| A bureaucracy that had grown by nearly 50% over the last decade, as the state kept getting bigger and bigger. A central government that resorted to increasing taxes on anything in order to fund its ballooning expenditure bill. Stagnating real incomes and growing unemployment for the average citizen. And fuel prices that kept on rising, even as a few family-owned business houses continued to strengthen their domination over the economy and vast swathes of industry. All leading up to an economy whose annual growth would finally plummet to -5.2%. That was India in 1979-80. It was exactly four decades ago that the Indian economy last saw negative growth. And if minus 5.2% sounds catastrophic, brace yourself. Because minus 5.3% is how much ratings firm India Ratings expects India’s economy to contract this year. Moody’s estimate is -3.1%. The World Bank’s -3.2%. The IMF thinks it might be -4.5%. “India is in the midst of a growth recession, with significant distress in rural areas,” said Raghuram Rajan, the former governor of the country’s central bank and the former chief economist of the IMF. |
| “Moody’s just sounded the alarm on India’s credit rating. Given that in late 2017, even after the economically ill-advised demonetisation and the poorly implemented roll-out of the Goods and Services Tax (GST), Moody’s had upgraded India’s sovereign rating, it can hardly be accused of bias. Repeated government allusions to a $5 trillion economy by 2024, which would necessitate steady real growth of at least 8-9 per cent per year starting now, seem increasingly unrealistic. What is going wrong, and how do we fix it?” Exclusive: Raghuram Rajan explains how to fix the economy, India Today |
| A few months back, Nirmala Sitharaman, India’s finance minister, had ruled out a recession, “Looking at the economy in discerning view, you see that growth may have come down but it is not recession yet; it won’t be recession ever.” That was in November 2019. India has not seen a recession for four decades. But it’s here now. Sadly, instead of learning how to avoid it, India seems to be walking faster towards it. Rajan’s unsolicited, but eminently sensible, advice to the Indian government is as relevant in June 2020 as it was in November 2019, when he wrote it. |
| The Make in India initiative — which presumably is also meant to draw foreign direct investment (FDI) and global supply chains to India — is undercut by constant fiddling with tariffs and taxes, as well as rule changes intended to favour domestic incumbents. A case in point is the RCEP trade pact, where India’s refusal to participate seemed a sudden decision. If India does not participate (though it still might), it risks becoming an even less attractive investment destination. Foreign investors have not exactly been surging to invest in India — FDI today is not much higher in dollar terms than in 2007-2008, even though the economy is much bigger [see graphic: FDI]. Unfortunately, domestic businesses have not been investing either, and the stagnation in investment is the strongest sign that something is deeply wrong. Exclusive: Raghuram Rajan explains how to fix the economy, India Today |
| Sadly, the Indian government is increasingly shutting its economy off from international trade pacts and supply chains, all in the name of self-sufficiency. Its imposing tariffs, customs checks, and regulatory hoops for global goods and services, ostensibly to protect India’s economy. Instead, its economy is going to get even less competitive and innovative. |
| India needs to increase internal competition steadily by reducing tariffs and joining free trade agreements judiciously. Exports today are import intensive, and India cannot make more in India if trade barriers are high. Indeed, one of the surest ways to take India back to the Hindu rate of growth is to reverse the steady trade and investment liberalisation begun in the 1990s. To those who argue that India is uncompetitive, its history should suggest that keeping barriers to competition high is the surest way to ensure it remains uncompetitive. As India brings down barriers, its business sector will cope, innovate and reinvent itself. This is not economic theology, it has been India’s own experience. Exclusive: Raghuram Rajan explains how to fix the economy, India Today |
| The scary aspect about India’s recession is not that it is happening because of Covid-19. But that it was in the works for much longer. Sanjiv Bhatia, a former investment banker and hedge fund manager, captured the Indian recession predicament in depth in September 2019. |
