Professor Viral Acharya's take on Indian and US Economy

Systematix Institutional Equities recently shared a report with key takeaways from discussion with Prof. Viral Acharya.

Here are some interesting points from the discussion:

On Indian Economy

1. India perspective – Time to assess the counter-factual output loss:

While the stock market remains the bell weather, it has been out of sync with the real economy. India’s GDP growth is below the pre-COVID trend by 5-7%. So, this divergence essentially reflects the sharp slowdown in the small, informal, and unlisted parts of the economy while large firms have gained.

With the employment situation remaining tepid, it is a signal that the K-shaped recovery is underway.

2. Leveraged consumption-led growth, but for how long?:

If the majority of the economy is unable to grow the real wages then ultimately the consumption engine of the economy will slow down. One can keep the consumption engine growing for a while via credit extension, but its sustenance is a problem if real incomes are not rising.

3. Rising monopolistic power makes private capex growth difficult:

  • The divergence of profit to sales gap across large and small firms is significant. The large firms have gained at the cost of the small firms through acquisition and the consequent market power enlargement.

Thus, despite the improved banking sector stability with the clean-ups, private capex remains elusive.

High corporate profits have induced de-leveraging rather than investments. Large companies have generated margins and shored up profits not by improving their efficiency, but by keeping the supply constrained and charging high mark-ups. This may be good for the stock market but is detrimental to the real economy.

  • Backdoor privatization is not the answer to everything as further privatization is happening in a concentrated manner only by selected names.

A probable solution to solve this elusive private capex conundrum could be to increase vibrancy and competitiveness in the economy.

The real elephant in the room is that India is not generating jobs at a fast enough pace at which the young population is entering the workforce.

4. Rising ruralization is a concern that needs policy rethinking:

The share of agriculture in employment remains fairly high (46.5% NSS 2020-21) with just an 18% contribution to GDP. This sector also has a severe concentration of subsidies as well.

This high dependence on the Agri sector for employment creation is not desirable. The government should seriously revisit this entire functionary for getting agriculture to a point where it is not heavily subsidized.

5.India needs a macro-policy facelift:

Many indicators are suggesting that we need a macro-policy facelift. A probable solution could be found in enhancing our capabilities and investments in the services sector. India’s service sector (both tech and non-tech) does not have high entry barriers, unlike other countries.

As the employment elasticity is also very high in the services sector compared to the other sectors especially manufacturing. This can be one of the avenues that can help generate employment for the rising labour force. India has far more vocational training possibilities and expertise and we must keep capitalizing on this to enhance our labour force capabilities.

On US Economy

What stops the US economy from regaining manufacturing?

In the past, shifting manufacturing to the rest of the world was the way in which the US created low inflation. But with the cost of labor scaling up significantly it will be a challenge for them to recreate manufacturing capabilities; it will be a gradual process.

The US can have an edge in innovation, robotics, and AI. But on the labour front, it is very difficult to compete with Asia. So, near-shoring and re-shoring may still not be major drivers for the US in the near term. Herein lie the structural tailwinds for India’s IT industry.

Credit crunch and regional bank failures, bigger monitorable than Fed’s actions:

There seems to be a pattern in the recent banking crisis. Signature Bank, Silicon Valley Bank, and the First Republic Bank, all were heavily exposed to the crypto, tech, and commercial & real estate sectors which had undergone significant correction as the first-round effect of Fed’s normalization.

Depositors shunning lazy banks, creating challenges for regional banks:

The ongoing credit crunch at the local banking level is expected to accelerate, thereby impacting small businesses that are heavily reliant (50%) on regional banks. This will intensify the consolidation process as depositors are shunning lazy banks that are reliant on rate arbitrage for margins and returns than on bank lending business.

Episodes of banking collapse we are witnessing, appear to be characterized by permanent outflows of funds from the small banks to money market funds and large banks, thereby magnifying the monopolistic nature of the large banks.

A scenario of sustained failure of regional and medium sized banks can induce contagion. Here, the prerogative of the Fed to lean in favor of a soft-landing scenario will get challenged and force it into reducing rates and injection of liquidity, even amid persistently elevated and sticky inflation. This forced situation will be counterproductive to the inflation control efforts thus far, as the consumption demand that currently remains strong gets stimulated again.

Therefore, one should be vigilant over regional bank performance rather than just be focused on what the Fed is undertaking.


I totally subscribe to this view and thats why I continue to be bearish on financials.

Since the top tier companies are all listed entities - the stock markets will keep outperforming. The informal sector which is down, is not getting reflected in GST collections or GDP assumption. It will take some time for this to show as consumption metrics is the only window that captures this data set.

Govt. plan of increasing the fertilizer costs & providing a subsidy on that is falsifying the actual revenue numbers.

All the major banks in India is reporting stellar numbers, so the real metric to check is the instances of default from the poor & SMEs which has been badly impacted due to reforms.

Providing cash benefit instead of job opportunity has 2 issues

  1. inflation
  2. increase of crime due to unemployment

Till then let the drum roll…