A Roller-Coaster Ride
The Modi government did reasonably well in its first two years. Then came the twin shocks of demonetisation and GST and the Indian economy never looked the same again
THE ECONOMIC PHILOSOPHY that guided policymakers in the decade of the 2010s was the antithesis of the reasoning that influenced the previous decade. The Indian government’s policy framework too swung from one extreme (free-market thinking) to the other (a commandand-control economy, with a bias towards socialism). Meanwhile, in the corporate world, one witnessed the bonfire of the vanities, as many old business tycoons borrowed heavily for unrestrained expansion—and then came crashing down. In banking and finance, sterling reputations, built over decades, were ground to dust. And a new breed of entrepreneurs came into the limelight—young engineering wizards using digital technology to disrupt old business models. With a free flow of dollars from enthusiastic venture capitalists, these newbies burnt cash and disregarded profits in a bid for scale and market dominance.
But let’s first look at why the policy pendulum swung back to a controlled environment. The first decade of the millennium had showcased both the rich possibilities and the worst excesses of the free-market philosophy, first articulated by Austrian-British economist Friedrich Hayek. The enthusiastic embrace of this thinking by governments and central banks alike led to an unprecedented boom, till the Lehman Brothers’ bankruptcy and the sub-prime crisis sent the world reeling into a financial meltdown in 2008.
While India rode the optimism of the boom years, it managed to avert the worst effects of the 2008 bust—under the watch of then RBI governor Y.V. Reddy and his successor D. Subbarao and the economic team of Manmohan Singh—through some quick steps, including two stimulus packages from the government to keep the growth engines purring. (Reddy demitted office days before the Lehman Brothers’ bankruptcy, but his policies kept the Indian financial sector reasonably well insulated from global financial markets. Subbarao acted quickly, reducing interest rates and increasing liquidity.) The government
lowered taxes and gave other incentives to business, and pumped money into the rural economy—most notably through MGNREGA—to keep rural wages and consumption high. Policymakers were still committed to a free market, but within prudential limits.
But if the first decade belonged to the followers of Hayek, the current decade has been characterised by some ham-fisted government intervention, which probably owes to a misreading of the economics propounded by Hayek’s contemporary and great rival, John Maynard Keynes. Keynes had concluded that during economic downturns, the market alone could not bring back growth or employment—the government had a critical role in aggregating demand for goods and services.
Not appreciating when to step off, the UPA’s Pranab Mukherjee, who held charge of finance from 2009-2012, administered a third stimulus, overheating the economy, and sending inflation and the fiscal, current and revenue deficits soaring. P. Chidambaram, who took over in 2012, did try to undo the damage, but before his efforts could bear fruit, the UPA was out of power.
When the Modi government assumed office in May 2014, the economy looked dodgy—inflation had not been reined in and, at 4.1 per cent, the fiscal deficit was still higher than targets set under the FRBM (Fiscal Responsibility and Budget Management) mechanism of 2004, which had set a target of 3 per cent or less from 2008 onward. Initially, the
Modi government seemed to be doing all the right things, with some help from plunging global crude oil prices. It welcomed foreign investors, talked of manufacturing competitiveness, brought the fiscal deficit under control and talked tough with businessmen who were not repaying loans. Recognising that private players, saddled with excess capacity and old loans, were loath to invest, the government started spending on infrastructure to boost economic growth and create employment and demand. It seemed to be working, and by 2016, the economy was looking better.
Then came the demonetisation shocker of November 8, 2016. Not only did the fantasy benefits of this illadvised move not accrue, the sudden withdrawal of 86 per cent of the currency in the system made the economic engine seize, causing great distress in rural areas and the informal economy. If this wasn’t bad enough already, the government decided on yet another big reset—introducing a compromised version of a goods and services tax (GST), which sent businesses into yet another tailspin. The biggest draw of the GST was the underlying principle of a single tax for the entire country. But in its rollout, secured after many shapeand spirit-altering compromises with states, who had to be brought on board with lures and promises, the GST became a massive disruption without any of the real benefits. Two and a half years after it was introduced, the central government has never met its indirect tax revenue targets and is struggling to untangle the knots it has tied itself in.
