Great Indian Money Illusion

TR Vivek is a Bengaluru-based journalist
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Graph gazers say you should be pleased. India is nearing double digit economic growth once again. It’s boom time. But if that only makes you wonder which planet they are from, you are entirely justified. Here is why you are not as well off as the GDP graph suggests.

There is something about magic figures that has held Indians in thrall down the ages. Ten per cent economic growth, you might say, is just the newest installation among the numerous bedazzlers in a pantheon unique to the country. Befittingly, this new object of awe has come in the Age of Globalisation, and global acclaim for India’s ‘success’ has had a role to play in it. ‘The second fastest growing economy in the world’ has been a suffix for India in news mentions across the world, this past decade. And the chest thumping has survived the recent Great Recession in the West.

After all, India did pull through fine, with just a small dip in its rate of growth (6.7 per cent in 2008-09). And when British Prime Minister David Cameron came visiting last month, he claimed to be on a “jobs visit” to demonstrate to India “how Britain is open for business again”. It is now predicted by many economists that India’s economy will begin to outpace China’s by 2015, if not sooner (Beijing is purposely slowing its economy down right now to prevent overheating). The Indian Government expects to clock 8.4 per cent growth this financial year, ending 31 March 2011, though the International Monetary Fund projects a figure a whole percentage point higher. This would bring India within a whisker of a double digit dream that so enraptures people who go graph gazing.

In response (at least partly), the Bombay Stock Exchange Sensex has risen above the 18,000 point mark—a 30-month high—and is showing jubilant signs of touching ever higher levels. If you listen carefully, you might even hear some of the cheering.

Only some. India’s current economic reality is less than reassuring, actually. In fact, for most people out there, this is the season of cheerless growth.


Ten per cent is a mere figure, a statistical wonder that turns more abstract by the day. Even India’s middle class, once trusted to respond to such figures with punch drunken prurience, is not too kicked about it. Stuck in a traffic jam, that too with a fuel tank destined to drain your wallet, it doesn’t seem so exciting at all.

One reason is that this spell of speed is unlike the previous one that lasted for four years starting in 2004-05 and ending only after 2007-08. It was a true boom. In that phase, India’s gross domestic product (GDP), which basically sums up all the money made in a year adjusted for inflation, was expanding at an average of about 9 per cent per year.

Then came the global crisis, and India slowed down for a couple of years. Now, while the economy may be expanding almost as fast again, the exuberance is missing. ‘Cautious optimism’ is the new buzzword. The caution is because the world economy, while having averted disaster, is still not back in form yet—and the global risk of receding into a recession again (‘double dip’ as they say) is not gone. So investors and businesses in India are not throwing money around with as much zeal as they did earlier. If things suddenly go bad again, and demand slumps for goods and services, businesses don’t want to be trapped in a fix of having created capacity for stuff that nobody wants to buy.

According to Siddhartha Sanyal, senior economist, Edelweiss, a brokerage firm, global worries and the scars of the 2008 crash are the big reasons why business is pussyfooting its way in India. This means fewer jobs to go around, even as the economic recovery fattens corporate profits. “Jobless, cheerless growth is inevitable when economies come out of a recession,” says Jay Shankar, chief economist, Religare Capital Markets, “The last ten recessions were accompanied by jobless recoveries; eight were followed by double dip recessions. There is every reason to be cautious. Not many companies would want to invest crores of rupees when they’re unsure of its worth after a few months.” Understandably so.

Pay freezes and stingy salary hikes can also be pinned on ‘cautious optimism’. Sure, a salary survey published earlier this year by HR consultancy Hewitt predicted that Indians would witness one of the highest salary jumps in the world—10 per cent—this year. But even if Hewitt’s projections come true, inflation would have shrunk your paycheque. Alice-like, you would have to run just to stay where you are.

Graph gazers, though, want you to talk about GDP growth. More than ever, your everyday citizen has plenty in common with the hero of that classic joke: to an economist, a terminal cancer patient going through an expensive divorce is good news; it adds to the country’s output.


