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Emerging Economic Situation-Global & Indian Economy

Updated: Aug 6, 2021

Global Economy:

Fears of another global economic slowdown are rising as reliable data indicates the USA — the world’s largest economy — may be headed for another recession. That’s bad enough for global markets, but what’s worse is that many of the world’s other top economies may also be headed for troubling downturns.

Japan faces a recession, and it’s recently entered into a nasty trade dispute with South Korea. The turmoil over Brexit has partly led the UK’s economy to shrink in the second quarter.

In Asia, South Korea is encountering woes with growth; with a negative first quarter and a positive second that analysts don’t believe will last. Seoul is embroiled in a trade war with Japan, and South Korea's signal electronics and semiconductor export are off by a third.

Months of protests in Hong Kong have brought the financial hub’s economy to a standstill, and the looming threat of a possible Chinese military intervention to quell the unrest isn’t making the situation any better.

Even Singapore, a mighty city-state and financial nexus, is feeling pain, with a 3.3% economic contraction in its recent quarter. The side-effects of the Sino-American trade tiff are to blame. Singapore is also on the brink of recession.

The Eurozone faces category 5 economic storms (Double shock of impending global recession and a no-deal Brexit). Growth has essentially stopped in Italy, and a political crisis there doesn’t inspire much confidence. Italy is already in a recession, and has been since 2018, groaning under one of the globe’s worst debt loads (132%), and its shaky government. Germany’s economy declined in the 3 months before June, according to new numbers, a troubling sign for the world’s 4th largest market. Germany is heavily dependent on exporting cars, which are in a slump worldwide. Europe Is stuck between the United States and Russia (Gas pipelines & Sanctions), China (Trade War) & Iran (Oil & Tankers).

In Latin America, Argentina just went through one of the worst stock market crashes in decades after an allegedly corrupt politician nears power once more, is in a recession that only seems to get worse. Inflation is running rampant, the Argentine peso is plummeting and the Buenos Aires stock market since early August has been halved. Fear is rife that Argentina won’t be able to pay its debts. Brazil and Mexico, two leaders of Central and South America’s economies, are expected to perform weakly this year. Brazil, which has the biggest economy in South America, is looking at a second possible negative quarter. Slumping commodity prices are hurting it.

On top of it all, China’s growth rate has slowed due in large part to the trade war launched by President Donald Trump. China’s economy grew by 4.8% in July, lowest rate since 2002.

Trade war turning in to Economic Cold War

Is this the start of an economic cold war?

This is the slow-brewing cold war between the US and China over technology. China and America are vying for dominance over the industries of the future: artificial intelligence (AI), robotics, 5G etc. 5G technologies will soon be the standard form of connectivity for most critical civilian and military infrastructure, not to mention basic consumer goods that are connected through the emerging Internet of Things. The presence of a 5G chip implies that anything from a toaster to a coffee maker could become a listening device. This means that if Huawei is widely perceived as a national-security threat, so would thousands of Chinese consumer-goods exports.

Sino-American conflict is already fueling a broader process of de-globalization, because countries and firms can no longer count on the long-term stability of these integrated value chains. As trade in goods, services, capital, labor, information, data, and technology becomes increasingly balkanized, global production costs will rise across all industries.

In fact, with firms in the US, Europe, China, and other parts of Asia having reined in capital expenditures, the global tech, manufacturing, and industrial sector is already in a recession. The only reason why that hasn’t yet translated into a global slump is that private consumption has remained strong.

Should the price of imported goods rise further as a result of any of these negative supply shocks, real (inflation-adjusted) disposable household income growth would take a hit, as would consumer confidence, likely tipping the global economy into a recession.

An economic model that’s dependent on consumption and investment fueled by excessive borrowing is unsustainable. Lower rates, which are ineffective and weaken the financial system and ultimately the real economy, are merely a mechanism to maintain excessive debt levels for a little longer

U.S. Labels China a Currency Manipulator, Escalating Trade War

China and Russia look to ditch dollar with new payments system in move to avoid sanctions China's economy (second-largest) grew at the slowest pace in 27 years, as the trade war with the USA takes a toll on its currency (lowest point in more than a decade) and precarious financial market with Debt to GDP at 282%. Since 2009, China Has Created $21 Trillion Of New Money ("Helicopter Money"), more than twice the amount of money supply created in the US, the Eurozone and Japan combined over the same period. Over the past 10 years, Chinese banks have been on a credit and money creation binge. China’s money supply stands at Rmb192tn, equivalent to $28tn. It equals the size of broad money supply in the US and the Eurozone put together, yet China’s nominal GDP is only two-thirds that of the US. As to the central bank’s foreign exchange reserves, at $3tn they are less than a ninth of the amount of Renminbi deposits and cash in circulation. It is inconceivable that China can open its capital account in the foreseeable future. China is trying to boost the use of their national currencies in bilateral and international trade, underscoring their intent to cut their reliance on the US dollar.

