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Commentary

Do we NEED a recession?

I’m moving to Mumbai soon, and have just returned from a family trip to Mumbai and Delhi, back to Bangalore. This post is not going to talk about investing per se, but about what I feel is the future.

The traffic in Bangalore is horrendous. I live near the city center and even then, driving to a place less than a kilometer away can take half an hour. Mumbai seemed to be the same – the roads are wide, but traffic jams are heavy and huge. Delhi has even wider roads, fantastic infrastructure and great flyovers. Yet, one day we were stuck on a road where there were at least 8 cars squeezed between the median and the pavement. The other side, hapless passengers returning from the airport were stuck in a massive flyover jam which lasted more than 2 kilometers as far as I could see.

We don’t really need wider roads. Bangalore, I thought, was screwed because of its lousy infrastructure, and still, improving the infrastructure is not going to be about widening roads, or building a metro. No, people who take trains are different from those that take cars – see Mumbai for an example. It’s not even about our population – we have a lot of people all right, but the problem is that they crowd into our cities and the countryside is barely populated.

Yet, we have places like Boston, London and New York where despite large populations, the mass transit systems and the mega size of the cities (London is perhaps quadruple Delhi’s size) makes a difference. But I don’t think it’s just that – after all, there were times when New York was crowded and dirty (and parts of it still are), London’s Tube was horrendously crowded and so on. These cities moved past those challenges by focussing on building their infrastructure and creating big suburbs, large sub-cities and so on.

Now that’s what the SEZs are about, that’s what mega-townships like Dwarka and Navi Mumbai are about. (In fact, Mumbai and Delhi are the only cities that have a reasonable plan to expand their borders – among the big ones. The rest are doing piecemeal work) Yet, the transition does not happen in a short time – it is a long, slow process that needs serious political and corporate will. Companies need to move. The local municipalities need to provide for roads, power, water and sewage, at the very least, and create by-laws and layout specs so that growth is not hampered. (Dwarka is an example) We have to urbanise our countryside, and not attract more into our cities.

But these things will take time. Companies won’t move unless they see that their employees CAN move, meaning there should be something in terms of housing, power, water etc. Gone are the times when BHEL would build a massive township, with employee quarters, at the city’s borders, and provide for power, water and road infrastructure themselves.

Municipalities will not do anything unless a fire is lit under them. Lack of funds is one example, and the government needs to free up and open the municipal bond schemes to a much larger level, and allow for bond insurance. The municipalities must then be encouraged to profit and provide bonuses to their staff based on performance. A huge change, again, not something that will happen overnight.

What’s to happen of our cities till then? The pace of these changes are way way slower than the pace of our growth. And given that we cannot rapidly progress the infrastructure development, only one thing results: we will slow down.

We *have* to slow down. So that our infrastructure catches up, so that our cities become liveable again.

But we can’t slow down in a market driven economy. It’s like water flowing downhill – you can’t stop it by putting small hurdles or bumps. It has to hit a trough, collect and then move on. Hitting a trough, in the economy, is going to have to be abrupt.

Why abrupt? Because any attempt to slow things down will result in job losses, lost profits and in general, tears and blood. Look at the dollar/rupee – as pressure sees it come to a 39 level, it’s already apparent that profits are hit hard, and if it keeps going this way we’ll see lakhs of unemployed rushing out of apparel exports, and perhaps even software and BPO exports. Slowing down anything else – like bank branch licensing, airline rollouts etc. have only seen reversals because it hurts a few people who then complain that they are left behind.

So we’ll have a sudden fall. Some external trigger or something we haven’t even thought about may induce the fall – and eventually all the stuff built on shaky foundations will come right down. For the first time, I am beginning to think it will be a good thing. Our companies will have time to consolidate. Some companies will go down the drain, as they must, because failure is as important to a mature economy as success.

Today, we are at phenomenal peaks in terms of market growth, earnings, and profits. We’ll continue to grow, no doubt about that, but not at the same frantic pace. We have to learn to live with lowered expectations, if only for a while.

To the investor this is horrible. Slowing down usually results in a sharp cut in valuations, despite the fact that it is a required thing. Money goes to what is hot, and we’ll probably start looking for those 10% fixed deposits again.

Now, don’t take what I say to happen overnight. I don’t know when it will happen, or how. I don’t know if it will happen this year. All I know is that I’m not scared of it any longer. It will result in a sharp cut in my own money since I’m invested – but big deal, it will ensure that the markets are still there tomorrow.

And I think we need a recession. We’re burning out in terms of everything – work, traffic, markets and even cricket. Everyone needs a little break.

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