If you feel poorer today, the big reason is that awful nine-letter word: inflation. Ask anyone. Even a hermit knows that the prices of almost everything have risen steeply in the past couple of years. First, it was your household food bill going berserk. Now it’s virtually everything else (other than what’s literally virtual, like mobile bills). And the thing with inflation is that it spares none. Not the rich, not the poor. Especially not the poor—since they have it much harder raising their incomes to beat prices.

India’s double digit dream is still a dream, but double digit inflation is already reality. Right now, average prices are 10 per cent higher than last year’s. Your rupee’s purchasing power has been hit hard: what was Rs 100 last August is Rs 90 now. If your bank deposit is earning you 5 per cent interest, you are actually losing money, even if you don’t notice.

It’s called the ‘money illusion’, also why some writers have called inflation ‘devious taxation’. It is stealthy and hurts the poor the most.

“High inflation has become the new normal,” says Kishore Biyani, chairman of Future Group, which runs India’s largest retail chain Big Bazaar, “Indians are toning down their aspirations, and the exuberance of 2007 is being replaced by feet-on-the-ground cautious optimism. They’ve learnt that good times don’t last forever. I’d say this experience has made them mature.”

Real maturity, though, would require a better understanding of inflation as a phenomenon. In simple terms, inflation is caused by ‘too much money chasing too few goods’, and while the Government has drawn attention to the ‘too few goods’ part (mainly food supply), there is no denying the role played by ‘too much money’ caused by the ‘easy money’ policy of the Reserve Bank of India (RBI), a policy crafted to insulate the economy from the global crisis of 2008.

It was part of the ‘stimulus’ that all G-20 members had agreed upon; heavy State spending was another part. Taken together, it meant more money being pumped in, with supplies unable to keep up as it turns out. While India has survived the crisis admirably, something had to give—and price stability it is.
Now, thankfully, the RBI is focusing its efforts on containing inflation to a pre-selected low figure. Apart from relieving the Aam Aadmi, there are three sound economic reasons why this should be done. One, high inflation in India and low overseas is bad for exporters, who find their costs going higher than foreigners are willing to bear.

Two, the stability of the rupee’s purchasing power, as assured by the RBI, is essential for anyone to make any financial plans over a long period.

And three, inflation warps the ‘price signals’ that convey what is in how much market demand, which warps the way money gets invested; some prices rise faster than others, and these blips often attract investment that is later regretted. This makes the economy inefficient, which defeats the purpose of securing better lives for Indian citizens.

Any more of this, and India could well join the dubious club of weak democracies and authoritarian regimes, under which people’s voices remain weak and inflation high. Among emerging economies, India’s current inflation is the highest barring Hugo Chavez’s Venezuela (its inflation is above 30 per cent).


But if the economy is expanding, somebody surely must be making a lot more money. Who, really, are the beneficiaries of India’s epic ten per cent chase? The aam aadmi it isn’t, that seems clear. Well, corporate shareholders are looking markedly happier. Dividend payouts, on the back of soaring corporate profits, have been generous. And even stock prices are up sharply since their lows during the recession. So the notional ‘portfolio’ wealth of equity investors is higher.

Also, everyone hasn’t suffered equally from the salary stagnation since the 2008 recession kicked in. One study reveals that CEO and senior executive salaries in large stockmarket-listed firms rose by a third in 2009, despite their profits rising only 25 per cent. They are busy taking credit for all the ‘shareholder value’ they have delivered, by the sound of it. Their manic cost cutting measures—freezing salaries, withholding investments and sharpening the grind to crank out better ‘operating efficiencies’—have helped boost corporate profits on the upturn.

As business conditions have revived, their costs have stayed compressed, but cash inflows have improved. This has spelt bumper profits for many companies, pushing up their stock prices and encouraging shareholders to approve of bigger rewards for managers.