An important assumption to China's endurance strategy is that the trade war would not lead to a collapsing Chinese economy. On this front, China appears to be learning from Japan's experience in the 1980s. Most economists and policymakers now believe that it was not the US-Japan trade war that ended Japan's economic growth miracle. Japanese companies remained competitive internationally, despite the trade war.

In Trade War, the main goal is to preserve China's economic resilience, while taking the higher US tariffs as a given fact.

The economies of both countries and the fortunes of both leaders have been damaged by the trade war, which does not seem to have hit its peak yet. In China, the Yuan has hit an 11-year low, and overall economic growth has slumped to its lowest level in 27 years, with its domestic GDP growing at the slowest rate since 1992.

Put it all together and the world’s economic outlook looks pretty bleak. The IMF, a world body that helps keep the global economy stable, also sees it that way. Last month, it cut its projection for global growth to 3.2 %, the lowest rate since 2009.

Why so many countries may be headed for recession/Slowdown?

2 major trends have caused the current slowdown:

1 Trump’s deeply misguided trade war. The effects of the trade war go beyond just the US and China’s bilateral trade relationship. For instance, Germany relies heavily on exports, primarily to the US and China, and is now struggling to sell to those nations as their economies slow. Germany is heavily dependent on exporting cars, which are in a slump worldwide.

2 Many nations are facing immense political turmoil at home. Nationalist politics in Britain (for a no-deal Brexit), Brazil (populist President Bolsonaro hasn’t focused on needed reforms to its pension and tax systems), Mexico (Mass firing and forced salary cuts of government employees), Argentina (a surprising electoral result has sparked political chaos) and Italy (in the middle of a political crisis) have caused long-term, complicated political crises that allow little time to manage economic affairs adequately. In some cases, the problem is “self-inflicted political wounds” brought on by incompetence. The trouble in the Middle East-Iran (with American Sanctions, Tankers seizures & Drones on Saudi Aramco Refineries), 4 year war in Yemen between the Houthi rebels, Saudi Qatar standoff etc. major risk concerns oil supplies America’s confrontation with Iran could have the opposite effect. Should that conflict escalate into a military conflict, global oil prices could spike and bring on a recession, as happened during previous Middle East conflagrations in 1973, 1979, and 1990?

Why the Rest of the World Could Push the U.S. into A Recession

As the old saying goes, “When America sneezes; the rest of the world catches cold.” But these days, with the rise of other economies and globalization, could the reverse be true? A whole range of big nations are in worsening economic shape. And with exports accounting 13% of the U.S. economy, the ill health of the other major economies is a big-time concern.

At the moment, the U.S. apparently is headed for a slowdown, Manufacturing, particularly of cars, is weakening. There are new forces at work these days. Federal Reserve Chairman Powell cites worries that impelled the Fed to lower short-term rates July 31, he zeroes in on the trade conflict. That’s a direct threat from overseas. Combined with the malign influence of sickening economies elsewhere, a no-deal Brexit could cause a period of volatility in global financial markets which, if it was sustained, might weigh on U.S. growth.

Is USA bracing for a 2020 recession?

The Fed’s main target interest rate is just over 2 % now, compared with 5.25 % heading into the last recession in 2007. Other global central banks have even less wiggle room. The trade wars and a breakdown in international economic diplomacy cause businesses around the world to pull back. This leads to further tumbles in markets and job losses, prompting American consumers to become more cautious. High corporate debt loads create a wave of bankruptcies. And central bank policy proves impotent, combined with fiscal policy that is nonexistent.

Unlike the 2008 global financial crisis, which was mostly a large negative aggregate demand shock, the next recession is likely to be caused by permanent negative supply shocks from the Sino-American trade and technology war. And trying to undo the damage through never-ending monetary and fiscal stimulus will not be an option. Trying to undo the damage through monetary and fiscal stimulus will not be a sensible option. - NOURIEL ROUBINI

Nearly half (48.1%) of chief financial officers in the United States are predicting the American economy will be in recession by the middle of next year. A Majority of Economists think the Next Recession Will Come by the 2020 Election, but one believes the downturn has already begun. Economists don’t know when the decade-long expansion, now the longest in American history, will end.

Global economy is experiencing challenging time ahead with indicators like:

Inverted yield curve

The inversion of the yield curve, a historical precursor of a recession, has forced the markets to wake up and take stock of the situation. The yield curve is considered inverted when long-term bonds - traditionally those with higher yields - see their returns fall below those of short-term bonds. Investors flock to long-term bonds when they see the economy falling in the near future.

And to make matters worse, the German government is considering outlawing negative deposit rates. In a negative rate world, forcing rates on short-dated debt to zero would keep the yield curve permanently inverted. The fractional reserve banking system cannot operate properly in this environment.

