The Narendra Modi government will release the GDP growth data for the financial year 2024-25 at the end of this month. From the looks of it, it seems that growth will be robust in the 7.5-8 per cent range. But the new government that comes to power in June should not let the macro data overwhelm its senses.
Some alarm bells have been ringing for a while now, especially regarding individual income levels and private investment appetite, but now they are spreading to foreign companies and their investment decisions as well. All of it shows that things are not quite right once you dig below the macroeconomic surface.
Data at the macro level can be misleading. The quarterly figures from the government’s Periodic Labour Force Survey (PLFS) show that unemployment has been largely trending down since the January-March 2022 quarter. This would suggest that more people are employed, which would also suggest that more people are receiving an income.
This may very well be true. But let’s instead look at the behaviour of people to see if this matches how a financially secure person would behave. Short answer: it doesn’t. These account for two of the three alarm bells.
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Poor gambling with their savings
The first alarm bell is the sheer exuberance in the stock markets. Speak to any analyst, and they will tell you it is being driven by investments in small and mid-cap stocks. That is, small investors are putting their money in small — and often volatile — stocks.
According to the Ministry of Finance, households added net financial assets of Rs 22.8 lakh crore in FY21, nearly Rs 17 lakh crore in FY22, and Rs 13.8 lakh crore in FY23. Data for FY24 has not yet been released. So, the quantum of savings is falling, and the share of these savings invested in the stock market has increased.
This is where behaviour comes in. Poor Indians are increasingly betting and gambling with their savings, albeit in a formalised way.
People who are secure about their incomes tend to keep their money in the bank, especially when interest rates are relatively high, as they are now. Their stock market investments are typically through systematic investment plans, done either with the advice of or through an investment specialist.
If the chairperson of the Securities and Exchange Board of India (SEBI) has to speak out in public about “froth” or a bubble in the small and mid-cap stocks, as Madhabi Puri Buch did a few months ago, then she must be quite concerned. The issue was a huge influx of first-time investors falling for the advice of social media influencers in a bid to rapidly increase their incomes.
Despite the SEBI chief’s warnings, the surge in small and mid-cap stocks continues more or less unabated. And that’s just the relatively simple trade in stocks.
Worryingly, this trend has been overflowing into the more complex futures and options markets as well. India accounts for nearly 90 per cent of the volume of options trades in the world, and this is driven by new investors completely unaware of how options or futures work.
The lure is the prospect of huge, overnight profits, but the reality is loss. And yet they keep coming back.
This is the behaviour of the desperate and the near-destitute. It’s an ‘all-in’ approach to gambling, where the prospect of loss is trivial in comparison to the remotest possibility of a gain.
This desperation can be seen in how people are borrowing from banks as well, which is the second alarm bell.
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People taking loans for survival
Despite the curbs and warnings by the Reserve Bank of India (RBI) to clamp down on unsecured loans, data from the central bank shows that these loans are still growing at strong double-digit rates.
These are not loans to buy houses, cars, or appliances. These are also not education-related loans. These are credit card spends, and desperate loans taken for what the RBI classifies as ‘other personal loans’ but which are, in actuality, loans for survival.
And these are just the loans from banks and NBFCs. There has been a mushrooming of loan apps and unregulated lenders that charge exorbitant interest rates for small loans.
In a country where a single health crisis in the family can be the difference between living under a roof and being homeless for crores of people, these unsecured loans are a lifeline for the poor.
As the RBI pointed out, these pose risks to the financial system. But their real significance is in what they reveal about the borrowers — an increasing desperation and fragility.
This dire state of income levels is largely the reason why the private sector has not been investing. If there’s no demand, there will be no increase in supply. I had previously argued that the private sector looks like it is ready to begin investing now, but that the 2024 elections have resulted in an untimely hesitation.
All of that is contingent on a sustained revival in consumer demand — and not just among the urban rich. A normal monsoon will, of course, help, but real private investment will come in only if the new government can sort out the nagging issues of land and labour.
In fact, this is connected to the third alarm bell, which is foreign direct investment into the country.
FDI has been falling for a few years now, as has India’s share in global FDI, which shows foreign companies are increasingly choosing other countries. One of the major reasons is difficulty in procuring land and dealing with India’s labour.
A 100-day agenda for the new govt
Now, if these are the three alarm bells, here are three solutions too. They have been said before, but the urgency to act is only growing.
The first is for the Centre to repair its increasingly fractured relationship with the states. There’s a distinct trust deficit that needs to be bridged.
State governments must remember that FDI might be tracked at a national level, but it actually comes to the states. There are huge economic benefits to working cohesively with the Centre on attracting more foreign investment instead of treating it as attracting investment despite the Centre.
The ruling party at the centre, for its part, needs to actively dispel the notion that it favours only those states where it or its allies hold power. Investments in an opposition-led state also benefit India.
The other two solutions are to do with land and labour, both issues that have plagued India’s economy for decades. Procuring land needs to be easier, and hiring labour less fraught. Any progress toward fixing these would benefit both the Centre and the states. Again, progress here would require cooperation, not acrimony.
Through these solutions, foreign companies looking for a China-alternative will again come here and create employment, which will create incomes, which will create demand, and which will encourage our domestic private sector to invest. And the cycle will continue.
But the first steps need to happen soon. This should be the 100-day agenda for the new government.
TCA Sharad Raghavan is Deputy Editor – Economy at ThePrint. He tweets @SharadRaghavan. Views are personal.
(Edited by Prashant)
Too many assumptions to support ideological narrative.