There was much brouhaha in the ‘India Investments’ Reddit community when someone shared a news report that the model which had predicted the 2008 global financial crisis had suggested that another recession was on its way. It would hit India the hardest was a common sentiment, as commented by a lot of users. That was July 2019. And the anxiety surrounding such a scenario has not faltered a bit in the two months since then.
Looking at the current condition of the Indian economy further aggravated by the auto market slump, desperate attempts by the government to play poker face, a good share of scams involving the market, and an overall slowdown there is enough cause for concern.
Is India really heading to an unprecedented credit crisis? What does the future of capital markets look like? Let’s all stare at the ticker board.
Blame the Ultra-Low Interest Rates
Banks around the world have depended heavily on financial markets risk-taking, putting the pressure on individuals rather on businesses. Despite the low-interest rates, their policies are not finding any takers, which has been an event that was anticipated since the crisis of the previous decade.
Monetary policies have not been updated. In India too, the Reserve Bank of India (RBI) has decided to admonish banks for not responding to rate cuts, something that goes against the grain of their planned policies, especially in retail lending.
Retail Lending Takes a Hit
Whether it is the sudden death of Jet Airways or the messy fall of Alok Industries that resulted in multiple casualties, banks have suffered the most as the aftermath. According to Business Standard, retail lending has taken a hit mostly due to rising unemployment and the individual’s inability to maintain his credit.
The faith that individuals behave better than corporates (compare: Vijay Mallya and a neighbor) as far as repayments are considered is being tested now that people are losing jobs or companies falling short of assets.
This has made banks stare at the wall. The promise of retail credit doing good because of a lack of discipline from corporate customers has not been fulfilled and banks need to find a way out.
Auto Slump is the Biggest Cause
Economists agree that a country’s economy takes a beating when the automobile industry experiences a slowdown. And as far as India is concerned, that industry is in its worst state in about two decades. Looking at what caused this slump and trying to correct them can be a solution. But does the onus fall on the industry alone? Or should the government chip in too?
No one knows as both consumers and economists are debating what really to make of the slump.
Startups Far Away from Profits
This is a global phenomenon where growing and developed startups are yet to bring in profits from their businesses. Although this helps promoters and venture capitalists because of the capital available at their disposal from lenders without preamble, it also provides them tax cuts. The leniency shown by the government in terms of angel tax is just one of the examples that can be attributed to this trend.
When startups don’t make profits, they tend to bleed the economy. Further, the International Monetary Fund (IMF) has observed that corporate tax rates have only gone down in this decade with an average reduction from 46% to as low as 28%.
According to Mint, such a scenario is one of the leading causes of the next financial crisis if and when it happens. With all the above points, only the ‘when’ factor is something that needs to be discussed. That it will happen is almost certain.
A Look at Asian Economics
When talking about the west in the previous decade, the influence and effects have only just chafed the Asian countries. But that is no longer the case. Asian countries like China and Japan are so closely involved in global financial markets that it is important to take a look at their situation to understand what might transpire here at home.
Japan’s exports have seen a sharp decline in 2019 (as of August). A similar trendline is being seen in Korea’s exports and Singapore’s overall GDP. Anyone who has been watching global news also understands that China is on the brink of a trade collapse as more and more companies are moving out of the country and finding haven in other Asian countries. This might be a good hint for India but let’s not digress from the main topic. The Trump government in the US can be blamed for this course of action but what it means for the global economy can be seen as conclusive evidence: the economy is going down on a global scale.
The clouds are hanging even in other areas like Europe, South America, and the Middle East. Global exports and manufacturing have suffered an attack at the hands of a slumping economy, with no evidence of one common factor. Different countries have different reasons to blame.
The UK has been in a mess ever since they got themselves in the Brexit blunder with no respite being seen even as pro-Brexit politician Boris Johnson scrambles to find a solution, in vain.
There are a lot of such signals that hint at a possible catastrophe, even as the world treads towards the 2020 US presidential election without a plan. The crashing of the stock market won’t look good and experts have already submitted their reports that should something as that happen, it won’t be anything like the 2008 crisis. It will be on a much larger scale.
India, as it stands, has evolved into a strong economy since 2008, which makes it one of the top victims of such a crisis. Will India have its own little crisis is something that cannot be guessed because of the robust machine that is in a place like the SEBI and RBI. But will it be a part of the global parade? The answer slants to the positive.
The Indian government, however, is nothing but optimistic. The BJP-led central government has promised necessary steps to strengthen the economy, but if sentiments in the online and offline circles of stock market traders are anything to go by, anxiety seems to be the general tone.