Negative Interest in many developed economies

Negative interest on excess reserves is an instrument of unconventional monetary policy applied by central banks to encourage lending by making it costly for commercial banks to hold their excess reserves at central banks so they will lend more readily to the private sector. Such a policy is usually a response to very slow economic growth, deflation, and deleveraging. A negative nominal rate on a loan means the lender is effectively paying the borrower. Banks will have to charge individual customers higher fees for current account services. A bank solvency crisis may ensue as customers withdraw cash to stuff mattresses.

During economic downturns, central banks often lower interest rates to stimulate growth. Central banks in Europe and in Japan have demonstrated rates can go negative, and several have pushed them in that direction for the same reason they lowered them to zero in the first place—to provide stimulus and, where inflation is below target, to raise the inflation rate. The notion is that negative rates will provide even more incentive for commercial banks to make loans. What might have looked like a potential lending project, by a bank, not worth funding even in a low-interest-rate environment might now look attractive if the alternative is being charged to store money at the central bank or holding lots of cash.

Positive interest rates are that incentive, and in an unhampered market they will always be positive. If, however, interest rates are driven negative by the actions of the state or its central bank, time preference is inverted and traditional economic incentives are corrupted. Individuals and corporations are paid to borrow and consume goods or assets.

Low growth, low inflation, output gaps, unemployment and underemployment combined with financial instability, especially volatile asset prices; prompt central banks to lower rates below the zero. The objective is to stimulate borrowing to finance consumption and investment, thus setting off a self-sustaining growth cycle.

As witnessed in Europe and Japan, banks, faced with negative rates, export capital aggressively, driving down returns elsewhere. Also, higher relative rates cause currencies to appreciate, forcing nations to match interest rate cuts in a race to maintain competitiveness.

This is Ponzi finance; it has turned time preference on its head, driving us to borrow from tomorrow to consume today.

Negative interest rates erode the profitability of the banking sector and pose a threat to financial stability & threaten Global Financial System.

A fall in interest rates weakens a currency because investors in search of specific returns are forced to park their capital elsewhere. This is just as true when rates go negative.

Alan Greenspan says it's 'only a matter of time' before negative rates spread to the US that would have profound implications for markets.

There are currently more than $17 trillion in negative yielding debt around the world as central banks try to ease monetary conditions to sustain the global economy.

The reason for persistent strength in the price of gold can be found in the changing relationship between time preference for monetary gold, and a new round of interest rate suppression for the dollar. If negative rates for the dollar are imposed on financial markets, they will almost certainly lead to a flight out of the dollar where deposits become taxed with negative rates, not into other currencies, but into all commodities and future claims upon them.

How negative rates could backfire in USA

If the economy is so strong, why would the Fed need to resort to policies it didn't even pursue during the Great Recession? The Fed dropped rates to near-zero in 2008 after the implosion of Lehman Brothers, but never ventured into subzero territory. Negative rates would bring the debt-reliant US economy "to its knees."

Trump himself was recently against the idea of negative rates but now Trump is voicing support for zero or negative rates as a way to "refinance" America's mountain of debt, which has only grown larger due to tax cuts and a spending surge. Research suggests Bank margins and profitability fared worse in countries that adopted negative rates.


In a similar vein, Pension Funds use a discount interest rate to determine if they are properly funded. If one plugs in a negative interest rate as the discount rate, all pensions would technically be underfunded. The only pensions that would be properly funded would be those with assets exceeding expected liabilities. No pension is set up this way.

Negative rates on fixed-income securities also means there is no way pension funds can ever generate enough income to meet their obligations.

To see the results of low or negative rate environments, look no further than the euro zone and Japan. They account for 87% of the negative rates worldwide. Europe is essentially in recession with negative GDP in Italy, Germany and elsewhere. Its banking system is a mess, thanks to negative rates. European banks are trading at the lowest levels in more than 30 years. Japan is not doing much better. Economists are projecting negative GDP in the fourth quarter and the Japanese banking system is even worse than Europe’s, trading at some of the lowest since the early 1980s.

The U.S., UK, Canada, Australia and New Zealand are the only developed bond markets that do not have negative rates anywhere on their yield curves. Should these countries join the rest of the developed world in moving to negative rates, the financial system will be under much more stress? If negative rates become more widespread across the globe, then the financial system needs to be rebuilt on a new set of assumptions. The problem is we do not yet know what those should be or how they would work.

Leveraged-Asset Bubble

The effect that an artificially low interest rate has on an economy is pernicious. For corporates, borrowing becomes preferable instead of issuing equity. Firms become more leveraged. The managers of these businesses have an incentive to improve profitability per share by issuing debt and retiring equity capital. They are deterred from raising new capital for other purposes; stock buybacks are safer than speculative projects, especially when you cannot divine what discount rate to use in order to assess the potential of a project. For households, lower interest rates encourage borrowing to buy assets.