| With recent data showing deep contraction in several vital sectors India could be at the inflexion point down the slippery slope. Automobile sales have dropped by almost 35 percent from the previous year, real estate sales are down 18 percent and even inexpensive consumer goods such as clothing, biscuits, etc. have seen dropping sales. The next round could see large labour layoffs, followed by bankruptcies along the supply chain, including automobile dealerships, parts manufacturers, construction companies and real estate developers. This will result in further decline in consumption as unemployed people tighten their belts and loans and EMIs go unpaid. The vicious cycle of fear, uncertainty and loss of confidence will cause consumers and businesses to retrench and reduce consumption and investment and banks to stop lending. And eventually, through the multiplier effect, there could be a recession. The last time India had negative growth was in 1979, so it is rare for a developing economy with a large and growing population to suffer a contraction. Each year in India, more people join the workforce, there are more mouths to feed, and there is an improvement in technology and innovation, which increases productivity. So, in its natural state, India will likely have an increase in production and, therefore, a positive GDP. Even in the period before 1991, a socialist “license-raj” Indian economy grew at around 3.5 percent a year because of an increasing population. This was at par with the growth of less-populated, but developed, free-market economies like the US. IS INDIA HEADED FOR A RECESSION, Contract With India |
| The only silver lining will be for a handful of large corporations, Indian and American, as Saurabh Mukherjea and Harsh Shah of investment firm Marcellus pointed out earlier. |
| The 20 most profitable firms in India now generate 70% of the country’s profits, up from 14% thirty years ago. The rise of India’s networked economy (highways, cheap flights, broadband, GST) has allowed large, efficient firms to use superior technology & better access to capital to squash smaller competitors. In line with what is being seen in the US, the growing dominance of a handful of very large companies in India is changing the template of capitalism in India. Behold The Leviathan: The Remaking of Indian Capitalism, Marcellus |
| Burying the lede Arundhati Does it make a difference when you label something for what it isn’t instead of what it is? Google found out the nuance of this difference the hard way when it became the victim of fake news. Last Friday, this was the top trend on Indian Twitter. |
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| Allegations about Google Pay being illegal were backed by conspiracy theories fanned on WhatsApp, as well. (Incidentally, there is a public interest litigation (PIL) against WhatsApp’s payments services, too) |
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| The reason for this was the selective reading of the Reserve Bank of India’s (RBI) judgement. It all began with a PIL, which alleged that Google Pay was acting as a payments system provider in violation of the Payments and Settlements Act as it has no valid authorisation from the central bank of the country to carry out such functions. The petition also said that Google Pay does not figure in the National Payment Corporation of India’s (NPCI) list of authorised ”payment systems operators” released on 20 March, 2019. Google Pay, which runs on top of India’s Unified Payments System, has emerged as the top payments app in the country, with 75 million-plus transacting users, ahead of PhonePe’s 60 million, and Paytm’s* 30 million, said TechCrunch. In response to this petition, (RBI) told the Delhi High Court last week that Google Pay is a third-party app provider (TPAP) and does not operate any payment systems. The headlines the next day were all about how Google Pay is not a payments system operator. |
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| Social media caught on to the “cannot operate a payment system” and missed out on what it can do, fanning the call for a ban. |
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| That prompted NPCI to come out and explicitly say that RBI has not banned Google Pay. |
| RBI has authorised NPCI as a Payment System Operator (PSO) of UPI and NPCI in its capacity as PSO authorises all UPI participants. We would like to clarify that Google Pay is classified as Third Party App Provider (TPAP) that also provides UPI payment services like many others, working through banking partners and operating under the UPI framework of NPCI. All authorised TPAPs are listed on the NPCI Website,” the NPCI said Google Pay is not banned, clarifies NPCI, The Week |
| Now, if only RBI said this in the first place. As for the fake news, usually, these kinds of “Twitter trends” don’t emerge entirely organically… or do they? *Paytm founder Vijay Shekhar Sharma is an investor in The Ken. |
