The Indian economy looks bleak – but that only reflects the cancer within

There’s an apocalyptic nature to the way things feel and look right now. Overnight news of a crash and slide for the Dow and Nasdaq bring fears every morning of another stock market rout in India. The rupee is in completely new and scary territory now slip- sliding towards the 80-mark to the dollar. Crude has shown no inclination to ease back from the triple digits it now trades in.

All this is what grabs headlines and eyeballs. But to call a spade a spade, the stock market represents and holds only a minuscule fraction of India’s population and investing community within it. It is undoubtedly called the barometer of sentiment but whose sentiment does it reflect and is it only now that things have turned bad?

Go back a few years to the red-letter demonetisation day on November 8, 2016. On the face of it, both the country and the ruling Bharatiya Janata Party government emerged intact from a dangerous experiment. What went unnoticed – or certainly, unreported by mainstream media – was the devastation it wreaked on small and medium businesses. That devastation has turned into a slow but fatal grind, pulverising business after business.

What sucking out cash from the system did in 2016, was followed up by a patchwork rollout of the Goods and Services Tax in 2017. More pressure. The final nail in the coffin has been the insidious rise and rise of inflation. In April this year, inflation at the retail level surged to an eight-year high of 7.79%. The Wholesale Price Index hit a record high of 15.1%, the outcome of rising prices of vegetables, fruits, milk, manufacturing, fuel and power.

Lest we begin to blame it all on the war in Ukraine, inflation has remained in double digits for 13 months in a row now. A red flag that was waving in the air for many months, and now seems to have the Reserve Bank of India’s full attention.

Biting the bullet

Large businesses have responded. Consumer goods companies have decided to bite the cost bullet. Prices of goods have been increased, package sizes will get smaller and downtrading – switching from expensive products to cheaper alternatives – is the new reality for daily household purchases. The construction of homes will get more expensive as the prices of cement, transportation, materials all climb higher.

Do small businesses have the same luxury and leeway? Not really. In an interview to the Business Standard, Jitubhai Vakharia, the president of the South Gujarat Textile Processors’ Association in Surat explained how the input cost of coal has almost doubled. The cost of dyes and chemicals have increased by 25% to 40% and the price of some chemicals like sodium hydrosulphite of soda or discharging agent like safolite have increased by 140% to 150%. Input costs have increased he says.

So can they raise costs? Increasing prices is difficult he admitted, as demand is already low in the market.

What that means is, more business could be forced to close, more jobs are lost, and more households are left wondering how they will get by. The government’s own data shows that 5,907 businesses registered as micro, small and medium enterprises were shut during financial years 2020-’21 and 2021-’22. In the 2021 financial year, 330 MSMEs were shut down.

It is perhaps with an eye to this simmering discontent around price rise and seeing the neighbouring country of Sri Lanka quite literally go up in flames over spiralling inflation, that Finance Minister Nirmala Sitharawam announced on Saturday an excise cut in petrol and diesel taxes and a Rs 200 subsidy for those buying cooking gas cylinders , along with some customs duty cuts. While the move is being criticised as an optical illusion, the Narendra Modi government has clearly sensed dissatisfaction around the way costs have risen and moved to do some damage control.

The latest State of Inequality in India Report by the Economic Advisory Council to the Prime Minister had these observations to share. The income of the top 1% shows a growing trend, while that of the bottom 10% is shrinking - the top 1% of income earners in India cumulatively earn more than three times of what is earned by the bottom 10%. Within that, a person who earns an average of ₹ 25,000 per month is now part of the top 10 per cent of the total wages earned bracket. What does that mean for the others, what are people earning and how are they getting by in an environment of continuous cost rise?

This economic strife also begets the question, why doesn’t it translate into protests, electoral punishment? Why aren’t people voting out governments when they feel the pressure of rising costs, no jobs and less and less ability to spend?