Asset markets are supported, and it raises the point at which they clear, but it also reduces the need for companies to improve internal efficiency. And what of the poor, the unemployed, those unable to clamber onto even the first rung of the property ladder? Populist politicians will seize the opportunity to pander to the dispossessed voter. They will promise boldly, knowing that, once elected, they can lean on their notionally independent central banks and be paid to borrow at no apparent cost.

These USA Indicators will be closely watched

Shortage of skilled workers - concern is the ability to hire and retain qualified employees

Trade war trouble - Protectionist US trade policy remains a key risk and economic uncertainty

The Fed to the rescue? - Federal Reserve will seek to keep the economy afloat. Wall Street is betting the US central bank will soon need to lower interest rates — perhaps multiple times — to stimulate growth

Waning optimism - an unmistakable deterioration in sentiment among America's finance chiefs

Declining industrial production, a result of a weak global economy and the Trump administration’s trade war with China

Federal Reserve Bank of New York’s recession probability chart based on an inversion of the yield curve

The Organization for Economic Co-operation and Development’s leading economic indicators, which has edged down since last year.

Weak housing data - headwinds in the housing market in terms of residential investment

Job growth has slowed substantially from last year


Indicator 1: The Unemployment Rate

Indicator 2: The Yield Curve inversion - Interest rates on 10-year Treasury bonds falling below those on three-month bonds. (It has already happened.)

Indicator 3: The ISM Manufacturing Index -The index falling below about 45 for an extended period.

Indicator 4: Consumer Sentiment, Declines of 15 % or more over a year.

Indicator 5: Choose Your Favorite- Temporary staffing levels, the quits rate, Residential building permits, Auto sales

This ‘catastrophe’ could be Trump’s downfall in 2020 Election

That’s Nobel-winning economist Robert Shiller explaining how a downturn in the economy could be what finally marks the ruin of Trump’s turbulent presidency. “During a recession, people pull back and reassess their views. Consumers spend less, avoiding purchases that can be postponed: a new car, home renovations and expensive holidays, Businesses spend less on new factories and equipment, and put off recruiting.” In an economic downturn Americans will reassess their president’s unreal narrative and random management style. Trump type motivational speakers often end up repelling the very people they once inspired.

It is structurally defence less as the world slides into probable downturn or recession. This will not be an ordinary downturn because central banks no longer have the instruments to fight it.

Indian economy

Indian economy is experiencing turbulence with a latest GDP at 5.0% (25 quarter low), with slump in growth in various key sectors & the global growth environment is gloomy

Indian economy

Indian economy is experiencing turbulence with a latest GDP at 5.0% (25 quarter low), with slump in growth in various key sectors & the global growth environment is gloomy.

Disruptions and reforms-led to a drift down

The 4 major disruptions since 2016 were: Demonetisation, RERA, Trade War, and IL&FS & NBFC Crisis.

The 3 key economic reforms were: Adoption of inflation targeting framework by RBI, faulty implementation of the GST and the IBC.

Monetary and fiscal policies are two key instruments to fight a cyclical downturn. However, the fiscal and monetary authorities have, by and large, chosen restraint over using these instruments to stoke growth-Inflation control has preoccupied monetary policy since targeting was adopted & Fiscal policy, too, has not been used to pump-prime the economy .

GDP is the sum of consumption, investment, government spend, and net exports. Here, we consider consumption and investment, and exports.

Financial sector – frictions resurface

The banking sector’s NPA ratio worsened throughout the UPA-II term and is still quite high

No sooner did the NPA ratio started improving in fiscal 2019, the NBFC stress started building up Stress in NBFCs percolates faster, owing to greater interconnectedness (to mutual funds, banks, and corporate sector) vis-à-vis public sector banks


Auto sales continue to decline in August YoY, going through a slowdown for the past few months, due to several external factors & liquidity crunch. There are Lay-Offs, Shutting down Factories, Cuts Shifts. Tata Motors reported a 49 % slump in its domestic sales, commercial vehicles' sales dipped 45 %, Maruti reported a 32.7 % decline in its vehicle sales, and M&M local sales declined 26 %. Automobiles (passenger vehicles and two-wheelers): Despite flat growth in passenger vehicle sales volume, revenue is projected to grow 5% this fiscal on rising vehicle prices and inter-segmental shift. Revenue growth of two-wheelers is expected to moderate significantly to 3% from 13% on-year in fiscal 2019, primarily because of sales growth slowdown. Meanwhile, lower raw material prices will support the sector’s profit this fiscal. Auto exports are doing way better than domestic sales

FM said that millennials are no longer buying cars as Ola and Uber have become more affordable or Millennials have no money to buy cars. Many Customers have found that mobile app-based taxi services do provide a good alternative to personal cars. Maruti Chairman says purchasing power of domestic buyers has not grown enough to afford the increased product prices and Youngsters today find shared mobility economical.

Are Indian Auto Makers are indulging in excessive profiteering, greed?

