Finger-pointing is the worst use of an Analysis. Using the outputs of an Analysis for learning to avoid similar mistakes in the future makes the Analysis worthwhile. It’s with the latter intention that I am attempting an “Attribution Analysis of The Fall of India” – why we are where we are ? Seeing the deluge of articles / news-stories on the state of India, I thought that it might be useful to try to find as to which of the many factors are really responsible for our current state, and how much has each factor attributed to our fall.
What is “Fall of India” ?
“Fall of India” refers to a combination of :
- Fall in the real Economy (Slowdown of GDP growth, Increasing Fiscal Deficit, Increasing Current Account Deficit (CAD), Rising inflation, High interest rates, Poor corporate earnings growth)
- Fall in the Capital markets – Equities, Commodities
- Fall of the Rupee.
I don’t think anyone can debate that there has been a Fall of India after going through the above list of KPIs defining the state (situation) of India. Some people may debate that some “qualitative factors” have improved and that too, especially in Bharat – Poverty has fallen by 15% points, rural economy is growing. But then, I shall show parameters on quality of education, healthcare, sanitation, employment, law & order and corruption, and the argument on these qualitative factors will also be convincingly clinched.
Key factors behind the Fall of India
Now that we have laid down a seemingly decent foundation for the fact that India is not doing well as a country, let us try to identify a short list of key factors / theories explaining this Fall :
Failure to carry out meaningful economic reforms from 2009 onwards; High fiscal deficit, caused by subsidies on fuels, agriculture and now food security.
- Not managing the Import-Export balance well structurally; not encouraging enough exports and not being able to rein in imports. Leading to widening CAD, and hence bigger impact on the Rupee (especially, knowing that QE had to end some day).
- Global factors :
- Slowdown in economies of developed countries
- QE…and then of late, stopping of QE
- Worsening condition in West Asia & Middle East – Syria, Iran, Libya, Egypt.
- Obstructionist parliamentary Opposition & sometimes Allies, clamorous & Quixotic media, over-zealous CVC & Judiciary
- Vociferous opposition to large-scale projects from Environmental Ministry and Activists
- Series of scams from 2010 – Commonwealth Games, 2G, Mining, Coal, Railways, and hence Anna Hazare and hence slow-down by bureaucracy; Moral degradation of people at large.
According to me, out of 100% total impact that the above factors had on the Fall of India, my attribution to the 6 factors would be 20%, 15%, 40%, 10%, 5%, 10%, respectively.
Attribution Analysis of Fall of India – chart
1. Impact of global events
We all would have understood by now that there is no such thing as “Indian markets are decoupled from the world”. With Quantitative Easing starting after 2008 crash, emerging markets clearly benefited from easy money coming into their equity and commodity markets…without any positive change in fundamentals of the economy. This trend has been noticed across all emerging markets, and it has wrought havoc on interest rates, inflation, forex rate and hence on the economy. The battering of the equity markets is a logical fallout. Hence I rate point 3 above as the single most destructive factor in the “Fall of India”.
Europe slowdown has hit revenues of companies exporting to these countries. USA Itself had slowed down till 2011. To that extent, the real Indian economy got hit. However, the easy money coming in to “better” markets like India kept the equity markets propped up – and at that time, no one was complaining on why the markets are so high without an accompanying change in fundamentals ?
Besides the Western economy factors, the serious situation in Syria, Iran, Egypt, Libya have a straight impact on price of crude oil increasing, which increases our Imports bill and widens our CAD further. One thing which amazes me is the time it takes for the (global) equity markets to factor in these changes. Once it’s known that Syria has used chemical weapons, it should be expected that US & allies will attack Syria or impose some strong sanctions. This in turn will hit crude and hence the Rupee. But our markets fall on the day USA makes a statement that they are contemplating to attack Syria, a whole one week after the first revelation of chemical weapons.
Having said all of the above, please note that I hold Global factors to be 40% responsible for our situation, and domestic factors for the rest 60% !
