During the recent crashes in the stock market, many people have been discussing whether it is a good time to start investing in the market. I have second thoughts on getting back into the “gambling den”. The main concerns I have
1. Service sector slowdown: The growth of any economy is driven by one of the four main drivers, Consumption, Investment, Exports and Government expenditure. Indian Economy has been driven by software exports (rather export of services) during the initial years. Software exports have laid the path to a consumption and investment driven economy. Increasing spending by IT professionals led to growth in many sectors like Retail, Travel, BFSI and other related sectors. Spending by the people employed in these sectors has led to a growth in economy. Easy of access to money aided in the explosive growth. The growth has attracted increasing investments by foreign investors, which have aided in funding the increasing infrastructure being built by private and public entities.
In the current scenario, each of the services which were the main growth engines are slowing down. IT sector is facing slowdown due to lack of economic growth in their main markets, increasing aversion to spend due to uncertainty with regard to job is also causing a slowdown in other sectors. The lack of confidence of the industry is apparent in the slowdown of uptake in commercial space.
2. India’s “subprime”: The last few years have seen an explosive growth in credit in the Indian economy. The fact that credit has played an important role is evident from the release of a new movie “EMI”. Low interest rates in the earlier part of the decade has led to increase in car loans, housing loans, credit card spending etc., but the increase in interest rates over the last few years has led to shrinking disposable incomes. With the slowdown in service sector space, defaults are expected to increase going forward. The recent RBI report has given a hint in this direction. Credit card receivables have risen by huge margin as compared to last year. Even if the defaults do not increase, low disposable incomes might reduce discretionary spending.
3. Lack of acceptance of problem: If you see the views of the people on TV, you may hear many terms like bear cartel, FII sell off, conspiracy theories. Most of the people who are airing these views were the ones who were hankering about the all the defunct theories to justify the sky high valuations seen in the markets. Everyone is happy when the markets go sky high, but the moment they start going in the other direction everyone tries to stop it. The earlier they realize that the world is going through a phase of deleveraging which is leading to this sell off, the better to them. We need to be discussing the impact of this and the ways to reenergize the economy rather than wasting time trying to find conspiracy theories.
4. Lack of bandwidth with the Government: One standard way of getting out the mess generally has been to increase spending by the government. With the government facing both a current account deficit and fiscal deficit, it has to been seen how far the government will go with increasing fiscal deficits.
5. Increasing protectionism: Slowdown among all the world economies and increasing unemployment in these countries might lead to a strong wave of protectionism. Offshoring might be hit due to these measures, further reducing our service sector growth. The shot of this happening is long shot but still such a concern exists.
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