A BMW 320i costs 31,500 Euros in Germany (Rs. 24.78 lakh). A Mahindra XUV 500 top end model costs Rs.19.74 lakh (ex-showroom Delhi). The cost difference is Rs.5 lakhs.

In Germany an Automotive worker gets paid 31.40 Euro an hour , or Rs.2,470/ an hour, while in India an Automotive shop floor worker is paid 1.09 $ an hour or Rs.77 an hour . In effect, A German worker gets paid 32 times compared to Indian worker.

Now come back to the technology included in a BMW versus a Mahindra XUV 500. Is there any comparison? Cost of steel, rubber, plastic and other raw material is standard worldwide. The big difference is the cost of labor which is 32 times more in Germany. Yet a far more superior car costs only 5 lakh more in Germany compared to a substandard vehicle India.

What has been the downfall of automotive guys in India is absolute greed. Remember you are paying BMW prices in India for a substandard vehicle. They make you pay European rates for a far more substandard product made with labor that costs 32 times less. They lobby the Govt to charge 130% import duty to protect their sales instead of innovation of product and productivity. They will cry losses, but that is because a lot of the profits are hidden via complex corporate structures to avoid taxation. This bubble had to burst sometime.

Real Estate & Construction

RERA Impact, Worsening NBFC Crisis, Stress in Developer loans

Construction: Margins are expected to deteriorate because of a change in the revenue mix; revenue will be driven by less profitable sectors such as roads, power transmission and distribution (T&D), water supply, and irrigation. The Indian real estate and construction industry is not an exception to disruptions that are catalysing technological advancements, changing business environments, altering economic realities and changing consumer behaviour. With offices shifting towards flexible basis and Co-living becoming increasingly common the sharing economy may be adversely affecting demand. The lines between living, working, and playing are blurring.

Top four real estate markets show stagnation in project completion, fewer launches

Developers have shied away from launching new projects on account of muted end-user demand. India’s top 30 cities had 1.28 million unsold housing units as of March 2019, a jump of .07 from March 2018, when the number was at 1.2 million.

So, when the real estate sector does well, many other sectors, right from steel and cement to furnishings, paints, etc., do well too. This is something which isn’t happening currently. The fact that real estate prices haven’t gone up in years makes people feel less wealthy and as a result spend less.

Average completion timeline for residential projects in key metros is 5-6 years

Infrastructure investments to slow as external funding, execution remain challenging, India’s infrastructure investments as a %age of GDP may fall to a 15-year low


FMCG: Revenue growth is expected to slow down on account of moderation in sales volume, especially in the first half of fiscal 2020, and more so in rural areas as indicated by leading FMCG players.

A slowdown in consumption has triggered slower GDP growth. Sluggishness in rural demand, dent in exporters’ incomes, and tighter credit flow to the retail sector in wake of the NBFC crisis started telling on consumption demand. The volume growth or the number packs sold, of fast-moving consumer goods (FMCG) companies has slowed down over the last one year.

What has stifled consumption? - Rural incomes are running low; Credit is harder to come by

Manufacturing (including stress in MSME)

Manufacturing Slump

If nearly one half of the Indian labour force, dependent on agriculture, is seeing far weaker income growth than earlier years, then another large section of workers, who depend on the manufacturing sector, have been facing their own set of troubles. According to the latest Periodic Labour Force Survey, about 24.5 % of the urban male workers were engaged in the manufacturing sector. A similar proportion of urban women workers are employed with manufacturing units as well.

But the manufacturing sector has been hit by both sluggish exports and, in some cases, weak domestic demand. The unorganised parts of the sector have had the added burden of GST to deal with. This, too, has consequences on income and eventually demand.

Reduction in commercial vehicles sales is an important indicator of economic activity.

SIDBI survey shows deepening MSME crisis

The NBFC or shadow banking sector, which is a key lender to MSMEs, is still reluctant on lending to business as they continue to face the pangs of the liquidity crunch. The biggest challenge for MSMEs is unsold inventory, which had led to cash flow and unemployment issues. In fiscal 2019, fixed capital investment continued to be held back by weak private sector sentiment and corralled fiscal space


Weak global growth and falling trade intensity shrank India’s overall exports pie, and a gradual pick-up in crude oil prices fanned further headwinds. The rollout of Goods and Services Tax (GST) also had a knock-on effect on exports growth in the year of implementation because of delay in refunds to exporters. The export slowdown, which intensified in fiscal 2019, mainly affected labour-intensive sectors, denting export incomes

Exports growth slipped in fiscal 2019 and followed the slowdown in global growth in fiscal 2019, particularly in the second half when escalation of US-China trade tensions started having a material impact on global trade and investment flows.

Among the principal export sectors, labour-intensive sectors such as gems and jewellery, readymade garments, and marine products saw the sharpest decline & petroleum, rice, cotton yarn, organic and inorganic chemicals, engineering goods also had decline.

