The Great Indian Economic Slowdown

We millennials are no doubt a very special generation. We have been born in an era where humans are pushing the scientific frontier almost every year. Adam Smith’s invisible hand seems to be making more and more sense, the economy is growing at its fastest, technology is advancing at a breathtaking speed and things are increasing becoming digital. Millennials no doubt are a big market in a country like India where we form about 34% of the population. The way we think, the decisions we take have a very big impact on the economy. Even our finance minister thought so in her tweet where millennials were criticised. Though we made our FM an overnight twitter star and we got some extremely good content for our memes, still, we ought to understand what was she talking all about.

Haven’t you guys ever wondered about how our everyday decisions affect the entire economy and how does the economy, in turn, affect our decisions? This blog is an honest attempt by me to explain to you all about the current economic state as simply as possible without the use of any jargon. I hope that by the end of this blog we would be able to empathise more with our economy and get a sense of responsibility for our actions that have such drastic impacts on our lives.

I am sure that almost all of you have come across the term “economic slowdown” in the past couple of weeks. I, you and everyone are directly affected by this problem. You might not realise the gravity of the situation but believe me, it’s as real as it can get. Most people of our age have no idea about the current economic state of the country because there is no medium that explains the situation as simply as possible without all the financial jargon. One can find the information in economic newspapers but these are almost every time too complicated to read. It takes a lot of time to make sense out of these articles and not everyone has time and resources to study finance in detail.

 

Let us start the discussion by using a very small example. Let's Imagine you just got your dream job at ITC in the marketing department. It's finally the end of the month and you just got your first salary (yeyyy…time to finally cross things off that bucket list). You always wanted to buy those super awesome, extra bass JBL earphones. You go to the nearest electronic store and buy earphones for say 2000 bucks. Now, your 2000 will be undertaking a very interesting journey and let me walk through it step by step. Suppose it’s the store owner’s daughter’s birthday and he plans to buy a dress for his daughter, so he goes to a big shopping complex and spends that money on a cute frock. The poor shopping complex owner has problems of his own and needs to make his demanding girlfriend happy, so he takes her to some rich-ass club and uses that money to pay the bill. The club owner uses the same 2000 to pay one of his waiters.

Try to answer this, how many people were paid using the same 2000 bucks? Your initial 2000 changed hands 5 times. In other words, that 2000 bucks generated economic activity worth 10000. This is exactly how GDP calculation works. In simple layman terms, GDP measures the movement of money through the economy. Spending makes everyone better off. More is the spending by the people, more is the GDP and better is the economy of the country. Now imagine if you had just hoarded that money in your wallet. Doing this wouldn’t have made it possible for that 2000 bucks to generate economic activity worth 10000 ( I’m not suggesting that you shouldn’t save, in-fact I hold just the contrary views).

Keeping the above discussion in mind, we can say that more consumption is good for an economy in general and it makes everyone happy (at least financially). Now imagine what would happen to the economy if people become sceptical and start consuming less. You become sceptical and decide not to buy those earphones. The impact would not just be restricted to the shopping complex owner ending up breaking up with his girlfriend. Your 2000 no longer generates economic activity worth 10000. And what if everyone in the economy starts consuming less? That would also mean people consuming fewer cigarettes and ITC facing an extreme cash crunch. You might face a salary cut and in extreme cases even layoffs. This is exactly what happens during an economic slowdown. Don’t believe that all of this is actually possible? Let me quote some facts:-

• Business Today reports that India lost about 11 million jobs in 2018 alone. India’s unemployment rate shot up to 7.4% in December 2018.


• The Hindu reports that the auto sector alone lost 8-10 lakh contract employees in the last few months(more on this later)


• All major companies including Cognizant, Zomato, Parle, Samsung have been laying off employees left and right. In fact, Parle recently made it to headlines for slashing production due to demand slump leading in about 8000-10000 potential layoffs.

Our GDP growth which used to be on an average 7% reduced to just 5.8% during the January-March 2019 quarter. I know, a mere 1.2% reduction doesn’t seem much but think in this perspective. Our “Beloved” PM wants India to become a “$5 trillion” economy by 2024. We currently stand at about $2.8 trillion and to achieve that target we need an average growth rate of 11.5% until 2024. And we currently stand at 5.8%. At the current rate, It would take at least 2027-28 to reach that target.

