High debt holds back India’s growth

Jayshree Sengupta

BOTH the RBI and the recently released Economic Survey do not seem very upbeat about the economy in their reports. The biggest cheerer, however, has been the normal south-westerly monsoon this year. Otherwise the economy’s prospects would have looked gloomier. The grain output has been at a record level of 36.1 million tons in April-June 2017. With a good agricultural output, rural demand is likely to pick up which will hopefully give a boost to industry. Because on the industrial front there is nothing much to cheer about and industrial output has shrunk by 0.1 per cent instead of growing at a fast rate. Both manufacturing and mining growth has slackened due to excessive inventories and there has been a near stagnant output of oil and oil refineries’ products. 

Behind the hype of high economic growth and the fastest growing emerging economy today is a tale of average performance in various economic sectors. It means that jobs are not growing at the promised or desired pace and the job-seeking youth are likely to be disappointed badly. There is good news on the inflation front, however, as it has been at a record low of 1.54 per cent in June. Yet the overcautious RBI did not loosen its monetary policy stance and reduced the key rates only by 0.25 per cent in August. The Economic Survey does not seem to agree on this small rate cut. It would not give the right stimulus to demand in the coming months. Demand has been slack in many sectors. The Survey says there are deflationary impulses that will limit the economic growth. 

The slackness of growth is evident from another important indicator—electricity demand. There has been a deficiency of demand in electricity which tells a lot about the pace of industrial activity. Only consumer non-durables sector -- ordinary everyday use items like toothpaste, soap, washing powder etc.-- is growing on the back of resilient rural demand but consumer durables like appliances and white goods production has contracted due to sluggish urban demand. Commercial vehicle sales, however, have risen after two months of contraction and motorcycles demand rose for three consecutive months. It shows that the rural demand is still not subdued in this subsector.  

Core sector growth involving industries like coal, steel, fertilizers, power is down and has contracted. This sector has been bogged down by excessive inventories of coal and tepid demand. Only natural gas and steel output have risen in June-July. An increase in steel consumption can be encouraging news for the construction sector but cement output is falling which is a contradictory signal. 

What is very worrying is that new investment announcements have fallen to a 12-year low in the first quarter of the current financial year. Capital goods production, so important for the GDP growth through the multiplier effect, has slowed down over time. There is low capacity utilisation and that is why machinery does not get replaced or refurbished.  It is also alarming to see from the RBI Industrial Survey that business optimism is waning regarding the pick-up of demand conditions across all sectors, capacity utilisation, profit margins and increase in employment.

The number of stalled infrastructure projects is another sore point and this has resulted in the slowdown of output of infrastructure goods.  

Export growth was down in May and June but import growth has been in double digits due to a surge in oil imports and stockpiling of gold ahead of the GST. The trade deficit in Q1 was high at $40.1 billion, more than double of what it was one year ago. 

On the whole, the service sector is not looking too bad. The transportation subsector and freight carriage by air both rose on an annual basis.  The hospitality sector has picked up with the help of more tourist arrivals and there has been an increase in passenger air traffic. The telecommunication subsector has been doing well and has shown sustained growth in the subscriber base and voice and data services.

Internationally, foreign investors seem to be upbeat about India’s growth potential. Perhaps they are betting on a stable reformist government at the Centre to remain in charge of the economy for a while. Net FDI inflow doubled in April-May and went mainly to manufacturing, retail and wholesale trade and business services. FIIs have made net purchases of $15.2 billion in domestic debt and equity (July 31) and Forex reserves are higher at $392.9 billion. And the rupee has hardened against the dollar which is not good for exports.

So what is the main prognosis? Something is holding back India’s growth and is leading to a lack of confidence in the business minds that is coming in the way of their undertaking new investments. There is global uncertainty for sure-- regarding the new policies that President Trump might unleash and there is a lack of robustness in global demand. But the main factors affecting the mood seem to be the two balance-sheet problems of banks and corporations. Both need immediate remedial action. The NPAs have to be reduced to make public sector banks healthy again. There is much corporate deleveraging going on and corporations are selling assets to reduce their debt ratios but it only shows the degree of stress and pile-up of unpaid debt that is stressing the corporate sector.  Unless the mountain of banks’ NPAs (at Rs. 10 trillion now) is removed, the economy would not pick up and GDP growth would suffer. According to the former Vice-Chairman of Niti Aayog, Arvind Panagariya, a solution to the NPAs will lead to faster credit expansion. In February 2017, non-food bank credit growth declined to a record low of 3.3 per cent as compared with an increase in credit of 9.9 per cent in February 2016.

The Economic Survey has also pointed out that the UP government’s capital expenditure has fallen by 13 per cent to accommodate the Rs 36, 359 crore loan waiver. Other states will also be similarly hit and will be compelled to cut back on capital expenditure which will accentuate the problem of low capital goods growth in the country.  The BSE Sensex, however, keeps on rising despite all the gloomy news—that is something to cheer about!