Rural & Agriculture

Non-food inflation continued to surpass food inflation in the past two years, amounting to income transfers from rural to urban areas. Tractor sales are falling indicating stress in Agriculture.

Rural ‘Self-Reinforcing’ Spiral

The story of the slowdown in the Indian economy didn’t begin in the April-June 2019 quarter. It probably began many quarters before that. Think back to the middle of 2016. It was a year of a strong monsoon. The government had also decided to adopt policies to keep food inflation in check, including a policy of smaller increase in minimum support prices. Supply was ample, price support was low. And, so, food inflation was on the decline. Lower food price increases meant lower income for farm owners and lower wages for farm workers. While government focus on aspects like rural housing helped to some extent, even non-agricultural wage growth fell. Lower food prices, which led to lower wages and reduced spending power created a self-reinforcing spiral in the agricultural economy. This spiral impacted nearly half the total labour force, engaged in agriculture. At the core is the fact that 44 % of the total labour force is absorbed by the agriculture sector which generates only about 17 % of gross value added.

India's Cow Crisis: Threat of decline looms over livestock (cattle) economy (of Rs 9.18 lakh crore,) after 35 years’ growth threatening livelihoods of India’s poorest small and marginal farmers due to lingering threat of violence. Cattle have simply vanished from the village’s landscape. At best, a few households keep some buffaloes or goats. It is like an economic plague taking its victims one at a time, eventually sweeping away everybody. The cattle economy is a perfect example of the circular economy of the country’s poorest. Cows are called productive till they milk—from the age of three to 10. But they live up to 25-30 years, when they are economically unproductive. Most owners then sell their cows. It can be assumed that the buyers slaughter them. The income from this is then ploughed back into buying new cattle, thus self-sustaining an economy that supports the poorest the most. The livestock sector is bigger than the crop sector, though both are clubbed together as the agriculture sector. Livestock is the best insurance against agrarian distress as the sector is the source of sustained income and generates income more frequently than the crop sector, for the last 35 years, the livestock sub-sector under agriculture never reported negative growth.

GST revenue crisis- India is facing a silent fiscal crisis

GST Collection in August is Rs. 98,202 crore, 4.5% growth YoY but lower than the over Rs1 trillion collected in July. The subdued trend in GST receipts coincides with a sharp slowdown in economy. Growth in indirect tax mop-up in the first 5 months of the current fiscal has been 6.4%, well below the 10% estimated for the year.

The sluggish growth in Goods and Services Tax (GST) revenue receipts, unless reversed quickly, could lead to a Rs.40,000 crore shortfall by the end of the current fiscal, straining finances of the central government which is required to make good on states’ revenue loss.

Modi government’s 3.4% fiscal deficit numbers for the last fiscal year with a revenue-GDP ratio of 8.2%, which was a full %age point lower than the revised estimates.

FY19 gross tax to GDP ratio dips to 10.9% (Lower by 0.3% over 2017-18) on shortfall in indirect tax revenue, as indirect tax revenues fell short of budget estimates by about 16 %, due to shortfall in GST mop up. The expected tax revenue of the Centre in 2019-20 is 7.8% of GDP.

India's tax-GDP ratio is still abysmally low.

Remember, Pre-GST, the statutory tax rate for most goods was about 26.5%, Post-GST; most goods are expected to be in the 18% tax range.

Indian Rupee is also weakening

Given India is a current account-deficit country; the rupee is vulnerable to volatility from oil prices and tariff wars.

Unemployment is rising

Unemployment is at a 45-year high of 6.1%, barely 23% of workers earn a regular wage, and only three out of the 10 who enjoy a steady salary have proper job contracts.

Income is falling

In India, the deceleration in industrial output and its main component—manufacturing—to below 4 % during 2012-19 has larger consequences in terms of employment and income generation in both rural and urban areas-RBI. For almost two years now, rural wage growth has been between 2-4 %. When adjusted for rural inflation, there are months when wage growth has been negative. Among the organised private sector, too, wage growth has been declining. Over the past few years, households dipped into their savings and leveraged themselves to finance consumption. Wage growth has moderated across most key segments. There was slower growth in revenue for farmers. Urban income growth has also seen a tepid pace in the last few quarters

Saving rate is slumping

The country’s savings rate, or the share of gross domestic savings in the gross domestic product (GDP), has come down to 30.5% in 2018, latest available official data show, compared to nearly 37% in 2008. Poor savings have been a largely “addressed” reason for the country’s continuing slowdown.

India is approaching sub-prime financial crisis

Exotic funds, designed for wealthy investors, have grown to $40 billion from nothing in just seven years, expanding by 71% in the 12 months through March. Since September, when the surprise bankruptcy of infrastructure financier IL&FS Group triggered a refinancing squeeze for property developers, investors have committed an additional $9 billion to these so-called alternative investment funds. Accidents may occur because of a weak property market, leveraged developers and their troubled financiers, the shadow banks. Since non-bank finance companies are facing a liquidity shortage of their own, they’re passing on their illiquid, poor-quality builder loans to bespoke funds by indicating 20%-plus returns to investors.