Such a scenario is reminiscent of the US, where the annual income of the bottom 90 per cent of the population has remained flat for three decades, while that of the top 1 per cent (this includes Wall Street mavens) more than tripled. Economic parallels with America might once have seemed flattering, but not in this day and age.

Shouldn’t this pose the Indian Government a big political problem? In a sense, yes. The Centre has been making all the right noises about tackling inflation. The rate at which prices are rising will fall to 6.5 per cent by the end of the financial year, it promises. This could well happen, despite its poor record on such assurances in the recent past. After all, prices have already spiked upwards last year, and so this year’s numbers (based on last year) will look not-so-scary. But that doesn’t mean that all is hunky-dory. Inflation is inflation. Once out of the bottle, it is very hard to cork back in.

In any case, household purchasing power would still stand eroded. As consumer spending gets scaled back, this could possibly translate into less demand for a wide variety of goods and services, ultimately hurting the business boom that has made the profit horizon look so good. For now, though, the picture is rosy on the corporate front.

Industrial production, or factory output, has been going great guns over the last several quarters. Sales of passenger cars, two-wheelers and consumer durables have been scaling new heights month after month. Latest sales figures for colour TV sets, mobile phones and household appliances show upturns in the region of 40 per cent or so (compared to last year). “You can sense something anomalous when FMCG products [soaps, suds and shampoos] grow only by 2 per cent. More cars and TVs have sold thanks to stimulus measures like higher government spending and higher disposable incomes because of Sixth Pay Commission payouts. It clearly was growth powered by a few sectors,” observes Rajrishi Singhal, head of policy and research at Dhanlaxmi Bank.

Automobile sales, once considered a nation’s economic weathervane, are fast turning out to be a dubious indicator. While pent up demand in smaller cities, semi-urban and rural areas—untapped so far by marketers in any major way—may have kept the going good, whether such numbers can be sustained over a longer period is still a question.

“This is the sternest test of the structural strength of the Indian economy,” says Religare’s Jay Shankar, “India’s growth story sounded great when all was well around the world. Even when the world was collapsing around us, we felt confident that our domestic market will keep us afloat as if it’s a bottomless well. India has been trying to run an SUV at 90 miles-an-hour on second gear. That’s simply not possible without the engine heating up.” And signs of overheating, there are.


The Centre is counting on a farm sector revival to stop inflation from throwing India’s growth story into turmoil. Agricultural growth was expected to decline last year, but posted a surprise 0.2 per cent growth. This is barely enough to crush food inflation (feeding a billion-plus Indians has always been a challenge, with or without a Food Security Bill). But good rains this year could boost growth still more, even if floods in key agriculture states do not augur well; a fifth to a quarter of the paddy crop in Punjab and Haryana (India’s food bowl) is feared washed away. According to some estimates, India’s paddy production might decrease by some 2 million tonnes, putting more pressure on the current gap between consumption and production (it’s close to 3 per cent).

“It was clear by early 2009 that there was a severe food shortage,” says Singhal, “Timely imports could have solved the problem to an extent, but for some inexplicable reason, the Government dragged its feet.”

Solutions to the problem of food inflation are in short supply, it seems. Alas, India still does not have modern farm-to-consumer supply chains that could keep waste low and efficiency high. The incremental benefits of the Green Revolution ran their course by the early 1990s. “Since then, we haven’t added any technology to augment our produce,” says Shankar, “Ninety per cent of our agricultural universities are defunct. There is an alarming decline in government spend on agriculture.”

Huge problems persist, even as India stays vulnerable to a ‘double dip’ recession worldwide—maybe triggered this time by Europe, which remains wobbly even as the US economy achieves some stability. Right now, though, a revival of ‘animal spirits’ in India’s business sector would be a big help. “Consumption in India today is fairly stable,” says Edelweiss’ Sanyal, “That cannot be the big delta we are looking for. The big delta will always be capital expenditure or expansionary investments made by corporate houses. Only that can bring sustained cheer to a growing economy.”

And, of course, the end of inflation: the only way everyone can realistically hope to win. Even the poor. Especially the poor.