| For Singapore Airlines, a silver lining Jum The pandemic brought an unexpected opportunity for Singapore Airlines. The carrier now looks set to grab a bigger share of the lucrative Indian market through local unit Vistara, as it expects people to prefer booking direct flights for long-haul overseas trips. Understandable, since stopovers increase the risk of exposure to Covid-19. You see, India doesn’t allow foreign airlines to fly passengers from the South Asian nation to, say, Europe without those airlines touching down in their home countries. For instance, Emirates and Etihad Airways, which currently dominate the traffic for the India-Europe route, have connecting flights in their hubs of Abu Dhabi and Dubai, respectively. Those travellers who prefer to fly India-Europe direct will have to opt for a local airline. That’s music to the ears of Singapore Airlines. Its Indian unit Vistara—a joint venture with India’s Tata Group—is ready to scoop those passengers away from Emirates and Etihad. Following Jet Airways India’s collapse last year, only Vistara and state-run Air India have wide body aircraft in their fleets that can fly non-stop to Europe and the US, reports South China Morning Post. Being the world’s third-largest travel market, India could provide a crucial boost for Singapore Airlines, which has been hammered by both budget and premium carriers in Asia over the past years. |
| A potential India-US Covid bubble Jaideep The pandemic season is all about bubbles. Travel bubbles (which we’ve written about), sports bubbles, and social bubbles. India hasn’t created any yet, but that could change soon. The Indian civil aviation ministry is considering establishing “individual bilateral bubbles” with the United States, the United Kingdom, Germany, and France. It would allow airlines of these countries to operate international passenger flights. There’s just one big problem. When it comes to the proposed US-India bubble: the countries are ranked No. 1 and No. 4, respectively, in terms of the number of Covid cases. Travel bubbles, by definition, mean that there will be fewer restrictions such as quarantining and testing of passengers on arrival. The conditions of this proposed India-US travel bubble haven’t been revealed, but this passage from a Business Standard story is, well, deeply concerning. |
| While such corridors are being created by countries that have successfully curbed the growth of cases, officials indicated that India and the US would not wait for cases to fall to zero before creating the corridor. “A travel bubble can also be between two countries which have similar number of cases and respond in the same way to the pandemic,” one of the officials said. In such a scenario, neither country needs to close the border to protect citizens. US-India to create green corridor for resumption of international flights, Business Standard |
| The trigger to set this plan in motion was actually a complaint by the US Department of Transport (DOT). DOT has accused India’s national carrier Air India of “discriminatory practices” while operating chartered repatriation flights. The airline is selling tickets to passengers directly, rather than via a broker, like the government. |
| At issue is India banning regularly scheduled international flights but allowing charter repatriation flying under the “Vande Bharat” program. Charters are supposed to be limited in frequency and duration; even Lufthansa’s large-scale charters wrapped up in May. But Air India’s proposition is extensive. Air India is planning 59 flights between June 10 and July 3, representing 53% of its pre-coronavirus schedule that had 34 weekly roundtrip U.S. flights, according to DOT. That pushes the boundary of what is a special charter versus slimmed-down normal offering. “It appears that Air India may be using its passenger repatriation charters as a way of circumventing the Government of India-imposed prohibition of all scheduled” flights, DOT said. US…Accuses Air India Of Evading Coronavirus Restrictions, Forbes |
| The US barred Air India from operating chartered flights between the two countries from 22 July. Air India currently has a monopoly on the US-India route. Because of restrictions imposed by the Indian government, foreign airlines are forced to fly empty one-way. US airlines such as Delta have so far been denied permission by India to operate flights to the country. This has resulted in a “competitive imbalance,” said the DOT. To smooth things over, while European countries are preparing to block Americans from entering, India is looking in the other direction. India can’t afford to strain relations with the US right now, what with tensions running high along its border with China. |
| Consensual colleagues Arundhati |
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| Clarification: In edition #64 of BFO, Matt Chitharanjan, founder of Blue Tokai, was misquoted as saying, “Starbucks should reduce the price of a coffee because the experience and real estate cost makes up for 40% of the price.” He had originally said, “The experience and real estate cost makes up for 40% of the price.” The misattribution has been corrected. The error is regretted. |