Last year when the UN did a Happiness ranking of 149 countries India ranked at 136th place, behind its neighbors, like Bangladesh and Pakistan. The main reason for such a poor show of the country was its dwindling economy and unemployment. The living standard and happiness of the citizens of a country are reliant on its economic situation. If the country has a strong economy supported by the growth of primary and secondary sectors followed by increasing employment its status will be respected among its neighbors as well as the world. India has enjoyed such a position tracing back to 2008 when the whole world was reeling under stagnation but India was saved. The position started fading in 2012, slowly and slowly it started to exacerbate and the nightmarish started with demonetization which hardly could meet any objectives which were told by the govt to justify. The hastily introduced GST and NPA of the banks further aggravated the problem. The banks suffered their first shock in 2019 with the failure of PMC bank followed by others and then mergers to save the banking system. This has led to RBI (Reserve Bank of India) in its report dated 24th June 2022 which mentioned that the Black Swan event could be possible in India. This gave a warning signal to Govt. and economic planners to prepare for unseen and sudden changes which if happen can create a major disruption in the economy, which requires years and years to recover from its effect. Let us elaborate on what the Black Swan Event is and how it affects us.
Black Swan Event: Black Swan was found in Australia in 1697, it was found to be more dangerous than the white swan. The use of the Word Black Swan was introduced in the financial sector by Nassim Nicholas Taleb in 2001 with reference to Dotcom Bubble. The Dotcom bubble occurred because many IT (Information Technology) companies artificially overstated the value of their assets in books. The moment reality came to the fore the share prices collapsed leading to a major loss of investors. The concept gained popularity when Taleb wrote the book “The Black Swan Event: The Impact of Highly Improbable” which is now the 12th most influential book in the world. The event was again witnessed in 2008 in form of the Real Estate Bubble, followed by the worldwide recession, the impact was so severe that inflation, skyrocketed in many developing countries. The Highest inflation which broke the world record was witnessed in Zimbabwe at 79%, recently in July 2022 inflation in Sri Lanka reached 60%. Let us discuss the current situation of India’s economy.
Increasing Export Loss: In June 2022 the exports from India were to the tune of 37.4 billion dollars or 2,99,000 crore at the same time. Import of Country rose to 63.85 Billion Dollar or 5,02,069 crores leading to loss of 2 lakh crores. The loss in the financial year 2021-22 was 193 billion dollars which are expected to rise to 300 billion dollars by end of fiscal 2022-23. The basic question arises, has to demand Indian goods decreased in the world market? It can also be seen that local consumption of various goods has also decreased. Many blame the increased prices of petroleum products for the rising trade deficit. It may be added here that petroleum was being imported earlier also the only difference of an extra 20 billion dollars came due to an increase in the price of the dollar against the rupee. The overall demand for Indian products reduced in foreign markets like Engineering goods exports reduced by 72594 crores, whereas medicines to Rs.16000 crores. The biggest assets on which we consider ourselves safe is our foreign exchange reserves which too decreased from 634 billion dollars to 560 billion dollars, the loan against the Indian Govt. was 65 lakh crores in 2014 which has increased to 135 lakh crores by 31st March 2022 and is expected to reach 155 lakh crores by end of this fiscal (2022-23).
The biggest question is that banks’ fraud is increasing every odd day. The govt. has been advocating a digital economy since 2016, even though the objective of demonetization was to control frauds and put the economy in digital mode. Despite all these, we are still number three on the world’s list of maximum cash-using countries. In the financial year 2021-22 the frauds with public sector banks were to the tune of Rs. 41,000 crores and Rs. 13,000 crores worth with Private Sector Banks. The highest Default is from DHFL to the tune of Rs. 34,615 crores, the irony is that they had taken loans from almost each and every bank, putting a serious question mark on the software like CIBIL which are used to check the credibility of prospective customers which are again at mercy of humans. The banks are losing money through fraud and NPA, the govt. is helping the banks by writing off the NPA. During the last five years govt. written off the NPA’s to the tune of 9.91 crores so that banks can resume lending. It may be added here that all the NPA’S are not genuine>
Share Market Growth: Another indicator leading towards the black swan event is the share market (March 2019) and going back to the period when corona started every business was shut leaving us with negative GDP, but coming out of it, the business was infused with packages given by Govt. in order to bring it back on track and ultimately the economy. This was seen that despite being in the second wave the share market was going up, giving an indication of growth. The question here was that, whether the growth was real or artificial. Actually, production decreased due to falling demand. The reason for decreased demand was unemployment, reduction in pay, and inflation. Despite all odds, the share market was accelerating at a much faster rate than Sensex touching the 60000 mark. The RBI then gave a word of caution in May 2021 report, that a market bubble is being created and can burst at any time. This warning was contradicted by the policymakers that it is just speculative optimizing of Demand oriented, everything is on right track ignoring the fact that this growth was mostly based on the additional funds received by companies as relief package, which was used to show the better financial position of a company and pushing the value of shares to new heights. The RBI warning came true in October 2021 leading to the bursting of a bubble with FPI (Foreign Portfolio Investors), which started to withdraw its money till date more than 2 lakh crore have been withdrawn May 2022 has witnessed the withdrawal of 39993 crores whereas June saw 50,202 crore withdrawal from market leading the Sensex down to 51000-52000, mark but now as of July, it has recovered to the tune of 55000-58000 mark with Rs.1638 crore infused by the FPI and Rs.1462 crore withdrawal from the market. In addition, the Rs.600 crore was infused by locals. The local residents have been instrumental in sustaining the market to some extent. No doubt the officials are happy and say it will recover by October 2022 but many experts still differ saying that everything is not still good in the USA, we cannot say that inflation will ease in the USA and it will not head towards recession. Why the US is considered instrumental because due to rising inflation the central bank of the USA has been constantly raising interest rates, which attracts FPI to withdraw money from Indian Market and invest in the USA because it is considered a less risky market.
The reason for local demand was that people lost faith in the banking system and as it is not considered a safe investment, now due to meager interest rates as well the bleak financial position of the banks and Niti Ayog’s recommendations to dispose of the public sector banks. The commoners having small savings and cannot buy any property or gold like to invest in the share market seeing the artificial growth that it may give them additional income to survive upon. Ignorant about the fact that this growth is too based on a poor foundation. The govt. is claiming that the NPA had fallen to 5.9% but actually, they are again ready to move to the 9% level, the reason being the recovery didn’t happen it was waived offs given by the govt. from people’s tax money. The bank is again lending without diligence and most of the defaults are willful. The govt. needs to make strict laws for recovery. So to summarize the govt. Economists and Niti Ayog and fund managers need to heed the RBI’s advice and be cautious so that the black swan event is kept away from the Indian Shores. If this event comes it will be detrimental to the country.
Dr Amanpreet Singh Brar