A Rant About the Indian Economy
By: Indiaspeaks Official
Tags: India, Asia, Economics

By u/Plutonian990

Before I begin with this rant, just a disclaimer- this will be harsh and based on my personal observations and opinions.

As a person who got extremely black pilled about India in 2016, I’d like to begin with a warning of sorts:

“This is the last decade left for India to grow up, stop living in the past and engage in self-pity, embrace market economics, STOP looking at the Government as the solution to all the problems which they created in the first place. Stop using history and other nations as an excuse to justify the current condition of this country and stop worshiping mediocrity”

The World does not run by the pace of what India wants it to run- sure almost every industrial and services based foreign investor is more than willing and happy to invest in India- it’s just every time they come into the country, the government does not bother to show interest in doing organic work or reforms but yes, they’ll use this to garner headlines and popularity, or the Big Business of India, fearing competition from these companies, will do everything in their power to make sure their grip on the economy is never challenged, the same is done for any domestic business which looks promising. You can make as many positive Wakeman and Cushfield Style reports to show how India is “changing”, the bitter truth remains- any foreign industrial investor in India must pass through a whole mountain of regulations, licenses, and permits through a monstrous bureaucracy that is more interesting in fooling these goras for bribe money and then the whole unions and Big Business who will use anything at their disposal to make sure these businesses will never enter India in order to keep their uncompetitive business models safe. Unions will allege that foreign businesses violate rules- rules which aim to keep out any foreign investment that can seriously help India to get on its feet economically and eventually become an economic giant. Big Businesses will fly the victim card, ignore contractual agreements, use emotional arguments to justify their outdated and uncompetitive business models, ignore court rulings (yes, the SC right now is going towards full-on judicial dictatorship, but this was one of their common sense rulings) and then drag the same company through the metaphorical sand to another court whose track record in settling cases is poor and the basis of prosecution is laughable in many cases, but at the same time are run by big traders who love to overcharge customers, have an excellent track record of harassing Indian and foreign businesses with “anti-trust” cases (examples: 1, 2, 3, 4), not even hiding their bias against anything that offers superior value, services and redressal to customers, while demanding full-scale government surveillance to “curtail monopolistic activities” and “to prevent round the clock operations for retailers” while Big Business hides the fact that they silently accepted billions of dollars from the same foreign business happily and then alleges they did not get any help, which leads to the said business paying thousands of crores in legal fees because of the weaponization of the legal system against the companies whose only mistake was to dominate the market for both small retailers by providing many of these small retailers a superior platform to trade and customers with a superior value in service quality, in an industry that now has thousands of participants, most of them being small businesses themselves and is rapidly outstripping physical retail while providing employment to tens of thousands and running their Asia-Pacific HQ in Hyderabad, which threatened these uncompetitive businesses and Unions run by rich traders. And this is not limited to foreign businesses only- Flipkart has been a long-time victim of these same big businesses and unions attacking and weaponizing the legal system against it, something which continues even today. Any business that tries to do good in India- be it domestic or foreign, becomes a victim of its own success as everyone and their mother will start to fabricate claims out of thin air or try to rub them into the ground so that their traditional dominance is not challenged in any way- the end result once again, the free market and the average Indian consumer and small business is the biggest loser in all this. And this cannot be complete without the government stepping in on the fun- our former trade minister calls foreign investment into India “no big deal” while “re-looking” at FTAs and then demanding foreign companies to invest more in India- a classic case of cognitive dissonance of a typical minister who is completely out of touch with the economy while thinking the Government is the Lord and Savior of the Indian Economy.

