GDP, jobs, tax collections, government revenues and business to the MSME sector. But that needs a revival of the animal spirits of the businessmen, which are in coma at the moment.

Rakesh Jhunjhunwala, the well-known investor says that the animal spirits and business spirits of the business community have been bruised. Naushad Forbes, a well-known industrialist says that he has not met a single person after the recent budget, who says confidently that the future looks bright and hopeful. He says that our animal spirits will revive and fresh investments will take off only when our perceptions about the future revive, which at present is cast in gloom and doom.

The government is finally recognising the slowdown in the Indian economy which is visible all around. The FM has been in consultation with representatives of various sectors such as banks, SMEs, automobiles etc., but is unable to come out with any relief measures since she is yet to get the PMO’s approval. To us, this slowdown is not short term or cyclical as many government supporters claim. It is of a structural nature and merely doling out financial relief package to different sectors will not resolve the crisis. The animal spirits of Indian businessmen are depressed due to deeper reasons, which to us also give the remedial measures that the government needs to initiate to revive the economy, restore confidence of the business community and trigger fresh investment. These are:-

1. Complicated and uncertain laws, which foist huge sudden liabilities of penalty and prosecution.
2. Heavy handed cost of compliance with these laws, where the entrepreneur’s capital is always at risk.
3. An era of prosecution raj and tax terrorism.
4. Uncertainty at the judiciary, due to which business contracts are freely violated by the delinquents, and businesses suffer.
5. Banks continue to be unwilling to lend, and the pervasive distress in the NBFC sector.
6. Widespread unemployment and stress in the MSME sector.

The solution thus lies in simpler and lighter laws, remove the tax terrorism, reduce the cost of compliance, make bank loans easy for the deserving and finally make courts efficient, in order to revive the animal spirits of business.