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Why India is Heading Towards Recession?

I still remember golden period of late 80’s or early 90’s, when life was so simple without any complications…No Internet, No Satellite TV, No Mobile & Our economy was also very simple (No Complications). It was totally & purely dependent on monsoon. If monsoon was good means economy will perform good and if monsoon is poor then economic growth will be poor, reason being it was totally dependent on agriculture sector for GDP growth as contribution of Service and Manufacturing was comparatively Low….In 1992 our foreign exchange dried up and Gold reserves were dispatched to England to save the economy….In 1992, India’s Fiscal deficit reached 8% of GDP and India became bankrupt. Today India’s Fiscal Deficit is touching 6% therefore if situation in not brought under control soon then our generation will face the worst recession so far.  

Times have changed, innovations have bring more complications to our lives and same goes for economy of the country. Currently we are in very bad shape and in all probability we are heading towards double dip, W recession which means first recession, then slight recovery and again recession before boom.

You might have read many articles on reasons behind this situation, i will explain in very simple terms the key reason behind the same. Assume u r head of family (PM) running a joint family of 100 people (India’s Population). Composition of joint family is as follows

(A) 4 members are earning & direct contributors to family finances i.e. Tax payers (4% of India’s population pay tax) & 16 members are dependent on these 4 members therefore total 20

(B) 11  members are farmer in family, they are earning but don’t contribute directly…They contribute very less indirectly (Indirect taxes) to family finances & 42 members dependent on these 10 members therefore total 53.

(C) 27 People are poor in family (27% of India’s population is Below Poverty Line) & they are not able to meet their end

After every five year all members of family vote to select the Head of family. Now Head of Family, in order to secure vote of Category (B) and Category (C)  to ensure his selection come out with various welfare schemes like He writes off Loans of Category (B) i.e. Farmers though they can easily pay loans, Guaranteed Employment scheme for Category (C) i.e. poor people, Free Education for Category (C), Free Food for Category (C),  Free Medicines for Category (C) & on top of that Category (B) is exempted from contribution to family finances i.e. Farmers are exempted from income Tax though Rich Farmers can contribute/pay tax easily.

Head of Family’s source of income is only contribution from earning members but expenditures are beyond source of income as if there is no tomorrow…Now Head of Family cannot run the Family for long…This difference of Income and Expenditure is Fiscal Deficit. Currently India’s Fiscal Deficit is 6% i.e. Govt is spending 106 Rs for every 100 Rs earned. As i mentioned that India became bankrupt in 1992 with Fiscal Deficit of 8% so you can judge how grave is situation.

Though currently we are putting 100% onus on Euro zone crisis for near recession in India. I agree situation in grim in P.I.G.S i.e. Portugal, Italy, Greece and Spain but that does not have much impact on Indian Economy becoz India does not have much exposure in Euro Zone. Greece kept its actual debt situation under wrap and could not manage the same, when situation went out of control. It is similar to situation explained by me above, if ur expenditure is more then income than you tend to borrow more to manage your expenditure and thus ur debt burden keep increasing till you either control your expenditure or increase your income.

In India, we are rolling out more and more social welfare schemes thus rather controlling , we are increasing expenditure. On income front, The real problem started from 2 key proposals in budget

1. Income Tax Act was amended retrospectively

2. Inclusion of GAAR (General Anti Avoidance Rule) to know the source of FII income

Income Tax Law was amended as Income Tax Deptt felt cheated by Vodafone deal and raised a bill of 20k crore against Vodafone as capital gain tax and secondly to know source of FII money, GAAR was introduced in Budget proposals. Both the proposals actually sent wrong signals among foreign investors and suddenly it appeared that India is not a investor friendly country….As i mentioned in previous articles also that economy not only run on fundamentals but also on sentiments, any negative sentiments can create havoc…As a result of these proposals, FII’s started pulling their money back thus resulting in Stock Market crash which further created ripple effect therefore demand for dollar increased as Dollar is global currency and FII’s can’t take Rupee back home thus value of rupee is devalued…Secondly due to high petrol prices , Govt needed more Dollar to import Oil and Thirdly demand for Gold also increased as a hedge against inflation…All 3 factors contributed to free fall of Rupee. Devaluation of Rupee will further increase the inflation and this spiral process will keep aggravating the economic conditions in country & ultimately super fast depletion of India’s forex reserves….

Another Big problem is that RBI is not understanding the actual reason for inflation and has kept interest rates high, which is harming the growth. I agree High inflation is due to high demand but no one care to understand why demand is high….Demand increases due to increased circulation of money & it was made possible by way of implementation of 6th Pay Commission thus generous revisions in salary structure of Govt employees across the board therefore putting more money in hands of millions of Govt Employees for spending…Obviously with increased supply of money, demand will increase thus High Inflation. It is quite shocking to know that now the Bank employees of PSU Banks are getting more salary then their counterparts in Private Sector. Today, the salary of a clerk is 40k per month  therefore resulting in more demand from large pool of Govt Employees then supply….End result is out of control inflation.

Besides this, reforms like FDI in retail are put on back burner due to coalition politics compulsion, which also sent negative signal in world community.

The strength of currency against Dollar is a broad parameter, how well the economy of country is doing. With very high Fiscal Deficit, High Inflation and Negative investment sentiments, we are very fast moving towards Recession. Recently Govt decided to divest in large no of PSU’s, which a welcome step but more needs to be done to control the situation.

Only solutions to control current fiasco is to immediately Control Fiscal Deficit, Control High Inflation and improve investor sentiment by rolling back retrospective Income Tax amendement & to put on hold the implementation of GAAR else we should be ready for Job Loss, Salary Cuts & Slowdown in Economy which will take india atleast 5 years back from current times.

Copyright © 2011-2012 Nitin Bhatia. All Rights Reserved.

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9 years ago

Thanks Nitin for explaining complex terms in easy to understand language.

I am not sure instead of publishing ads just to save fuel why government doesn’t spread such awareness to save our economy which is foremost important.

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Shadab

Thanks for sharing your views and i completely agree with you. The biggest problem for govt is how many people will understand the root cause of problem therefore govt focus more on ads to create public awareness which are easy to understand.

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