Nilesh Gupta

Everyone is talking about Recession and we heard this quite often in different parts of world and for different economies or Industries, in last couple of decades. Be it post mortgage crisis or current economic downturn we all are facing slow down. Even economists and analysts are discussing and predicting more recession for India now.

My view is little different in this regard. Although I agree with the slowdown in every aspects of economy however, I wonder, is it really a “RECESSION” or I Call it a “REALITY”?

To understand better, I suggest the followings to be considered:

1. Overtrading.

2. Reduction in overtrading.

3. Disruptive Innovation – be it technology or product

4. Redefining the definition of long term! short term etc.

Let us understand one by one:

1. Overtrading:

Overtrading was prevailing globally. We can understand this by way of an example.

Mr. A has got an order of Rs. 10 lacs and has got an advance of Rs. 1 lacs this he in turn will pay to one of supplier say Mr. X and ask to prepare goods worth Rs. 9 lacs. By just paying an advance of Rs. 90k. Mr. X in turn will ask five other people to provide supplies to complete this order and pay them less than 10% of their order price.

In this way, each one was overtrading beyond their real capacity of executing the orders and everyone was enjoying credit of suppliers or sometime from banks whereas their actual capacity may not be there to execute this order of 10 lacs Rupees on their own. So, at each level everyone is dealing over and above their real capacity and it gets multiply upon each transaction.

Interestingly, wherever banks have extended credit to these channels, that were also largely funded beyond their real requirement or their real capacity to repay. Also, these advances would have been against a security which have been valued much higher than its realistic price which it can fetch. So once again overtrading by banks! borrowers. In case of default the bank will not be able to recover fully and hence there are losses, someone has to bear the pain and further credit stops leading to loss of business for the next businessmen due to NPAs.

2. Reduction in Overtrading:

Now since everyone was doing overtrading, suddenly due to many factors (improvement in systems, Controls, regulations, defaults, transparency and much more) these overtrading has started declining or virtually stopped. So now, Mr A is able to get the goods worth Rs. 3-4 lacs which was actually his capacity to invest in and in turn, Mr. X will also not be able to execute orders of Rs. 9 lacs with just an advance of Rs.90k. So, his turnover also come down to Rs. 2-3 lacs

Therefore, the Turnover in this example of Mr. A will come down to 3-4 lacs (almost 60% down) from 10 lacs and the same is consequently applies to Mr. X and so on and so forth which everyone is complaining about recession. Based on the given example of single transaction (60% down in this case) one can imagine total impact on turnover of Mr. A and X respectively.

This I called it as Reality and not just recession since we have come down to our actual capacity from the hype we were into.

3. Disruptive Innovation – be it technology or product

Another reason for such a down turn and uncertainty rather I would call about the future of economy and particularly any Industry I would say, is largely due to Disruptive Innovation – be it technology or product.

In last decade, my personal view is that all the innovation which has taken place has actually acted as disruption to the existing system! process! product! Industry and accordingly it kills the others.

We take any example and ultimate effect will be disruption to others. Some of them are:

– Rise of Patanjali disruptive for FMCG,

– RERA for Real Estate

– JIO for Idea, Airtel, Vodafone,

– Rise of Smartphone – Earlier Samsung and now Vivo, One plus, MI etc.

– Block Chain Technology – In fact it has been called a disruptive technology itself.

– Digital Economy – Disruption to Banking sector and parallel economy

– By’jus and other apps – disruption to education sector

– GST – Disruption to small traders and unorganized sector

– Ecom- Disruption to Retailers, malls etc.

– Electric Vehicles evolution is putting present vehicles existence in danger. And much more…

I am not against such rise, the point I am trying to make is that anything new coming up is actually closing the doors for others to survive.

4. Redefining the definition of long term/ short term etc.

In view of the Coming down to once actual capacity to deal in and also due to disruptive innovation as discussed above, the life of future & prediction is shortened to a great extent and accordingly I view it as the definition of long terms is not more than a YEAR  now. Yes! You read is correctly.

One cannot predict beyond one year now in his business. I am not talking about Reliance/ Amazon here since they are on the other side of the disruption and it is largely the smaller participants of the Economics which are now not in position to plan beyond one year. Unfortunately, these smaller participants can be as high as 95% of the total. After one year how badly it will affect their business nobody can predict, it can be positive but who can predict with certainty. Hence the uncertainties and sustainability starts questioning the very business plan of the organization which if not answered timely can be fatal for the business.

This we have seen in fall of many bluechip companies and corporate groups.

Conclusion:

Thus, I believe it’s the reality on which we are and will be and we have to accept the fact that we were into an overtrading zone earlier. Apart from the above, the diversion of funds by the promoters, failures of auditors of efficient and timely unearthing the malpractices etc. have fueled these overtrading in some or the other manner as the promoters have started believing in getting easy money and more so they believe it will continue and never stops.

Diclaimer: All the views published here in this Article are of my personal views and does not intend to an opinion, statement or otherwise against or in favor of person, subject, country etc. These views are purely for the academic discussion for betterment of understanding and brainstorming.

(Author can be reached at nileshguptaca@gmail.com)

Author Bio

Qualification: CA in Practice
Company: N. Gamadia & Co.
Location: Ahmedabad, Gujarat, IN
Member Since: 06 Sep 2019 | Total Posts: 1

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5 Comments

  1. Shashima says:

    Very well explained. Yes over the years things were getting beyond control, absolutely disruptive way loosing the innovative insight. Actually no new thing came up and competing each other.
    Growth – Development is creativity not form change.
    Beautiful article.
    Hope this change now at least.

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