 

Now it is a very very complex and difficult task to assess the health of an economy as large as India with nearly 1.3 billion people. But there are certain indicators that can be used to assess the health of the economy. Let me try this again. Suppose you are not feeling good and you go see your doctor. What is the first thing she does? How does she know there’s actually something wrong with you and not that you are emotionally down because your crush didn’t reply to you back? She’ll probably check your heartbeat and pulse rate, right? These indicators serve as the pulse and heartbeat of the economy. One can be sure that there is something wrong with the economy if the pulse does not feel right.

One such indicator is the automobile sales figures. The automobile industry is a hot topic these days amongst the country’s economists and know-it-all political analysts amongst our friends alike. The entire industry is in a very dilapidated condition right now. During April-June 2019, domestic car sales were down by nearly 23%. Around 3.5 lakh jobs were lost in this sector due to the recent slowdown. All major production houses such as Honda, Tata and Mahindra have temporarily stopped the production of automobiles in their factories.

Now what makes the automobile sector so important and how is this an indicator, you might wonder? The answer to this question lies in the peculiar dynamics of this industry. Automobile is an industry that has both forward and backward linkages to a ton of other industries. Let me explain that again. Let’s make a list of things that are used to manufacture your favourite car. This list will include stuff like steel, aluminium, rubber for tyres, tyres itself, plastics, textile for seats, stereo, engine, suspensions, airbags and a hell lot of other products. These are the industries that take part in the manufacturing of cars(the backward linkages) but what about sectors that support the car once it’s on the roads. Sectors that share forward linkages like petroleum, the car dealership, the insurance companies that insure your car, the banks that give auto loans ( and of course the traffic police that depends on them for their living :p) are also very much dependent on the automobile industry. This makes the automobile sector a very good indicator of the economy. If this sector is facing a crisis then it implies that all the other dependent sectors are not doing good as well, which in turn implies that the economy is in trouble. There is another point of view as well. Automobile sector also manufactures trucks and tractors. Commercial vehicles are seen as an indicator of industrial activity. What can one imply if the demand for trucks and tractors is reducing? Obviously, factories are consuming lesser raw materials and producing lesser finished goods.

Real estate is another sector that’s highly connected. The top 30 cities of our country nearly have 1.28 million unsold houses. People are not preferring to buy houses anymore. The story of FMCGs( fast-moving consumer goods, basically your daily need stuff) is not that rosy as well. HUL, Dabur, Britannia, all of them have their growth down by more than 50%. This implies that people are indeed hesitating for making even everyday purchases. Indicators like these just show us how grave the situation is.

There are a lot of such indicators such as the amount of steel consumed, revenues of railways from freight trains, net exports et cetera that can give us a sense of how our economy is performing in general. And all of these indicators are in red these days. And to top it all, we are facing the slowdown during a time when the west has already experienced the bond yield curve inversion(more on this in the next blog)

So it appears that currently, our economy is not all sunshine and rainbows. There are definitely some gloomy clouds ahead. We not only as an economy but as an individual as well need to brace for the impact. The best way to navigate these rough waters is to SAVE. Reduce your expenses, plan your investments and do SAVE. I would usually take this opportunity to buy as many stocks and mutual funds as possible as you’d get them really cheap but that’s something that I won’t recommend to someone who does not trade daily.

Remember the 50-30-20 rule. Spend only 50% of your salary on your necessities (Netflix subscriptions is not a necessity!), 30% your luxuries and make it a habit of saving at least 20% of your salary. Keep track of your expenses and force yourself to save. A good strategy would be to transfer the 20% of your salary to a different bank account as soon as you get it. I know this might sound a little counter-intuitive given the fact that decrease in consumption has been the major reason for this slowdown, but the economy is all about how to outperform everyone else in the economy

Apart from that, just try to keep yourself aware of the latest happenings in the financial world. I would try my best as well to keep you all posted with the major happenings through these blogs.

In case some of you want to discuss more, I would love to hear your views as well. 

Until then….Happy Investing

-Nikhil Mudholkar
nikhilrmudholkar29@gmail.com