Indian economy and the ‘but what about?’ question

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“But what about?” is the favorite phrase for anyone in India who does not want to believe that there are severe structural problems with the Indian economy.

There are 1 million Indians entering the workforce every month, and compared with that number there are very few jobs available. Recently, 28 million unemployed Indians, which I estimate to be around one-fifth of the country’s youth workforce, applied for 90,000 vacancies at Indian Railways, the country’s largest public-sector employer.

The labor-intensive export sectors, which are essential for creating jobs for India’s large labor pool, haven’t been performing well over the past few years.

The proportion of non-performing assets (or bad loans) of banks passed 10% of their total loans as of December 2017. The situation in state-run banks is much worse. These bad loans have primarily been on account of corporates, who have borrowed more than their capacity to repay.

According to the Centre for Monitoring Indian Economy, in the financial year ending March 31, 2018, Indian companies scrapped projects worth US$117 billion, the highest ever. Of these projects, 40% were dropped in the period of January to March 2018. Long story short, the ability of the Indian economy to create jobs for its huge labor pool is looking extremely limited. This is a genuine problem, and wishing it away isn’t going to help anyone.

The OECD (Organization for Economic Cooperation and Development) Economic Survey of India released in February 2017 put the rate of unemployment among India’s youth (between the ages of 15 and 29) at more than 30%. These youth are neither employed nor in education or training. Indeed, this is a very worrying factor for the Indian economy.

But often when the point regarding India’s huge unemployment (and underemployment) is raised, many people like to point to the strong stock market despite its recent fall, and the fact that foreign investors are bringing so much money into India.

They argue that if the Indian economy isn’t doing well, why are foreigners bringing in so much money? It’s only a fair question to ask if you believe that the stock market and other markets reflect the real state of any economy. The question is: Do they?

Recently, a report by Mint highlighted that Blackstone, the largest private equity firm in the world, was planning to invest in India 60% of its total maiden Asia-focused fund of $4 billion.

Immediately after this, questions were asked: If Blackstone is betting so big on India, how can the economic narrative on India not be positive?

The actual story is different. According to the Mint report, the firm manages $430 billion of assets globally. Of this, around $7.5 billion has been invested in India up until now. This means around 1.7% of Blackstone’s total investment has been invested in India to date. With the new investment of $2.4 billion (60% of $4 billion), this will go up to $9.9 billion. So much for betting big on India.

Let’s drill down the numbers a little further. Of the current investment of $7.5 billion, around $4 billion is in the real-estate sector, which has been down in the dumps for a while.

In fact, a report published in The Economic Times in March last year said that the private equity funds made up for 75% of the funds coming into the real-estate sector. Many of these funds are foreign funds. This is clearly betting on cheap assets available in a distressed sector rather than the economic future of a country. Also, much of this investment is in the commercial-real-estate sector.

Recently, Blackstone agreed to invest $150 million in the Mumbai-based International Asset Reconstruction Co (IARC). Luv Parikh, managing director of Blackstone, told The Economic Times: “Our investment in IARC will enable us to more effectively participate in the emerging distress investing space in India.” Distress investing isn’t exactly betting on the economic well-being of a country.

On a general level, it’s often why, if the Indian economy is not doing well, foreign institutional investors are putting so much money into the Indian stock market. But are they?

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Figure 1. Source: NSDL FPI Monitor

This chart clearly tells us that foreign investment in the stock market in India peaked between 2012-13 and 2014-15. In total, 3,311 billion rupees ($50 billion) was invested by foreign investors in India stocks, and it has been rather sober since then.

In fact, during the course of this month, foreign investors have sold stocks worth around 42 billion rupees. The Indian stock market in the recent past has been driven more by the investments of domestic institutional investors, who have collected money from retail investors (such as mutual funds and insurance companies).

There is a TINA (there is no alternative) factor working here. The interest rates on bank fixed deposits have been low since demonetization. Gold hasn’t given much return in rupee terms. And the real-estate sector is down and has lost investors’ trust.

An important point here is that in the aftermath of the financial crisis that started in September 2008, Western central banks, led by the Federal Reserve of the United States, unleashed an era of easy money by printing and pumping it into the global financial system. This benefited large institutional investors who could borrow money at low interest rates and invest it in financial markets around the world. A chunk of this money also came into India. Look at the huge jump in Figure 1 in the post-2008-09 period.

A few years back, I interviewed Aswath Damodaran, professor of finance at the Stern School of Business, New York University. When asked how strong the link between economic growth and stock markets is, Damodaran said: “It’s getting weaker and weaker every year.” The easy-money era is responsible for it. As the Western central banks raise interest rates, this era is now coming to an end.

To conclude, there are several structural issues with the Indian economy and they won’t go away just by asking “but what about?” questions.

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