Any financing that’s secured by collateral — steel mills, textile factories, power plants, roads or land — is in trouble in India. A multiyear investment slowdown has decimated credit quality. Now, the problem is spreading. The near-recession in the consumer economy means unsecured lending could be the next domino to fall. With business collateral losing its sheen, India’s top three private-sector banks have been expanding their credit card and personal loan business at 30%-plus rates, double the pace of growth in their corporate loan book.

Is public money safe?

National Small Savings Fund (NSSF)

The net accretions under the small savings schemes are invested in the special securities of various States/ Union Territories (with legislature)/ Central Governments.

The total NSS funds were estimated at Rs 16.85 lakh crore in 2019-20, as against Rs 14.8 lakh crore in 2018-19.

Outstanding NSSF loans to state-owned enterprises, excluding repayments, are budgeted to cross Rs 4.2 lakh crore in 2019-20, an increase of around 17 % from Rs 3.6 lakh crore in 2018-19.

Such borrowing runs the risk of understating the fiscal deficit

From just 1.8% in FY13, NSSF funds financed 19.7% of fiscal deficit in FY19 and are budgeted to contribute 18.5% of the deficit in FY20. But government officials said the withdrawals could be higher if revenue collections fall short, as they did in FY19.

The Union Budget FY20 proposes to borrow 21% (INR1, 480 billion) of its fiscal deficit requirement from NSSF and state provident funds. Although this is marginally down from 22.4% (INR1, 420 billion) in FY19 (revised estimate, RE), it is significantly higher than 3.0% (INR151.45 billion) in FY15.

The states, who were the prime borrowers from this fund earlier, are now relying more on market borrowings (state development loans) to meet their funding needs, because the Union Government excluded state governments and union territories (except Arunachal Pradesh, Delhi, Kerala and Madhya Pradesh) from NSSF with effect from 1 April 2016.

NSSF is investing Rs 1.2 trillion this financial year in government agencies that fund rural electrification and power, railway and highway projects among others.

NSSF is lending money to the government at a higher rate of 8.4 % this year

The airline, which boasts a total debt of around Rs 58,000 crore, has sought the government's approval to borrow Rs 2,400 crore from the NSSF account to meet its working capital requirements.

Food Corporation of India will be given a one-time loan of Rs. 45,000 crore from the NSSF. FCI, till now, was borrowing from banks for its working capital requirements, which was then shown by the lenders as food credit. Net Disbursement of Rs.1, 24,000 cr since 2017-18.

National Highway Authority Of India (NHAI): Rs.40, 000 cr since 2017-18

Indian Railway Finance Corporation (IRFC): Rs.17, 500 cr

Building Materials and Technology Promotion Council: Rs. 8,000 cr

We will also discuss stress in financial market with FCI, NHAI, Air India & others receiving bailout funds from National Small Savings Funds putting small saver`s money at risk and also using NSSF to fund projects to avoid off balance sheet exposure and thus manage Fiscal Deficit target. This is particularly relevant in light of recent episodes of IL&FS & DHFL.

NHAI’s debt soared from Rs. 40,000 crore in 2014 to an unsustainable Rs1.78 lakh crore in 2019 (plus contingent liabilities of Rs.63,000 cr. (but this may be a gross underestimate) as against overall claim of Rs3 lakh crore) under Mr. Gadkari’s watch. NHAI is one of the biggest litigants in Indian courts. At that time, it had over 5,000 cases pending in various courts and another 200 in the Supreme Court. The number may have easily doubled. Most disputes are over cost overruns, usually caused by long delays in land acquisition and obtaining various approvals and clearances which, often, turned projects unviable even before construction commenced. Disputes with NHAI are also a hurdle in the resolution of IL&FS, previous management had claimed that Rs17, 000 crore was due from NHAI.

He said NHAI would make an IPO (initial public offering) to raise funds and bragged that it could raise Rs10 lakh crore. Although there was no IPO, in July this year, LIC was asked to provide Rs30, 000 crore to NHAI by subscribing to bonds. Meanwhile, in the same month, Mr. Gadkari told the Rajya Sabha that he planned to create a separate finance arm for the NHAI for which he would seek the finance ministry’s permission.

The NHAI, sources familiar with the developments said, has become excessively leveraged with its debt, which is expected to touch Rs 2.5 trillion by the end of the current financial year. While government support has marginally fallen by Rs 36,691 crore over last year, borrowings are expected to rise by about 21 % to Rs 72,000 crore this year.

KPMG report pegs highway ministry’s annual revenue deficit at Rs 1.36 lakh crore

SIDBI: Over advances has crossed Rs.1.36 lakh cr, Asset base of Rs.1, 55,861 cr., Gross NPA Rs.868 cr.

