Arvind Subramanium has again been
in the news with a very informative and well-explained paper of his name: “India’s
Great Slowdown: What Happened? What’s the Way Out?”
We all have been talking about
the slowdown at the behest of the parameters available in the public domain.
But his recent paper co-authored with Josh Felman has been very elaborate on
its way to mention the key factors lucidly and even pointing out the remedies
possible.
Few factors are:
1.
The collapse in Commercial Loans: Rs 22 Lakh cr was Housing loan sanctioned in
2018-19, while it has reduced to Rs 1 lakh cr in 2019-20 (6 months data)
- Credit Crunch: Credit is the grease that runs The economy. ILFS saga in tandem with the major irregularities found in the functioning of other Infra companies have tapered off the flow of credit. In fact, the companies are paying more in bank interest than their earnings. The Nominal GDP growth rate taken as a proxy of Likely earnings would result in these data-
Interest Rate on Loans: 10.5 %
Likely Earnings: 6.1 %
This is no sustainable way forward
with these rates and things will go worse before the situation gets better.
3.
Budget Deficit doesn't show the true picture:
Restricting the deficit to 3.3 % is a healthy figure. It also shows that the
economy can relax the percentage point upwards to boost the economy if the
government wants so. But there is a problem. For better explanation, you may
refer to this one: https://www.financialexpress.com/economy/under-reported-deficit-rise-in-non-capex-extra-budgetary-borrowings-raise-the-fear-of-a-debt-trap/1475171/
But the summary is that the real
deficit may be up to 6-7 percent depicting that there is no space for
increasing the budget deficit in the name of boosting the economy.
4.
Housing
Sales: Considering the Top 8 cities (2019), the housing sales tuned up to 2
Lakh cr. But the unsold houses amounts to 8 lakh cr. That's terrible. The
demand has been meager in the face of supply. The more worrisome fact is that a
percentage of the loans sanctioned by the NBFCs and Banks to these Infra
players are not going into building new estates but just to maintain the
already existing inventory that they have.
5.
Electricity
Generation (Growth percentage): It's even worse than the 1990 crisis falling to
the meager 1 percentage point.
6.
Double
Twin Balance Sheet challenge: With growth collapsing, India is now facing a
Four Balance Sheet challenge—the original two sectors, plus NBFCs and real
estate companies. In this situation, the standard remedies are no longer
available. Monetary policy cannot revive the economy because the transmission
mechanism is broken. Fiscal policy cannot be used because the financial system
would have difficulty absorbing the large bond issues that stimulus would
entail. The traditional structural reform agenda—land and labor market
measures—will not address the current problems.
And these all come at that time
when we have been quite lucky with the prices of Crude falling from $ 106 in
2014 to $ 61.11 per barrel as of 24th December 2019. Meanwhile, the RBI cut interest
rates by a cumulative 135 basis points during 2019, more than any other central
bank in the world over the period and one of the largest rate reductions in
India’s history, in the hopes of reviving lending. But lending continues to
decelerate, and investment remains mired in its slump
Nevertheless, the positive sides
are that macroeconomics factors have been quite stable for the nation. We have
healthy foreign exchange reserves. The data reached an all-time high of 413.0
USD bn in Oct 2019 and a record low of 1.1 USD bn in Jun 1991 (just for a
perspective). This would mean that we have enough cushion to shrug off the
exchange rate fluctuation that the economy may face. The inflation has been
well contained in the limits.
The remedies suggested by the
eminent scholar are these:
- Fix India Data problem. There has been a concern about the validity of the GDP, NPAs figures.
- The Bankruptcy code: Consider the big picture. Only Rs 2 lakh crore has been resolved through the IBC so far (with recoveries of just Rs 83,000 crore), a small fraction of the initial stock of NPAs. At this rate, it will take a very, very long time to solve the bad debt problem
- Increase supervision of NBFCs
- Allow new GMO Crops (It's controversial. Safety concerns led 38 countries, including 19 in Europe, to officially prohibit their cultivation)
- Do not raise GST rates and Do not cut personal tax.
The fact remains that our Finance
Minister has got a tough job. It may sound funny but when Mr. P Chidambaram on
being asked by Rajdeep Sardesai, what would you do if you were Nirmala Sitharaman, he said "I
would resign. If my assessment was so wrong, I would resign". All eyes are
on Budget 2020-21 which may be presented by the minister on February 1.
For such articles in your
inbox, subscribe here. And do let me know in case of any errors that may have
crept in. Have a wonderful day.
References:
- https://www.hks.harvard.edu/sites/default/files/centers/cid/files/publications/faculty-working-papers/2019-12-cid-wp-369-indian-growth-diagnosis-remedies-final.pdf
- https://www.macrotrends.net/2516/wti-crude-oil-prices-10-year-daily-chart
- https://www.ceicdata.com/en/indicator/india/foreign-exchange-reserves
- https://en.wikipedia.org/wiki/Genetically_modified_crops
- https://www.financialexpress.com/economy/under-reported-deficit-rise-in-non-capex-extra-budgetary-borrowings-raise-the-fear-of-a-debt-trap/1475171/
