An economy in limbo & the ripple effect : The Tribune India

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An economy in limbo & the ripple effect

Several indicators point towards an economic slowdown. Those who had weathered the demonetisation disruption in their lives are having to face a second GST-induced trauma in just a few months. The future looks uncertain.

An economy in limbo & the ripple effect

No Voice: Textile traders in Bikaner protest against GST. Businessmen in the micro, small and medium enterprises deal mostly in cash and maintain rudimentary accounts. MSMEs have been the hardest hit. PTI



Subir Roy

The Indian economy seems to be in a peculiar limbo. Several economic indicators taken together point to the economy being in the grip of a slowdown. On the other hand, current GDP data and forecasts point to robust growth now and forthcoming.  

First, the downside. Number crunching by Business Standard indicates that bank loans grew by a mere 1.7 per cent in the last financial year (2016-17), the lowest in over two decades (since 1995-96). The loan portfolio of public sector banks, which account for over 70 per cent of the assets of the banking sector, actually contracted by 2.5 per cent. Such severe slowdown in bank lending is symptomatic of an overall economic slowdown. 

If there is an economic slowdown then it will show up in falling inflation and this is precisely what has happened. The consumer price index for June, compared to a year ago, was up by a mere 1.5 per cent. This was below expectations and way below the Reserve Bank of India medium-term target of 4 per cent. 

So the economy should be dragging its feet. Hardly. The IMF has retained its earlier forecast that the Indian economy will grow by a robust 7.2 per cent in the current financial year and rise to a formidable 7.7 per cent in the next (2018-19). (In both the years, Indian growth will remain ahead of China's!) 

The growth rate did go down in the last three quarters of last financial year, with a sharp fall of over one percentage point, brought on by demonetisation, in the last quarter of the year. This caused the growth rate for the year (2016-17) to fall to 7.1 per cent, well below the rate of 8 per cent achieved for the previous year. But, according to the IMF forecast, 2018-19 will see a return in the growth momentum to pre-demonetisation levels. Well, if demonetisation was a bad dream which is over, then why worry? Things are not so simple. The abysmally low increase in bank lending was brought about by the dual balance sheet problem. Numerous large infrastructure projects went sour and the crash in global steel demand post the global financial crisis traumatised Indian steel producers. This led to red ink on the balance sheets of the concerned firms that consequently defaulted on their bank loan repayments. This splashed red ink across public sector bank balance sheets. 

The future looks murky because the defaulting large borrowers, who are being put on the fast-track recovery process under the new bankruptcy code, are in no position to renegotiate their bank loans and return to putting their projects back into shape. The recovery in global steel demand is at a “new normal of low growth” with continuing overcapacity. Price recovery is also taking place but not at any kind of pace to pull the troubled Indian producers out of morass. Thus banks' bad loans scenario will not change in a quick year or two. Industry will start to invest again once capacity constraint is in sight but that is not the case right now.

An economy which is experiencing serious slowdown in investment (the rate of gross capital formation), particularly in infrastructure, is laying up trouble for itself in the future. A high growth rate, fuelled mainly by consumption expenditure, will then be met by capacity constraints preventing a rise in output. This will lay the foundation for renewed inflation. 

So the demonetisation impact may be gone but other downsides remain. One of them is the second shock to the system in less than a year through the initiation of the goods and services tax. News reports indicate that this is impacting the MSME (micro small and medium enterprises) sector the hardest, the same way as demonetisation did. These businesses typically deal mostly in cash and have not maintained anything but rudimentary accounts. For them, GST is a new worrying unknown and many have shut shop. 

This is reinforcing the jobless growth scenario. Those migrating to cities because Indian agriculture is unable to sustain them typically find jobs in the MSME sector. Its workers who had somehow weathered the demonetisation disruption in their lives are having to face a second GST-induced trauma in just a few months.   

As if all this was not enough, there is trouble on another front — bad blood between the government and the banking regulator Reserve Bank of India over interest rates. The government's point is that since inflation is so low the time is more than ripe to lower interest rates so that growth can be speeded up. It is of course not clear how much faster you can grow beyond 8 per cent, which is on the horizon, and whether even faster growth is environmentally sustainable.

Lower interest rates and a rise in the moneys supply is good for the government as it aids revenue buoyancy. On the other hand, the RBI's top priority is to restore bank balance sheets to health. It is absolutely firm on putting an end to window dressing though it naturally does not use that expression. Lower interest rates will increase the space for window dressing by lending a fresh amount to a borrower so that he can make enough payments to regularise the account. This way things will look orderly without any real improvement in the health of either the borrower or the lender. 

Thus it is difficult to determine if the sum total of economic indicators point up or down. The rural distress manifest in farmers' agitations and the lack of promised new jobs point downwards. On the other hand, low inflation has prevented life for ordinary people from becoming unbearable and manifesting itself through declining support for the government. As for the highly commendable growth rate, experts both at home and abroad have questioned its credibility.

The writer, a senior journalist, is the author of "Made in India: A Study of Emerging Competitiveness.” 

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