Prepare for a long economic winter

Covid changed human interactions dramatically. What was affected the most was the physical space we occupied in our homes. We had to work from home and learn from home. Families had to create isolated islands — sometimes within the same room — from where they could attend office or school, virtually. People needed more computers and smartphones, along with high-speed internet, to keep them connected to the outside world. Even tech novices had to learn how to use Zoom and Microsoft Teams. Everyone had moved their social and professional lives on to the internet.

Along with that, an increasing number of people began to outsource daily tasks to e-commerce companies and online service providers. From grocery shopping to ordering daily meals, online consultations with doctors to buying homes through video-conferencing, everything that we needed to do in a day could be done on an app on our smartphones.

Futurists had predicted that this was going to happen one day, sometime in the distant future, when the internet would kill everything else. Covid made it seem that the future had already arrived. The speed with which people adapted to a tech-driven, virtual-led life made us believe that we are seeing a fundamental shift in human existence. Things would never go back to where they were before the pandemic hit us.

The two Covid years — 2020 and 2021 — were the best years for tech companies, whether they were global monopolies like Google and Amazon or small startups. They made big money and passed it on to their employees. Investment banks and venture capitalists vied with each other to get a share of the tech pie. Indian tech startups, for instance, raised a record $42 billion in 2021. The strike rate in the second half of the year was over $4 billion per month.

This massive surge in financing helped tech startups do two things. First, they increased discounts to customers to capture the market. Second, they began to hire more people and pay bigger salaries.

One reason why investors were so free with their money was because it wasn’t theirs in the first place. Covid made governments and central banks flood their economies with easy cash. Most of this found its way into the capital markets and financial investments. This also resulted in an unexpected stock market boom in the middle of a global recession. Finance, which had never fully recovered from the jolts of the Global Financial Crisis of 2008-09, found a new lease of life.

So, two groups of people flourished in the Covid years — especially in 2021. Those who made a living in the world of finance capital, and those who worked in tech. The year 2021 was probably the best one ever for Indian techies and, perhaps, the best for young professionals working for 15-odd years. Young people in the startup world saw their salaries increase by 50 to 100 per cent. In some cases, promising engineers were being poached from their previous employers at three times their existing salaries. Startup founders and senior managers raked it in, not only through higher salaries but also from the ESOPs they held. Many big startups — the so-called Unicorns — also went to the stock markets to raise funds and became some of the most valuable companies in India.

As these people earned more, they spent more. The demand for high-end goods, services and assets went up through the second half of 2021 and it continued through the first half of 2022. This rubbed off on other sectors outside the world of tech and finance. They were selling more and making higher profits. So, they too began paying more, especially to senior and middle management staff.

Understandably, this demand recovery was restricted to the organised sector, especially larger companies, which produced the goods and services that the affluent bought. The bulls believed that the good times were here to stay.

But then, the honeymoon ended. It began with the US Federal Reserve turning off the liquidity tap and increasing interest rates. First, the stock markets began to look shaky and then, funding dried up. This was bad news for startups which sold their goods and services by burning cash. Such startups, even Unicorns, needed to raise money periodically to keep up their fabulous growth rates. The money had kept flowing through 2021. Now, not only were they not being able to get new rounds of funding, but even existing investors were telling them to cut costs and prune their business.

Startups in India have sacked nearly 18,000 people this year, to reduce their wage bills. Job portals and HR consultants say things are only going to get worse next year. One year ago, tech employees were being wooed with massive pay hikes. Now, they are flooding HR firms with their CVs, offering to take 40-50 per cent salary cuts for jobs. The startup boom has ended almost as soon as it began. A similar cooling off has taken place in the financial sector.

The rise in incomes in the tech and financial sectors had resulted in a recovery of incomes in other sectors which supply goods and services to India’s affluent. This had taken place with a time lag. Similarly, the decline in salaries and job opportunities in the startup and financial worlds will, ultimately, affect incomes in these dependent sectors. There will be lay-offs, salary cuts and wage freezes in these industries as well.

This is a spiral, where income loss amongst the rich will affect demand for high-end products and services — the only things that were growing. The drop in demand will then force companies to sack people and reduce their wage bills. This, in turn, will cause a further reduction in demand. This is an inevitable cycle that has become intrinsic to the contemporary ‘free market’ capitalism, which is propped up by the neo-liberal economic policies followed by almost all governments. What is worrying is that the time period from boom to bust is getting shorter with each new crisis. Spring comes for a short while, followed by a long economic winter.

The author is a senior economic analyst