2. The simple Job description of a Govt
We have been guilty of not pushing ourselves on economic reforms, cleaning up the system, correcting exim balance during this wonderful 2009-2011 period (wonderful because our economy was growing faster than western countries, and monies were pouring into our capital markets). There’s no better time to repair the roof than when the sun is shining bright! Points 1 and 2 above represent the sheer Job Description of any responsible Government. And this particular one has fared miserably on both. Many analysts have explained this strange behaviour of a Govt with avg IQ of cabinet >130 as a calculated one, which was thinking that 2009 election victory through NREGA and other populist measures can be repeated and hence nothing needs to be done on points 1 and 2. This is again manifested in passing Food Security Bill in such haste – it could have waited for 6-9 months more till Aadhar and other enabling infra could have become more stable.
Because of sheer macro-economic mis-calculation (IQ of 130 and not 140 J), the UPA2 think-tank did not reckon that economic growth will slow down so much because of no work done on points 1 and 2…and that QE3 tapering will be the death-knell of the irrationally exuberant stock markets too.
Also, coming to the subsidies, while a big song-n-dance has been made regarding the Food Security Bill, the fuel & fertilizer subsidy is more damaging in terms of quantum. In fact, most of the arm-chair analysts criticising the food security subsidy must be driving in their diesel cars / SUVs and have been contributing to the burgeoning fuel subsidy.
At 35% collective responsibility, this is the second most destructive factor and almost equal to the impact of the Global factors.
3. Obstruction from the “Enablers”
Since Sep 2012, as Chidambaram became the FM again, they have been trying to solve the situation on the economic front, but now points 4 & 5 started coming in the way. The other enabling pillars of our Democratic system refused to play ball with the Govt, and after 4 years of requesting/pushing the Govt to act responsibly, their frustration is not completely unfounded. Hence, I hold these blocs only 10% responsible for the state of affairs (not zero though).
I have personally been a huge fan of the role of Media in our nation-building, and think that it’s usually been a great watch-dog on people in power. Without their pressure, some of the more brazen elements of the powerful elite would have shamelessly walked away with bigger portions of funds meant for the needy. However, at points of time in the past two years, Media has been unable to rein itself on a few issues and have caused the bureaucracy to be extra-extra-cautious and to slow down. Media has also had an unintentional impact of glorifying street protests over parliamentary debate, one of the most dangerous things to happen in a democracy.
Coming to the other alleged obstruction – from environmental ministry and activists – someone has attributed 2.5% GDP growth Loss to the over-activism of Environmental Ministry and social-environmental activists. However, when a country is growing at 7-9% pa, then the quality of this growth should also be watched. In corporate life, there have been umpteen cases in which a reckless CEO has grown the top-line aggressively, but has ended up (or his successor has ended up) with a business having many non-existent customers, with unsustainable revenue streams, quick-fix one-time revenue deals. This has required years to correct and to bring the business back to original levels. So, for the country also, growth should not come at the expense of future environmental issues or through opportunistic land-grabbing from original owners. 2009-2011 was a good time for the environmental ministry and activists to ask such questions to ensure long-term foundation-building. However, 2013 is possibly a time to relax some such rules, be tactical and knowingly increase speed, with a note to correct things later on.
Hence, I don’t think that this is a factor deserving more than 5% credit for the nation’s woes. However, if this continues for some more time, it could become a more damaging factor.
4. Moral Degradation
That brings me to the last point (No. 6) in the list above and one of the most destructive long-term internal factors. While economic growth course correction can be done through a series of measures, moral course correction can take an entire generation. Kaushik Basu in a speech this week actually cited this as a bigger issue than “these short-term economic issues”. At some point of time, we forgot the positive lessons from the great entrepreneurship model of the 1990s decade (Infosys, TCS, HDFC Bank, ICICI Bank). Newer companies which have grown fast in the 2000s are all in the rent-heavy industries like Power, Mining, Coal, Real Estate, Telecoms – politicians and bureaucrats are talking about personal incomes in billion dollars – I mean, come on…with 22% people not having even one square meal a day, these people need to have specially armoured skins to be able to sleep straight at nights. Anyways, I rate this at 15% but super-destructive for the future, since newer generations might just accept this as the new normal !