DeMo trigger, & things got worse : The Tribune India

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DeMo trigger, & things got worse

There are a number of causes for the economic slowdown witnessed by the Indian economy today.

DeMo trigger, & things got worse


Jayshree Sengupta

There are a number of causes for the economic slowdown witnessed by the Indian economy today. The disruption of the economy started with demonetisation in 2016 which severely affected the workers of the informal or unorganised sector. Thousands lost their jobs as cash became scarce and employers could not pay wages and workers, mainly women, returned to their villages. Then came the Goods and Services Tax, a reformist move to simplify the tax structure, but it ended up causing huge problems for exporters and small businesses. Involving complicated accounting operations for which the small businesses were unprepared, they stumbled on the export front and failed to get their papers in order.


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Then, in 2018, like a bolt from the blue, the apparently invincible Indian Lease and Finance Services (IL&FS), an infrastructure finance services company, collapsed and declared itself bankrupt. How this could come about so suddenly remains a mystery, especially with reputed credit rating agencies giving it a clean chit. There were severe problems in accountability of the top officials as they gave huge loans indiscriminately.

The entire shadow banking industry comprising Non-Banking Financial Companies (NBFCs) was affected by the collapse of IL&FS because their source of money supply that came mainly from mutual funds dried up. The collapse of IL&FS affected credit supply to all NBFCs as mutual funds had a Rs 76,000-crore exposure to the NBFC sector. They backed out from lending to NBFCs and stopped buying their bonds and shares. Their credit growth on y-o-y (year-over-year) basis declined from 30 per cent in March 2018 to 9 per cent in March 2019.

Most small businesses and even ordinary consumers borrowed money from NBFCs to buy cars and flats. The drying up of liquidity affected the entire MSME sector, which employs 12 crore people and contributes 45 per cent to India’s exports.

Meanwhile, the other source of credit for NBFCs from commercial and public sector banks also became problematic as they reeled under huge amounts of NPAs (Rs 9.49 lakh crore for commercial banks and Rs 8.06 lakh crore for PSBs). They were reluctant to lend to the NBFCs as a result of which the entire system of credit supply got clogged. The MSMEs, starved of credit, could not produce normally and the slowdown caused unemployment.

Govt needs to act fast

The economic slowdown is worrisome because manufacturing and core sector growth has been affected. As a result, the GDP growth outlook has been lowered to 6.9 per cent, which seems on the high side because the economy grew at 5.8 per cent in January-March 2019. Car and FMCG sales have been low but according to Financial Times FDI report 2019, India got 120 per cent increase in greenfield investment amounting to $54.3 billion in 2019. This happened alongside the Foreign Portfolio investors withdrawing $5.5 billion from the stock market in July. Along with a sliding Chinese Yuan, the rupee has slipped, touching almost Rs 72 to a dollar. This may boost exports but will discourage FDI and FPIs and essential imports will cost more.

The government has to act fast because already the economic slowdown is constraining fresh private investment in manufacturing. It is important to rev up consumer demand because it is the main engine of growth in the Indian economy.

Many more reforms than just interest rate cut are needed to boost consumer confidence. People have to have faith in their future earning capacity and only then they will start buying. The reforms should address the basic structural problems of the Indian economy like land acquisition laws and major infrastructural problems that raise costs. The reforms are important for encouraging both private and foreign direct investment.

Infrastructure investment push

Without more government investment in infrastructure and affordable housing, problems regarding the efficiency of labour will remain. Workers living in dismal conditions, incurring long and costly journeys to work, suffering from poor healthcare and inadequate education and training, cannot be competitive. India is fast losing its competitiveness as productivity of workers sinks lower.

Farmers have to be given adequate remuneration which covers costs. Rural investment can create jobs in the countryside and food processing industries can boost agricultural exports.

Lastly, it is important to restore the health of the banking sector and see to it that they transmit the recent interest rate cuts into lower lending rates and encourage fresh investment. Injection of Rs 70,000 crore is urgently required to recapitalise banks and bring them back to health.

— The writer is Senior Fellow, Observer Research Foundation

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