And let’s move to how India decided to kill the baby in its cradle- the Industry Sector. India’s industrial sector has been the neglected child of the Economy because our government in its infinite wisdom decided that we should jump from an agricultural centric economy to a service-based economy- as if we’re the United States after its Gilded Age of having industrialized first, which in reality, the Indian industrial sector was never allowed to grow up properly compared to other Asian nations like Japan, Taiwan, Republic of Korea, Vietnam, Singapore, and China because once again the Government decided to play God with the economy and utterly failed- which they declared as a resounding success at the cost of extreme overcapacity, low capacity utilization (pre-pandemic), gross capital formation remains low for a developing and re-industrializing economy like India, resource wastage remains high, industry is starved of capital investment, rising input costs cripple small and medium industrial houses, we operate on outdated principles of labor-intensive industries which generate lower productivity rates but the number of working hours have increased- which should be opposite considering the fact that Capital formation ratio remains at 28%- as more improved tools, capital goods and raw materials are employed, labor costs and overheads decrease, productivity skyrockets, and total hours worked always decrease- this has been the formula for industrial development across the entire globe- yet India remains an outlier to it- thanks to the reasons aformentioned above. We also like to dwell in our mediocrity- you seriously are gonna compete with nations offering tax rebates and land rent rebates for up to 25 years, duty-free imports for all raw materials and capital goods for specific industries with a policy that just gives you 4–6% in undisclosed benefits for just 5 years- are you kidding me? And as if to drive the point home, Indian industrial labor is 40%-60% more expensive than other emerging market labor, highlighted below:-

Country Name — Monthly Industrial Wages (in $) — Hourly Industrial Wages(in $) People’s Republic of China — 1083.41 — 6.5 Vietnam — 205.33 — 2.99 Bangladesh — 149.53 — 1.33 India — 290.80 — 6.33

Monthly Industrial Wages (in $)Hourly Industrial Wages (in $)People’s Republic of China1083.416.5Vietnam205.332.99Bangladesh149.531.33India290.806.33

And to further compound this issue, factory owners cannot even fire industrial workers without first seeking the “blessings” of the local government body who will conduct a “fair and final” investigation into whether the claims are valid or not (courtesy of the Industrial Employment Central Rules, 1946)- meaning that the employer has lost all rights to fire any ineffective/inefficient workers and replace them with more enterprising and hard-working individuals- which is essential for both the workers and the employer to ensure the firm does not go under. The Govt. did make enterprising changes on this in 2020 under their proposed Industrial Relations Act, 2020 however, the bill- just like the CAA Bill, remains in limbo to date, and also managed to piss off all labor unions in the country and given the glorious recent track record of the government in passing market reforms- expect it to be offered as a sacrifice to appease unions in the future, perhaps even next year, considering key states go up for election.The overall attitude of the country in terms of industrializing oscillates between “much needed” and “how the industry will do *insert random excuse* and hence we should regulate our expectations” and the way it has industrialized and then de-industrialized by jumping one hoop straight to becoming a Service-Based Economy is nothing short of dumb. Another thing to not discuss is the horrible condition of land and real estate laws in India and how much the government goes to regulate the sector to death while conveniently exempting itself from these draconian laws. The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 has placed unreasonable demands on any private entity looking to purchase/lease land- forget free contracts- the land demands that any claimants to the land in question must receive the following:-

an additional subsistence allowance of 38,000 (US$800) for the first year

an additional entitlement of a job to the family member, or payment of ₹5,00,000 (US$11,000) upfront, or a monthly annuity totaling ₹24,000 (US$550) per year for 20 years with adjustment for inflation — the option from these three choices shall be the legal right of the affected landowner family, not the land acquirer

an additional upfront compensation of ₹50,000 (US$1,100) for transportation

an additional upfront resettlement allowance of ₹50,000(US$1,100)

if the landowner loses a home in a rural area, then an additional entitlement of a house with no less than 50 square meters in plinth area

if the land is acquired for urbanization, 20% of the developed land will be reserved and offered to landowning families, in proportion to their land acquired and at a price equal to the cost of acquisition plus the cost of subsequent development

if acquired land is resold without development, 20% of the appreciated land value shall be mandatorily shared with the original owner whose land was acquired

This only has made land purchasing/leasing a significant nightmare for any private entity and on top of that, the GoI has placed a limit of 100 acres for private land acquisition while in the 2015 Amendment, exempting itself from such limits. Add the 5–8% Stamp Duty tax based on a 130-year-old Colonial-era law and you are basically punishing private operations.