MSME: Total credit exposure in India stood at Rs. 116.7 lakh Crores. Micro (exposure less than Rs.1 Crore) and SME (Rs.1 Crore - Rs.25 Crores) segments constitute Rs.15.8 Lakh Crores credit exposure

NPA Trends The overall gross NPA rate in commercial lending was 16.0% in Mar’19 (Micro 8.8%, SME 10.8%, MID 17.1%, Large 18.1%)

(Micro less than Rs.1 Crore, SME Rs.1 Crore- Rs.25 Crores, MID Rs.25 Crores- Rs.100 Crores, Large > Rs.100 Crores)

LIC @ Government's ATM

LIC assets under management of Rs 31.11 lakh crore (US$450 billion), 29 crore policy holders

LIC’s solvency ratio of 1.58 lingers dangerously close to the minimum threshold of 1.5. Bajaj Allianz is at 5.82, ICICI Pru 2.81. The lower a company’s solvency ratio, the greater the probability that it will default on its debt obligations.

This brings us to the question of the independence of the LIC and IRDAI as institutions. LIC has been violating the shareholding limit of 15 % in L&T, ITC, and Corporation Bank.

Funds-starved Modi govt gets LIC to invest Rs 10.7 lakh crore to help failing banks & PSUs

From lending a helping hand in many of the government stake sales in state-owned firms or public sector banks, to bailing out fund-starved sectors like railways, road or power, LIC has been at the forefront of many investments in the public sector.

Last year, LIC increased its stake in state-owned IDBI Bank to 51 % with an infusion of Rs 21,000 crore in the bank. However, with massive losses wiping out most of the infusion and a fall in the bank’s capital adequacy ratio, the government and the LIC were forced to go in for another round of infusion of Rs.9, 000 cr.

Over the years, LIC has also picked up stake in other state-run banks — like Punjab National Bank, Corporation Bank, Allahabad Bank and State Bank of India — as the government struggled to adequately capitalise PSBs in line with the levels required by the RBI.

LIC has also come to the rescue of several public sector undertakings during minority stake sales by the government-Coal India, NTPC, NHPC, NBCC and Hindustan Copper over the last few years. LIC has lost over Rs 17,000 crore of its wealth in PSBs over the past year. LIC’s holding of PSBs revealed that it had lost money in 18 out of 21 PSBs in the last two and a half years.

The notion that LIC has an unlimited war chest is totally fallacious because life insurance companies hold people’s premium money for 30-years-plus only to eventually pay back the insured or their nominees. LIC invests these funds so that it can meet its long-term liabilities. The investments thus have to be sound and based on economic merit. Such funds can’t be used to fill black holes in the government’s fiscal exercise. The government dips into LIC's piggyback like its own piggyback. But there is a difference that needs to be appreciated. The money that LIC has is the premium paid by its policyholders.

LIC to be a listed company? If it does, it will be bigger than Reliance Industries, TCS

How can India come out of slow down?

More Government Expenditure

Let Indian Rupee be weaker, that will boost exports and curtail Imports

Lower Lending rates

Certainty in the business environment is required

No need for excuses: Acknowledge and spend in rural areas

India's economic growth is temporary and is an "aberration" mainly due to the temporary disruptions; it will get corrected in the coming months, Quarters.

During an economic crisis, what matters is that the government keeps its foot on the accelerator

Accordingly, if the due corrective steps are taken, Indian Economy could come back on rails with a high growth achievement of 9-10%

Overcoming the Economic Slowdown

Start by asking the following questions:

Is this slowdown happening for the first time?

Or is it that all businesses and all economies go through periodic cycles?

Is this slowdown not going to end at all?

Is the Indian economy incapable of bouncing back?

Once we are confident that the current situation is just temporary and that we will be back on the growth path once again, we can reorient our approach by taking these positive steps:

Stay away from pessimism and unproductive discussions. Recognize that it's the job of the media to sensationalize and be alarmist. Accept the slowdown as a regular and recurring feature and adopt a stoic approach.

Take the slowdown as an opportunity to take a long, hard look at your business model and cost structures, cut out the bureaucratic layers and rationalize inventory, vendor costs and rentals. During slowdowns, the scale of operation is reduced everywhere. The suppliers and vendors are much more amenable to cost-reductions and discounts.

Re-energize your team with regular training and skill enhancement programs. Hire a business coach. Use your free time to read books on management and business leadership. Discuss the learning from them, try and implement them in the organization. Keep the spirit of your team-members high. Whether we like it or not, some fundamentally weak businesses will not be able to withstand the economic stress. Take advantage of this to acquire new customers and increase your market share.Use the good times to build up a strong financial reserve. This can serve as a war chest in times of need. Always keep a keen eye on your debt levels. Remember, zero-debt is your biggest asset.

“Just because the economy is down, doesn't mean that your spirit has to be down with it.”

“Never let a good crisis go to waste”-Churchill

CA Harshad Shah (

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