Never believe what politicians say

I remember sometime back Finance Minister Chidabaram said that Indian economy is strong and not to worry too much about the financial crisis. He has led a lot of people to believe that India will not be affected badly.

I watch CNN regularly in the morning and get an idea of what is happening around the world as far as the financial crisis is concerned. On reading what Shri Chidabaram had to say, I was shocked. Why? Let me explain.

I think our finance minister (FM) had forgotten that we are living in a global economy. If US economy goes bad, Japan, China and European markets go bad as these markets are feeding the US market. We may be exporting a small percent of our products and services but you take the top marginal sales, you are eliminating all the profits.

A lot of the hiring boom and increase in salary causing discretionary income to go up was the result of multinational companies settling down in India. Our FM should know that in the west, companies do things in a different manner. If the going is good, they expand fast and when the going is bad, they downsize very fast also. We can see this happening in US where practically all the big companies have announced massive layoffs. A couple of days back, just American companies announced 70,000 job losses in one day. To say that these layoffs will not affect the Indian economy is ignoring the obvious.

Lets also consider why were the valuation of Indian companies was going not only beyond the “reasonable” but also beyond the unexpected? I was surprised that people didn’t even consider to do simple math. If a company was valued at Rs. 65,000 crores, the interest cost at 15% interest works out to be approx. Rs. 10,000 crores and the company’s sales were less than Rs. 10,000 crores. The worst part was that the business owners really believed in these valuations otherwise they would not have expanded the way they did.

The valuations were atrociously high because of the money coming in from abroad especially the US. Funds were available in excess and companies like Unitech and Subishka and others borrowed money to expand beyond their means. Kishore Biyani was announcing a new retail format or a joint venture every second day. (I have been raising the question – “where is the money?” since a long time on my blog) Now serious actions will be taken to reduce debt, sell companies and other assets like Unitech and Subiksha are doing. All this will affect valuations, discretionary income, employment levels, profits, capital expenditure plans and whatever else you can think of. Don’t you think it would be foolish to think that financial crisis would not hit us badly.

We need to understand that India was experiencing a boom because the whole world was experiencing a boom. It was not the government or FM’s policies that were behind the boom. However, if it was upto Economic Times, it would like to give credit for every positive thing to the then FM Chidabaram. Why? Your guess would be as good as mine.

Cost cutting will happen all over the world. Margins will be sqeezed. Salary levels will go down. Discretionary incomes will go down resulting in lower demand all over the world not just in a few countries. The end result, the world economy, salary levels, valuations, property prices etc. will come down to “what they should be” and not “hyped up” as they were. Our dream will be over. We will all be back to reality.

I remember I wanted to buy a property but could not understand the reason behind high prices. I was considering buying a property in Greater Noida from who else but Unitech. While travelling from Unitech’s Noida office to Greater Noida with Unitech’s employee, I asked him a simple question, “If one buys a property of Rs. 50 lakhs, his monthly installment will work out to be Rs. 50-60,000 a month. Now in order to pay this amount, his income should be roughly about Rs. 1.75 lakhs a month. Now how many people are there who are making this kind of money?” He had no reasonable answer.

I don’t mind admitting today that the boom made me feel inadequate. Even though, with reasonable assets in cash and kind, I could never buy property as people were doing because I was afraid to take on such huge liabilities and also afraid how long the boom and the prices will last. I was trying to “remain within my chaddar (within my means)” and not spend or expand beyond my means as practically everybody was doing. I thought maybe something was wrong with me. Now I thank God I did not go beyond my means or depended on the fact that the boom will go on forever. I also thank my wife and mother because they also did not put pressure on me to do more but rather were sobering inflence on me. In fact, I was almost going to borrow Rs. 1 crore to buy a property but my mother dissuaded me otherwise I think I would have been in trouble.

So let me just say that its time to get realistic, work hard and take all the right actions as we will get to normal (I hope everybody now understands what normal is). Another boom is a long way off but it will again come. I hope we have all learnt a lesson and will deal with the next boom in a reasonable manner. Who am I kidding? Right guys! We all know that we will get ballistic again and finally end in a depression. Every depression results in normal times which is what is going to happen now. Normal times build up to a boom again. And finally to complete a cycle, the boom will again bring about depression. Life will go on.

Politicians do not think logically. Here we think logically and tell you the situation as it is. Now recently, the politicians are also saying that they had misjudged the situation and are expecting things to get a little more worse than what they had orignally thought.

As I have expressed earlier, the solution lies not in developing financial or bail out packages for specific industries. The need is to expand demand. This is possible in the following ways:

(a) Reduce taxes. On one side reduced taxes will increase discretionary income with people. On the other side, lower taxes will reduce prices of goods and services. For instance, reduce 12.5% service tax as that was done during the boom period. Make it 4%. If VAT can be 4%, why not service tax. Both will increase demand.

(b) Make it easier for businesses to do business. Here look at every industry and business and eliminate stupid rules and regulation. Ask every industry association to give suggestions which will make it easier for their members to not only do business but to increase it.

(c) Focus on infrastructure projects which do not involve legal hurdles. We need projects which can be completed fast so that the money gets rolling into the economy. For instance, one project that I can suggest is to focus on repairing roads. Apart from providing employment all over the country, it will save on total fuel consumption in the country, increase productivity and reduce input costs of all the products and services. Imagine the time and costs saved by truckers in deliverying goods to industries and markets and you have a good case to immediately adopt this suggestions.

Boosting one industry or the other is not going to help because this will result in bottlenecks. The whole economy needs to be revived as an integrated whole.

I am no economist but I think the normal will come by late 2010 as we need time to get over the hangover after the all night crazy party that we have had.

Avinash Narula

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