I am writing this blog after about three months of being a part of the Indian Economy. This may sound really fancy but it in fact isn’t. As a matter of fact, I could have just stood on the roads and sold some “chana” to understand the same. But I obviously didn’t take that route. In any case, you may already know what I am about to share with you either partially or completely. What I’ll do is reassert the same.
To highlight on the things we need, we first we to understand what we have. The Indian economy has been at its most stagnant and unpredictable stage since the past three quarters. The Index of Industrial Production is at its all time low, the growth rate isn’t performing at the figures proposed by “The Economic Survey of India 2012-2013”, NPA’s are increasing at an alarming stage, food inflation is shooting up and corporate restructuring is becoming a rampant exercise while the Sensex is dancing at 20,000 points showing a positive derivative all along. There is something wrong but the same is not apparent. It may be a possible situation of stagflation or may be something else. What’s important here is to understand the reason as to why there are conflicting indices being seen in the market. How can the market value of a listed company grow positive while its intrinsic value is certainly growing negative.
There is this one thing that I have realized being close spectator of this market. I believe that there is a small component called sentiments that lies between demand and supply in the Indian economy. Now this is really because we are operating in a market where there is an information lag. Almost every industry in India suffers from a lack of real time information whose void is then filled by sentiments. These are the sentiments that then influence the demand and supply creating absurdity in the markets. We take clues and references from fragmented information and then make conclusions that actually have no real relevance.
This is essentially the base of my discussion. I believe that more than anything else, the reason so as to why we are holding back to the stagnancy (Even in the case of the Union Budget) is because we are still waiting for better sentiments. Due to the existing sentiments, there is a money supply contraction that has been created. The RBI is scared to reduce the CRR and interest rates because of the increasing NPA’s and the banks are scared of sanctioning loans because of increasing defaults. Money supply is important towards fueling growth in any economy. Although, it’s not just the banks. Even businesses are facing a similar problem. Businesses are scared of making fresh investments, as the market is inherently stagnant. Hence, the idle funds businesses have are either being used to procure exiting assets or lying in the banks. A similar situation is happening in the case on consumers. Consumers have been subjected to high inflation that has reduced their real income. Hence spending has reduced here too. Further, the recent political imbalance due to the anti corruption movement have created a mistrust within the consumers.
The finance minister was probably correct when he said that we have already passed the period of recession and what lies ahead is a better economic growth. Although it is important to build those sentiments in the market. What we need today are policies that will restore better sentiments. The budget could’ve have been utilized as a tool to correct the sentiments but that didn’t happen. On the contrary, the government thought that it would be a better idea to use it as an election gimmick. What we also need is a better political governance to restore trust within the consumers. We are at a stage where it really doesn’t matter if the government is doing a bad job or a good job. What is important is a change. A change that will induce a fake if not a real change in the sentiments that are driving the current Indian markets.
Hence, what we need today is nothing but a sentiment that will promote banks, businesses and consumers to spend that will eventually restore the growth. Otherwise we will continue to drown in the current ocean of economic crisis.
- Govt taking steps to revive economy: Pranab (thehindu.com)
- Subsidy should be slashed: Economic Survey (thehindu.com)
- Economic slowdown: Will the PM take the blame? (rediff.com)
- Indian economy is at a turning point: Raghuram Rajan (news.in.msn.com)