Difficult conditions

One, this does not have a singular unified impact. In the run-up to the Uttar Pradesh elections, many roving reporters thrust their mikes into the faces of people. What do you worry about, what is a concern, they were asked? “Mehengai,” the rising cost of living, the interviewees would respond. Prices of cooking oils like mustard oil and sunflower oil had risen, gas cylinder prices were up, jobs were scarce and running a household was an uphill struggle. India’s overall unemployment rate rose to 7.83% in April, up from 7.6% in March.

Yet, it did not impact voting choices and the ruling state government was elected back with a clear majority. It is because my inflation is not your inflation. My household cost pressures are not yours. I have a job, but you don’t. Cost rise is too fluid and wide a challenge to cement together an entire population into making a political choice borne of it.

There is also the insulation that welfare schemes have created for the very poor. Food schemes, cash transfers and some workdays through the Mahatma Gandhi National Rural Employment Guarantee, which assures rural families of 100 days of work a year. The slice left vulnerable and besieged is India’s large and diverse middle class that is now feeling the pain. Households that own a motorcycle and dream of a small car, households that want to move from their one-bedroom rented accommodation, to a two-bedroom home of their own.

The rise of political marketing

Two, we now have a changed polity. With close to 500 million users, India has the most WhatsApp users. All of whom have been nursed with consistent messaging around political agenda. If the last 10 years have seen economic missteps, they have equally been marked by the rise of marketing in politics. More than Rs 6,500 crore was spent on elections by 18 political parties between 2015 and 2020. Of this, political parties spent more than Rs 3,400 crore or 52.3% on publicity alone.

The Bharatiya Janata Party spent 56% (over Rs 3,600 crore) of the total election outlay by all 18 parties in the five years and Congress spent 21.41% (over Rs 1,400 crore). In the last five years, the BJP has spent 54.87% (over Rs 2,000 crore) of their total election expenditure on “advertisements and publicity” compared to 7.2% (Rs 260 crore) on marches, rallies and other campaigns. The Congress, in the five-year period, has spent 40.08% (Rs 560 crore) of the total election expenditure on election-related publicity.

Does all this matter? Higher public expenditure on publicity and advertising in an election year is a major factor for a state government to retain power, In a May 2021 State Bank of India report titled “State Elections: How Women are Shaping India’s Destiny”, Soumya Kanti Ghosh. the Group Chief Economic Adviser, writes that in most of the states, on an average in order to be re-elected, incumbent governments make huge spends in an election year.

In a few states where publicity expenditure was low in election year, the incumbent government mostly lost the election. It may be fair to say then that this marketing blitz can mould voter opinion, whether it is to highlight the benefits of a regime – or to demonise a section of the population.

What does all this have to do with the stock market that’s battling its own losses and the fear of a prolonged bear trading patch? It is an ugly situation for markets, there’s no denying. Selling in the equity universe will come in waves and lashes, this purging of stocks, prices and holdings. However, this too shall pass. It may leave the markets in a dull trading range for many months where things move neither higher nor lower. Or it may bounce back faster than expected, egged on by better global news and the return of the prodigal foreign institutional investors.

Key lessons

But it leaves important lessons to think about. What did I learn from this, was I truly looking at investing when I picked up the small cap stock? Do I know enough to be trading in the futures and options market, sharp as a knife and fast as a bullet? A young India that was bedazzled by the cryptocurrency market will also have to collect its broken earnings and dreams. India has been one of the world’s fastest-growing cryptocurrency markets, increasing by 641% between July 2020 and June 2021. Much of that was India’s young population, from the B and C cities. In the crash burn we have seen this year, many young traders have been left singed.

The ultimate lesson, I believe, is this. When there is a cancer in the system, it will spread. For all those who believed the market, or one segment of the economy, would continue to grow even as the broader market and population was crumbling under the pressure of the last few years, it has not worked that way.

It is also true that we still remain a nation of great potential, a large working force, a diverse geography, a huge market size. But will India continue to walk into the future with only a rich few, or will we take all our people with us? As James Baldwin wrote, “Neither love nor terror makes one blind; indifference makes one blind.”

Mitali Mukherjee is a journalist, TEDx speaker and Chevening Fellow who lives in Delhi.