And now for emerging tech/advanced industry and R&D. Last night, Dr. Anand Ranganathan tweeted about how “India is closing the gap with America” in advanced R&D- I ask where? The United States still spends a massive $612 billion/year on R&D- almost all of it is fundamental R&D which is monumentally difficult and time-consuming, publishes the most research papers, and has the most citations too and on top of that has recently passed a bipartisan bill to increase R&D spending by another $350 billion by 2026 once it was apparent that China has overtaken the US in overall R&D spending (which focuses primarily in Applied R&D, for which the learning curve remains pretty flat). The United States alone accounts for 59% of all innovations in Medicine, Science, and Technology even today ranks 3rd in WIPO’s Global Innovation Index Report 2021, ranks 11th on the Bloomberg Innovation Index 2021 Report (which also has a shorter evaluation methodology) and American companies dominate innovation and R&D even today. This is not to say India hasn’t done anything- India is progressing, but not at the pace it thinks it is- it ranks 48th on the Bloomberg Innovation Index (only South Asian nation to make it to the top 50), the key point is that by merely making lofty claims, India won’t reach the skies, it takes work- and in this department, India fails. It spends a measly 0.7% of its GDP or just $34 billion in R&D- Fertiliser subsidy and MSP grants have a higher budget than India’s R&D budget and that should show where our actual priorities lie. Moreover, India is not prepared for the oncoming Industry 4.0 wave- except in the field of Artificial Intelligence applications in which India ranks 20th, India is NOT prepared for the next Industrial Revolution, which is already expanding at a breakneck speed in most nations- key nations of interest being China, United States, Republic of Korea, Japan, Germany, Italy, United Kingdom, and France which account for nearly 80% of all industrial robots and automated production lines installed in the last 3 years. In fact, a report made by Grant Thronton and the Confederation of Indian Industries (CII) placed India in the bottom 15 in terms of Industry 4.0 readiness. Fields like 5G, Internet of Things (IoT), Artificial Intelligence, Industrial Robotics, Automated Logistics and Industry, Autonomous Driving, Semiconductor fabrication, Chip Design, Advanced Computing, Financial Technology, Blockchain, DeFi, Biotechnology, Nuclear Energy (SMRs, MSRs and Fusion Reactor tech), etc. are increasingly dominated by China or the United States and will continue to do so because of the ginormous R&D infrastructure and the level of support extended to this machinery for both military and civilian applications.

The Infrastructure and Logistics Question of India still remain another major issue-the current bill which aims to increase infra spending by $1.4 trillion by 2024 is extremely unrealistic- considering the fact the Government has to raise all funds for 60% of projects and another 49% for the remaining 40% projects which are to be pursued in a PPP format- which is once again, being herded to the usual handful of companies as usual. And majority of this funding will be raised via debt through the National Bank for Financing Infrastructure and Development Authority- for which the GoI increased the FDI limit on corporate bond investments from 9% to 15% last year itself- at a time when the Debt to GDP ratio has hit 100%+ -with Public Debt rising beyond 90% of GDP, external debt rising to 21.3% of GDP, Household Debt rising to 37.3% of GDP, interest servicing bill accounting for 23% of the Budgeted expenditures. Infrastructure projects in India are well known for cost and time over-runs (examples: 1, 2, 3, 4), political interference leading to stoppages, and excessive delays (examples: 1, 2, 3) leading to investors pulling out of India. The Logistics Cost in India remains insane as usual, highlighted as follows:-

CountryPer Km CostIndia$14Vietnam$0.32China$1.14Bangladesh$0.22

The average Indian truck driver spends 15–60 minutes per journey at the toll plaza (which has been improved to a small degree with FASTag) and the toll tax rates vary widely in India- creating a complicated tax and cost situation for the logistics sector. Warehousing also remains a significant issue with 23% of storage capacity remaining underutilized and is costly and dominated by the Indian Government.

The next point comes to inflation- now many of you will be quick to jump and point out how nations like the US, Germany, the UK, China, Russia are facing high retail inflation right now, and that is true. However, I would like to point out a lot of problems and a significant threat that both the global economy and India are facing. With the inflation first then.

For retail inflation, the base year was changed from 2003–04 to 2011–12 last year and has the following list of commodities for the purpose of recording the CPI index.

Retail Price Inflation Commodity Groups

Producers’ Price Inflation Commodity Groups

As of October 2021, M-o-M Retail Inflation rose to 4.48%, although down from the previous year’s rate of 7.61%, which is good. However, there are a few inconsistencies I would like to point out:-

- A good number of goods categories (consumer durables, machinery, automobiles, etc.) are missing from the index. Meaning that the current CPI does not reflect actual inflation in the economy as compared to the indexes of other countries which have a broader index basket.

- Services and Gig Economy is completely ignored. Not only that, considering the materials and chips shortage, container shortage, a global supply chain crisis, the demand for secondhand goods is very high at this time, which is once again ignored in the CPI index.

