Deep systemic rot in the Indian economy can only be tackled with swift, decisive action that acknowledges the scale of the problem, writes Rajeev Narayan
Let's talk investments. The average retail investor in India is worried, scurrying around for options in a scenario where investment avenues are rapidly diminishing and increasingly moving into a high-risk mode. Stocks and Equity, Balanced and Hybrid Mutual Funds, Debt Funds, Liquid Funds, Gold, Real Estate, even Bank Fixed Deposits — each of these investment categories are seeing sharp declines in returns. The outlook is getting worse. In a bizarre turn of events, investors are now even worried about leaving their money in Savings Bank Accounts, as rising NPAs are pushing even the most prominent banks towards default and collapse.
The PMC Bank debacle freshly comes to mind. In September 2019, the Reserve Bank of India (RBI) discovered that PMC Bank had allegedly created fictitious accounts to hide over Rs 4,355 crore of loans extended to Housing Development and Infrastructure Ltd (HDIL). This financially scarred, even ruined, most PMC account-holders and sent shivers of panic down the backs of millions of others across the country, regardless of which bank they are associated with.
Return on Investments (RoI) has shrunk to an absolute nadir over the last few years, cutting across almost all investment categories, be it for the working middle class, the HNI (High Net-Worth Individual) customer or the retired senior citizen. A recent Goldman Sachs report recognises the 18 months from January 2018 to July 2019 as the longest slowdown in the history of the Indian economy). The 7 months since then have seen recessionary forces take an even stronger hold on the economic and investments outlook, taking the tally up to 25 months. The global standard for recession is two consecutive quarters of negative growth. We are well past that number now.
A confusing set of economic macros adds to the muddle for investors. While authorities claim a GDP growth rate of around 7 per cent and 6.3 per cent for the last two years, respectively, independent analysts and researchers peg the 'real GDP growth' at around 3.5 per cent. And as recessionary or near-recessionary forces take hold, global infusion of funds into the Indian economy and even investments by larger Indian corporates for expansion, are drying up. The investments outlook has never been this bleak in the country. Today, palpable fear has crept into the mind of investors, that of losing their life savings, no matter where they park their money.
As mentioned in a previous column, the corporate slowdown, the resultant listless jobs scenario and the decelerating economy are all intertwined, insofar as their root cause is concerned. In a nutshell, the double whammy death-blow of demonetisation of large-value banknotes in 2016 and the subsequent introduction of the Goods and Services Tax (GST) was way too much for an already weakening economy to bear. The last two quarters leading up to 2020 are a stark offshoot of these events. India's Gross Domestic Product (GDP) growth has dropped on the back of weak demand and a slump in foreign investments.
The first bank collapse in India happened in 2004 when Global Trust Bank went belly up. Then the PMC Bank debacle surfaced last year. A month later, in mid-October, a photograph of the Passbook of an account-holder in a prominent private sector bank went viral, it had the 'DICGC Clause' stamped on it. The Deposit Insurance and Credit Guarantee Corporation is a subsidiary of the Reserve Bank of India (RBI). Established in 1978, DICGC insures all bank deposits up to a limit of Rs 100,000 on each deposit in any bank. Seeing this message, account-holders of even the largest Indian banks panicked, stricken by the thought of their own money not being accessible to them.
Debt funds were considered a 'safe' investment option, with slow but steady growth and virtually no risk. With options like the Systematic Withdrawal Plan (SWP), the number of individual HNI investors in debt funds has been creeping up over the years. But today, even in debt instruments, fund managers are seeing their plans going awry thanks to corporate India's see-sawing fortunes and an increasing number of defaults and/or financial collapse. Two examples — Birla Mutual Fund recently segregated a hefty portion of customer investments when its exposure to Adlinks ran head-first into an imminent default. Franklin Templeton completely nullified a large part of customer investments in one of its debt funds due to its exposure to Vodafone Idea, hours after an adverse Supreme Court verdict. Investors woke up one fine morning to find lakhs of rupees wiped off their portfolio overnight. In both cases, it was the retail investor who was hit hard, while larger corporates had already made early redemptions in other MF schemes of these firms, increasing the 'risk factor' for smaller investors.
Today, Fixed Deposits in banks offer the lowest interest rates, ever; around 6.3 per cent and falling. With this return being taxable, the actual RoI is around 4 per cent. Today's inflation rates far outstrip this rate of return, and FDs have lost favour over the years. There is also the new-found worry of banks themselves collapsing, even the large and reputed ones. Gold? That remains an investment for very few in India, though it is comparatively safe and 'instantly redeemable'. Ironically, the only investment instrument seeing steady growth today is crude oil. But then, one can hardly imagine the average Indian investing in crude oil futures!
A striking change in the Indian retail investment approach is that traditional instruments like National Savings Certificates, Indira Vikas Patra, Infrastructure Bonds and Recurring Deposits, which were the mainstay of investments in the country till a decade back, have slowly fallen out of favour. A key reason for this was that new-age instruments, especially Mutual Funds, were providing greater returns. Paradoxically, the wheel has come full circle and returns on today's preferred investment options showing returns below the traditional options.
There is a deep and deadly rot in India's economic farm and, quietly, it is spreading. A tough problem exists. Let's begin by acknowledging this. And take some tough decisions swiftly to arrest the spread of the malaise. The authorities have made a beginning of sorts in the recent budget announcements by unveiling an alternative Individual Income Tax Policy and outlining plans to hive off part of its stake in Life Insurance Corporation of India (LIC). These overtures, while commendable, are too little to make but a dent in the larger problem at hand. Also, even a close look at other budgetary allocations does not really reveal how much money is actually going to be spent at the ground level.
Clearly, tiny taps of the 'policy gavel' are not going to do the trick here. A large sledgehammer and a larger user to wield it certainly sound like the better option.
Views expressed are strictly personal