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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.

  • Sandeep says:

    >excellent post!. You have summed up very nicely. I remember I read similar stuff on economic times article : http://spadhye.blogspot.com/2007/10/sensex-18k-mystery-of-indias-economic.html

    You are right that we need to slowdown a bit and focus on long term goals of shifting our population from dense cities like Bangalore, Pune, Mumbai into suburbs ..don’t know when that will happen. We see townships like Magarpatta City or Amanora Park Town Pune or Sahara for that matter…but in my opinion these are just private properties trying to pull-out hard earned money from people who are earning great in this boom period. As these townships too are very close the the city and still ads the chaos which you talked about in this article…as companies are not shifting there..We need a downtown like of concept as in USA/Singapore. This would also help govt to build the infrastructure in a more structured way !..

    cheers
    Sandeep

  • சாமான்யன் Siva(stocksiva.blogspot.com) says:

    >good analysis.Yes.everything is over-grown.

  • Anonymous says:

    >Deepak this is one of your finest posts in recent times! A lot of what you say is something i and others sense, but haven’t been able to articulate as well as this. I for one also look forward to some form of sanity returning to our lives – work and personal. And if a downturn is what it takes so be it. But since no one can quite see where it will come from, the masses are still happily punting their way in the stock market! And a soft landing maybe too much to ask for!

  • Anonymous says:

    >Excellent post. It sums up everything about Indian Metro Cities. India had the advantage of other’s (west)experience to learn. Why Indian leaders couldn’t foresee ?esply. when they keep visiting London, New York , Paris etc. and see and experience for themselves the differences existing way back home in Indian mega cities. Perhaps they are cut off from reality of Indian mega cities because these leaders ‘travel’ in mega cities in the ‘en-consed’ environments of ‘official’ cars driven by ruthless ‘govt.’ and other ‘Pilot’ guided drivers and the window panes of these cars are screened by ‘curtains’. So they can not see outside and they are shameless too.I am prepared for any eventuality. Its not in my control.

  • Baliga says:

    >Very good article. This is something that I had been discussing with people, but never could put it in such a nice way. Kudos to you for that. It’s gonna be very difficult task for Indian bureaucrats to tackle it. Indian growth story is not so yanky-dory as it seems from outside. Growth is not done in a uniform way across different regions of India, it’s just few prime cities.

  • Gunjan says:

    >I liked this article so much. Its optimist’s view of prevailing issues or constraints.

    “For the first time, I am beginning to think it will be a good thing”

    This sentence implies that if we have grown abruptly here and there without any plan, some crash is actually a chance to rebuild ourselves in more organized manner, with a nice plan.

    I would share an example of my home town, Bhuj (Kutch) in Gujarat. We used to face same kind of problems when it came to growing city boundaries. Roads were narrow, there were lot of huge lands that were ignored and nothing we being planned for those lands. No plans for schools and hospital renovation or rebuilding that were much needed. There were lots of places in the town which you just cannot visit even with your two-wheeler. You have to walk down some puzzle style paths to reach there. People in general were happy, no one wanted any change.

    And then 2001 came and earthquake happened. Almost 60% of the town was impacted. At one side debris started being cleaned up and at the other side “new” city was being planned by truly nice people. They took care of lot of minute things related to expansion. Task was challenging considering cultural issues, communal constraints and things like that. Finally Bhuj today is much better than it would have been, if no earthquake would have happened. We have one of the finest civil hospitals, school and collage buildings etc.

    Well point is, in case of Bhuj’s infrastructure it was earthquake which turned out good for the city. But in case of other much larger cities, like you have discussed rightly, slowdown would be the most possible immediate future thing.

  • Anonymous says:

    >man…you scare me

  • Nikhil Kulkarni says:

    >There are 2 assumptions you are making:

    1. All growth needs to be driven via the Metros & Suburbs

    2. B and C grade cities also need as much investment in infra as the metros to be able to absorb the rising investments.

    Both are related – we probably might not enter a ‘nationwide’ recession but a recession limiting itself to metros and big cities.

    What happens then is 2 things:
    > Existing Job-investment drivers like BPO move to smaller cities

    > New investments go directly into smaller cities who already have a good enough infra to support the current population and have enough scope to grow.

    If that happens it leads way to a more equitable development without needing a recession to set in.

  • Aditya Sikaria says:

    >I think, the slow down is more of a consequence of the shape we are into rather than a need … Unless things change fast, I think we will be hit by a slow-down soon.

    If you think the other way round, this may also have a positive effect on B & C grade cities, giving them a ground and opportunity to move up the ladder.

    I also happen to write a blog on my site aditya.sikaria.com on similar lines …