Stuck in the great slowdown

Subir Roy 

India’s GDP growth rate numbers released through the year have steadily declined, with the most recent, 4.5 per cent for the second quarter of the current financial year, touching a six-year low. In keeping with this trend, forecasts by various agencies have also been continuously marked down. The latest, released by Fitch, cuts the forecast for the whole of 2019-20 to 4.6 per cent. 

The irony is that even at this level, India will remain one of the fastest growing major economies in the world. However, this is a far cry from the 8 per cent growth that was achieved earlier, and on the basis of which the Prime Minister had set the goal of making India a $5 trillion economy by 2024. That goal has still not been officially given up but it will be difficult to find experts who believe that this goal is within reach.

Jobs become scarce

There was more bad news. Right at the start of the year, a leaked report by the National Sample Survey Office (NSSO), based on its periodic labour force survey, made the dramatic disclosure that the country’s unemployment rate had risen to a 45-year high (since 1972-72) of 6.1 per cent in the previous year (2017-18).  

What made things worse for the government was that two members of the National Statistical Commission, including its chairman, resigned alleging that the government had withheld the release of the report despite the commission approving it. According to the report, the rate of unemployment was much higher among the youth and overall as well than in previous years.

Fall in consumer spending

If unemployment is high, people have less to spend and they cut back on consumption expenditure. This was precisely the message in another report towards the end of the year. Last year, consumer spending fell for the first time in more than four decades, according to the consumption expenditure survey by the National Statistical Office (NSO). If people are spending less on what they consume (not save or invest), the impact on those at lower levels of income will be severe. Experts said this fall in consumption expenditure implied that poverty levels in the country had gone up. This is consistent with the indications of a fall in demand in the economy, driven by the rural market. The post-reform period has been marked by a steady fall in poverty levels, enabling India to graduate to the lower middle income group. Other indicators point to the fact that demonetisation played a role in adversely affecting the income of people at lower levels. 

Export growth rate in negative

If there is a slowdown in growth, what is happening to the main drivers of growth — investment and exports? Gross fixed capital formation, what the country spends on plant and machinery, including depreciation (writing down of existing capital stock), has remained static over the past one year ending September, up to which the data is available. So, there has been no growth in investment expenditure, which could have given a boost to the overall growth.  

Now, let us take a look at exports. In November this year, exports were at $25.9 billion, compared to $27.9 billion in December last year. Over the past 12-month period, export growth rate has been negative. It has gone down by 7 per cent. This comes on top of export stagnation over the past five years. This should set the alarm bells ringing.

How do we explain this gloomy picture? According to Arvind Subramanian, former Chief Economic Adviser and a leading economist who has been with the IMF and Harvard, the Indian economy is in a “great slowdown” and is headed for the ICU, meaning drastic treatment is required.

He attributes this to not one but two twin balancesheet problems. First, infrastructure companies like those in power generation, which started in the boom before the 2008 financial crisis, ran into trouble in the post-crisis slowdown. The firms fell back on bank loan repayments and created problems for the banks. This was the first twin balancesheet problem.

The boom years made the banks flush with funds, which they lent to non-bank finance companies (NBFC), which in turn lent these to real estate companies. Thus was created a real estate bubble, which collapsed when the present slowdown came. The proximate trigger was the collapse of IL&FS. The NBFCs overnight found it difficult to roll over their own loans (bonds) from banks and corporates and faced the consequences of borrowing short (through bond issues) and lending long (to real estate firms). Then came the dramatic fall of the DHFL. Thus was created the second twin balance sheet problem — involving NBFCs and housing development companies.

The solution

The government needs to create a “bad bank”, one that will take over or buy out the stressed power companies, hold on to them, turn them around and sell them off. The power companies have to be nursed back to health as they have huge amounts of money sunk into them. And as the economy grows, it will need more power. Ditto for housing projects. Once bank balance sheets are cleaned up and loans to troubled infrastructure firms and housing projects are cleared, banks can lend to viable businesses that are currently finding it difficult to access institutional finance.

“Bad banks” are in fact the long-term solution. In the short term, classically monetary (lowering lending rates) and fiscal (raising government spending and tax cuts) tools are deployed. But the RBI has already cut interest rates quite a bit and the government’s fiscal space is limited. So we will need to wait for the long-term measures to take effect, meaning the growth slowdown is here to stay for some time.

---

The highs

Sensex soars

The domestic stock markets broke multiple records in 2019 with the benchmark S&P BSE Sensex index scaling the peaks of 39,000, 40,000 and 41,000 for the first time ever. 

New FDI rules

The government introduced new Foreign Direct Investment (FDI) rules in e-commerce, intended at providing a level playing field to Indian brick-and-mortar or physical stores. The new policy for e-commerce bars companies from selling products exclusively on their online portals.

RIL’s big partnership

Saudi Aramco and Reliance Industries Ltd (RIL) signed a letter of intent for a proposed investment in RIL's oil-to-chemical division. The deal is expected to fetch $15 billion (Rs1.06 trillion) for a 20 per cent stake. RIL is also looking to turn debt-free in the next 18 months.

Airports privatised

In February, six government-owned airports were put up for privatisation. The Adani Group won the mandate to run these airports, becoming the third-largest private airport operator, next only to the GMR and GVK groups.

---

The lows

Inflation rises

Consumer price index-based inflation rose to a 40-month high of 5.54 per cent in November. Rising vegetables prices, especially onion which touched Rs 150 per kg, contributed the most to lift the headline number.

Banking trouble

Punjab and Maharashtra Cooperative (PMC) Bank collapsed as Housing Development and Infrastructure Limited, a real estate company,  defaults on loans, putting the future of millions of depositors at stake

Auto sales hit a new low

India's passenger vehicle sales declined the most in two decades in August due to a continuing slump in demand amid slowing economic activity and an increase in vehicle ownership costs. This is the sharpest fall registered since the Soceity of Indian Automobile Manufacturers (SIAM) started recording data in 1997-98.

Moody’s lowers ratings

On November 8, global ratings agency Moody’s lowered its outlook on India's credit ratings to "negative" from "stable", citing an ongoing economic slowdown, financial stress among rural households, weak job creation, and the liquidity crunch in non-banking financial companies.

Hello! Pay more 

In December, Vodafone Idea announced a tariff hike in the range of 15 per cent and 40 per cent across different plans. Following suit, Reliance Jio said it would introduce new plans with unlimited voice and data.