As the decade winds down, the economy looks like a train wreck: fis
IF THE FIRST DECADE OF THE CENTURY SAW A FREE MARKET SURGE, THIS DECADE HAS BEEN ALL ABOUT HAM-HANDED GOVERNMENT INTERVENTION
cal deficit and consumer inflation are on the rise again, exports are in the dumps, GDP growth is at a six-year low, unemployment at a 45-year high and manufacturing activity is showing its first contraction in over a decade.
If the government is grappling with problems of its own making, the decade has not been so kind to some big Indian business houses too. Some were roiled by disruptions caused by government policies, others by new technology that upended old business models. Several mid-size businesses, straining for scale and borrowing big as they built steel mills, power plants, roads, airports, real estate, and some that forayed into telecom or nonbanking financial services, saw their dreams ground to dust in the 2010s, littered with the debris of businesses such as Essar, Videocon, Lanco, Jaypee and Bhushan Steel. Vijay Mallya’s Kingfisher Airlines ran up staggering losses and he was forced to sell his prized family silver—United Spirits and United Breweries. And when even that was not enough, he had to flee the country.
The most spectacular fall had to be Anil Ambani’s. When the Reliance Industries group split after the death of Dhirubhai Ambani, many thought his younger son Anil had cornered the more promising new businesses—in telecom, power, non-banking finance, entertainment and infrastructure. Towards the end of the previous decade, in 2008, Anil Ambani was counted among the 10 most wealthy businessmen in the world. Over the next 10 years, though, one company after another in his group would get into trouble—because of excessive leverage, business miscalculations or policy changes. As the decade winds to a close, Reliance Communication has been referred to the NCLT, Reliance Naval and Engineering is struggling to repay debts, a big chunk of the power business has been sold to Gautam Adani, and Anil Ambani is struggling to keep the rest of his business afloat.
The world of banking also saw some hard-earned reputations destroyed. Rana Kapoor, who had built Yes Bank into one of the fastest growing banks in India, was forced to step down, as the RBI found serious problems in the bank’s loan books and assets. As Yes Bank struggles to regain its footing, Kapoor has had to sell off almost his entire shareholding to meet his other business debt obligations. Chanda Kochhar, ICICI Bank’s star woman CEO, saw her reputation disintegrate over conflict-of-interest allegations of wrongdoing under her watch. IL&FS chairman Ravi Parthasarathy, a doyen of financiers in Mumbai, built a giant infrastructure financing entity, but he raised it on quicksand, and the government has been driven to desperation to keep it afloat.
While old businesses and warhorses and their storied reputations were being dragged through the mud, a new breed of tech entrepreneurs was creating companies valued—at least on paper—in billions of dollars, using disruptive business models and unlimited venture capital.
The technology start-up boom started slowly and tentatively—about five or six years after the original dotcom crash of 2000. Sachin Bansal and Binny Bansal, unrelated but close friends, who had studied engineering at IIT and later worked together in Amazon, started Flipkart in 2007 with the modest aim of selling books.
They avoided the mistakes of the first dotcom entrepreneurs, by working on both payment innovations as well as logistics for better service. They became the poster boys of the tech revolution as they built scale and started attracting big venture funds by the early 2010s. So much so that other wannabe e-tailers also got easy funding, riding their coat-tails, as venture capitalists, who had missed the opportunity to bankroll Flipkart, looked for other e-tail business prospects. Some of these even acquired ‘unicorn’ status—Snapdeal and Shopclues, for example—before losing sheen for lack of scale or profitability.
The sharing economy gained traction a bit later—with taxi aggregation, hospitality and co-working and co-living rising in prominence. They all saw pitched battles for dominance. Enormous funds have f lowed into the sector though profits are still not in sight. Venture capitalists continue to feed the beasts because in this game, they reckon, the winner takes it all. As the decade draws to a close, many observers feel there is a bubble building up as no digital start-up has yet turned a profit. (Flipkart itself continues to make losses though the two Bansals walked away as dollar billionaires when the company was bought by Walmart).
That’s the big worry about tech start-ups: they have disrupted the market and upended old business models; they have even built scale and totted up revenues, but none of them has yet found a path to profit. The next decade will show how the e-commerce story plays out.
AS THE DECADE DRAWS TO AN END, MANY SEE A BUBBLE BUILDING: DIGITECH START-UPS HAVE BUILT SCALE AND EVEN REVENUES, BUT PROFITS ARE NOWHERE IN SIGHT