Cost of economic overhaul

Conventional economic theory talks of four stages of the business cycle in an economy – expansion, peak, contraction, and trough. Judging by the mood meter of ordinary people, expansion makes us ambitious, peak turns it into over-ambition, contraction sends us to hope that this is just an aberration and when the trough is reached, the sentiment is only of despondency. The four different moods impact the decision-makers as well. In the expansion phase, investment is rushed through, when at peak the same is expedited since hopes are eternal and peaks are often missed till the slide makes one realise it. The desperate effort to recover the loss sets in a long trail of losses and slides with mounting despondency everywhere. The link in this chain of mood swings is the flow of money.

In the phase of expansion, purse strings are always loose. Lenders are ever-willing to fund and earn extra from liquidity flowing in. In short, if one wants to gauge in what state an economy is – boom or bust – one should just ascertain if money flow is easy or tight and the degree of the same. Therefore, in order to understand the health of the Indian economy now, a cursory look at the flow of money will be in order.

Without much debate, one can safely conclude that money is scarce in the system. The signs are there in falling car sales, unfinished real estates and piling up of stocks of high-value consumer durables. Summer sales this year lasted well beyond summer months and continued even when rains covered the whole of India. Clearly, consumers are reluctant to spend. But why blame consumers, even banks are reluctant to lend when their business depends on lending. When money is stuck, either with consumers or their accounts in banks, how will the economic cycle move? Money is, after all, the lubricant for all economic activity.

Look at the history of the economic evolution of mankind. When Marco Polo travelled along the Silk Road to the royal court of Kublai Khan, the transaction was completed in years. In today's world, the time taken for one transaction in 1275 B.C. would have been enough for a couple of boom-bust economic cycles. Speed of transaction is a critical factor behind the modern economy. Faster the transactions, faster money changes hands and higher is the growth rate. This does not need any great understanding of economics from a branded institute but is common knowledge.

Applying this grandfather's wisdom, if we look at the Indian economy today we will know where the ailments are and how the same can be cured. India's small scale sector which supplies to medium and large corporates are facing a liquidity crunch. Usual wisdom in tea shops (hukka-paani gyan) is that this is due to demonetisation and introduction of GST. In other words, a semi-feudalist economy which encouraged rent-seekers to thrive did not deserve the jolt that has taken away the elixir of growth – additional cash "income". This saw real estate business coming to a standstill, car sales to nosedive and drastically cut-down conspicuous consumption thereby affecting the demand side of the economy.

This is not the only problem with the government's attempt to introduce a rule-based economic system in a rent-seeking semi-feudal democratic country. The emphasis on rules has deprived many, bankers for instance, of their freedom to extend funds to the deserving. Earlier it was easy to identify the deserving. The more one was willing to palm off as speed money, the more pressing was the need, and decision takers could confidently help to bankroll such enterprises. This helped the enterprise to raise money and the decision taker to indulge in consumption, a win-win situation for economic growth. In the post-2008 global crisis, such incentives to assist the Indian economy increased due to the then government's policy of maintaining Indian economic growth. We all go by growth, and whether such growth results in eventual collapse or not, cannot be of immediate concern. In any case, such faults come to notice later when the ruling dispensation might change. In a democracy, all governments focus on the immediate gains during their tenure.

An "easy money easy rules" regime encourages setting up several roadblocks in paying dues to suppliers. In the form of system and procedures, large corporates, the government-owned ones, in particular, delay payments. This helps the officials looking after purchase decisions to earn some extra. In the process, the small scale sector suffers the most. The aberration can continue unchecked since the measurement of efficiency in the purchasing department varies directly with delayed payments. Such delayed payments are effectively 'undocumented' credit facility enjoyed by the corporate. A back-of-the-envelope calculation of dues from the state-owned enterprises to small supplies and SME sector will be more than three trillion rupees.

Coming back to the issue of money flow which boosts economic activity, therefore growth, such delay in payment squeezes out liquidity from the system and thus hurts economic growth. It makes no economic sense to pump in the equivalent liquidity into the system when the corporate payment culture encourages withholding funds from the economic flow. Delayed payment, deep-rooted corruption and absence of accountability on the part of decision takers including funding agencies lead to an economy which tends to suck long-term growth out of the system. The rent-seeking system works on its own logic. Turn the tap of rent-paying off and introduce checks and balances, the activity comes to a grinding halt.

India's present growth predicament has come from the corrective measures initiated by the government of the day. But the job cannot be left half done by reversing the clock. Narendra Modi government in its second term is facing the maladies that had been running untreated for so many decades. The government has diagnosed the ailment correctly, only the economy has caught a new virus of slow growth as a result. How the virus can be cured, and how soon, are the two critical issues.

(The views expressed are strictly personal)