- The end effect of taxes is not included in either the CPI or the WPI indexes.

Accounting for these inconsistencies, the actual CPI of India would be far higher than what is reported, the current method and index of CPI are outdated and given the fact that inflation has remained a key political issue, expect no changes to this either.

A very conveniently left out index of Inflation, which is far more important than the CPI, is the Producers’ Inflation Index or WPI. WPI in October continued to remain in double digits as well, spiking to 12.54%. The reason why I call this index more significant is because of a very basic principle of economics: “Every Consumer is not a producer, but every producer is definitely a consumer” i.e the producer feels a more sharp effect of WPI, which is passed down onto the end consumer in the form of price hikes, combined with CPI, it makes a double whammy for the average consumer. In fact, even the WPI Index has its own inconsistencies:-

- Most manufactured goods are left out of the index altogether- Once again, taxes are not taken into account

Similar to CPI, WPI is also under-reported due to an outdated index basket. And the market does not care about whether the correct index prices are reported or not. Examples are shown below:-

- A black market for chemical fertilizers is thriving in India, owing to the fact that there is an acute chemical fertilizer and materials shortage worldwide and the rise in input costs has increased end retail costs as well.

- Automobile Industry has announced that it may hike car prices for the 7th time in 20 months, owing to a severe chip shortage, rise in input costs, rise in material import costs, and the ongoing global supply chain crisis deeply hitting the Indian industry.

- FMCG Company Proctor and Gamble has hiked the prices of all goods worldwide, price hikes ranging from 4–11%.

- Indian FMCG and Food Companies have recently announced a full-scale price hike of 8–10% for all products offered.

- Indian apparel and electronics brands have also announced a price hike of 8–10%

-Indian manufacturers are hiking prices across the board owing to a whole plethora of issues plaguing them- global supply chains, materials costs, expensive imports, material shortages, etc.

- Coal India Ltd. has warned of an inevitable price hike across the entire industry due to input shortages and an increase in costs.

- Govt. of India hiked Natural Gas prices by 62% in September 2021, paving the way for an inevitable increase in power prices and overall inflation rates.

- Steel Industry has also announced price hikes due to rising input costs, govt. restrictions on inputs and import restrictions (thank you very much Import Substitution i.e. Atmanirbhar Bharat)

- Active Pharmaceutical Ingredients (APIs) cost has risen by 11–54% in one month, leading to another price hike in APIs and Indian Pharma goods, citing trade restrictions, high tariffs, etc.

- Container prices have doubled in the last 14 days, from $4000-$7000 to nearly $10000-$14000, deeply affecting Indian exports.

- Real Estate and Construction Costs are said to rise by 10–15% by 2022, citing input costs and materials shortages.

Now some of you will also claim that this inflation is transitory and is a temporary effect. However, I would claim otherwise due to the concept of the Cantillon Effect which is hitting both India and the Global Economy and has created an extremely dangerous situation. The Cantillon Effect or better known as Biflation occurs due to monetary credit expansion/ Quantitative Easing i.e money printing in an effort to prime a stagnating economy in the forms of lower interest rates, ease in margin requirements, etc., leading to a simultaneous rise and fall in prices (inflation and deflation) at the same time in different segments of the economy- creating an extremely volatile situation caused by excessive price speculation in almost all segments of the economy leading to a serious economic collapse in the medium term (as soon as interest rates are raised to normal levels). This also leads to a massive increase in wealth and income inequality as the wealth of the middle class and poor is eaten away by inflation while the wealthy are the primary beneficiaries.I will explain this with a good example:-

Imagine the economy is divided into 4 segments; the top 20%, the top 50%, the top 80% and the top 90% shown below as follows:-

Top 20% of the Economy (Wealthy)Top 50% of the economy (Middle Class)Top 80% of the economy (lower middle class)Top 90% of the Economy (destitute)

Now, consider the country is in recession and in order to revive it and achieve full employment as per Keynesian Economic Theory followed by all Central Banks, the Central Bank will reduce interest rates from say 8% to 5%, reduce CRR and SLR, reduce margin requirements, cut interest rates on Reverse Repo Purchases and engage in mass dumping of securities to increase demand for money artificially and create a basis for money printing. This will open the floodgates for money supply as the printed money will be first passed onto the Wealthy who are well connected via institutions and banks. The wealthy will increase household consumption due to the increase in disposable income in hand- directed towards consumer goods and investment options, creating a major demand spike artificially. The wealthy will be in the most advantageous position from this as they seek to mitigate inflationary effects via hard asset investments while being at the top of the hierarchy. Subsequently, this chain will continue all the way to the lower tiers of the Economic hierarchy, increasing inflation at each step. Let us further model this with the help of the Keynesian Money Multiplier effect.

Suppose, for the top tier (top 20%) Marginal Propensity to Consume = 0.60

Multiplier (k) = 1/1-MPC

- k= 1/1–0.60

- k= 1/0.40

- k= 2.5 times i.e. 2.5 times more money will be created when the marginal increase in consumption is 0.60.

Similarly for the next tier (Top 50%), assume MPC= 0.70

- k=1/1-MPC

- k= 1/1–0.70

- k= 1/0.30

- k= 3.33 times i.e. 3.33 times more money will be created

For Top 80%, MPC = 0.80

- k=1/1-MPC

- k= 1/1–0.80

- k=1/0.20

- k= 5 times i.e. 5 times more money will be created

For Top 90%, MPC =0.95

- k= 1/1-MPC

- k= 1/1–0.95

- k= 1/0.05

- k= 20 times i.e. 20 times more money will be created

We can clearly see, that, as per consumer behaviour in this artificially boosted economy, the Money Multiplier Effect will create a never-ending demand for money which the Central Bank will continue to print out of thin air and further drive up inflation- which falls the hardest on the lower rungs of the economy and creating a gigantic “everything” speculative bubble. Eventually, this inflation will accelerate beyond control, forcing the Central Bank to take action by clamping down on Money Supply (Interest Rate raises, Market Securities Purchases, Increase in Margin Requirements, etc.) which will cause a money supply crunch and pop the bubble, leading to a severe economic collapse. This phenomenon has been noticed in the following economic collapses and even collapse of entire financial institutions and Central Banks:-

- Panic of 1825, United Kingdom

- Panic of 1873, United States

- Panic of 1819, United States

- Panic of 1837, United States

- Panic of 1893, United States

The issue is, we are making the same mistake on a global and national level again. India stepped on the Money printer in 2004 in order to boost the economy (under then Chairperson Raghuram Rajan) and to stave off the Global Recession of 2007–08 (also sowing the seeds of the NPA crisis) and never took its foot off the pedal as shown in the graph below.

(India M3 Money Supply)

In fact, this has led to the most broken commodities and capital markets in Indian history- there exists an extremely high degree of correlation between M3 Money Supply Growth and Fluctuations in key stock market indices (NIFTY50, SENSEX). RBI’s report on valuations paint an overly rosy picture, but the honest truth is- markets are extremely broken and firms like Bank of American Securities, Goldman Sachs, and Morgan Stanley have been sounding off alarms not only in India and United States but also for the rest of the world because the RBI itself confirms that by adopting an accommodative approach towards money supply, the economy has remained buoyant (on a massive bubble).

The reason why I have chosen M3 Money Supply as a measurement metric is that this is directly sent to the banking institutions in the form of additional deposits created via T-Bills, Repo and Reverse Repo Operations, OMOs- which has been confirmed by RBI, in an effort to control capital flows against a rapidly inflating US dollar. M3 Money Supply has risen by 11.8% while Total Bank deposits have risen by 21.3% in the same time. The value of Gold has also sharply increased to nearly $2000/ounce (1 ounce = 28.67 gms) which is considered a solid safe-haven asset- with the US Treasury Bonds (once considered the safest asset on the planet to park funds) going on a wild ride with yield rates fluctuating rapidly.

In the next part, I’ll continue further with the Cantillon Effect and its impact on India, small businesses, loans, social welfare, NPAs, PSEs, Regulations, and why Atmanirbhar Bharat will fail. I would like to conclude with an excerpt from the book “Restart- The Last Chance for the Indian Economy” spoken by former Goldman Sachs Analyst Jim O’Neill (an extremely pro-India analyst who had forecasted India would become a major economic powerhouse by 2015 but later grew extremely frustrated with the lack of progress)

“What is the bloody matter with you guys? Why are you not fixing your damn house?”

Post on IndiaSpeaks By u/Plutonian990