India facing 'Great Slowdown', economy headed to ICU, says former CEA Arvind Subramanian
Firstpost
Press Trust of India
Subramanian, who was Modi government's
first chief economic adviser but quit in August last year, in new paper
co-authored with the former head of the International Monetary Fund's India
office Josh Felman said India is facing a 'Four Balance Sheet' challenge.
India is facing a "Great
Slowdown" with its economy headed for intensive care unit primarily due to
a "second wave" of the twin balance sheet crisis at banks, former
Chief Economic Adviser Arvind Subramanian has said.
Subramanian, who was Modi
government's first chief economic adviser but quit in August last year, in new
paper co-authored with the former head of the International Monetary Fund's
India office Josh Felman said India is facing a "Four Balance Sheet"
challenge -- comprising banks, infrastructure, plus NBFCs and real estate
companies -- and is trapped in an adverse interest growth dynamic.
"Clearly, this is not an
ordinary slowdown. It is India's Great Slowdown, where the economy seems headed
for the intensive care unit," he wrote in a draft working paper of the
Harvard University's Centre for International Development.
Subramanian had flagged the twin
balance sheet (TBS) problem - debt accumulated by private corporates becoming
non-performing assets (NPA) of banks - back in December 2014, while he was CEA
to the Narendra Modi government. In his new paper, he has made a
distinction between the original TBS and "TBS-2".
TBS-1 was about bank loans made to
steel, power, and infrastructure sector companies during the investment boom of
2004-11 turning bad. TBS-2 is largely a post-demonetization phenomenon,
involving non-banking financial companies (NBFCs) and real estate firms.
"Since the Global Financial
Crisis, India's long-term growth has slowed as the two engines propelling rapid
growth -- investment and exports -- sputtered. Today, the other engine --
consumption -- has also stalled. As a result, growth has plummeted
precipitously over the past few quarters," he wrote. India's GDP growth in the
July-September quarter slowed to a six-year low of 4.5 percent. This was the
sixth consecutive quarter when the growth rate had fallen.
"Indeed, the economy seems
locked in a downward spiral," he said. "Best capturing this stark
reality is the astonishingly high interest-growth differential. The corporate
cost of borrowing now exceeds the GDP growth rate by more than 4 percentage
points, meaning that interest on the debt is accumulating far faster than the
revenues that companies are generating." This, he said, has caused "a
resurgence in the amount of stressed debt, a second wave of the Balance Sheet
Crisis". If this process is left unchecked,
the economy will continue to spiral downward, as stress reduces growth, which
then intensifies the stress, he said.
"Clearly, action must be taken
to stabilize the economy and get it back on the path of rapid growth," he
said. "But in the current circumstances, the standard macroeconomic tools
are not very useful. There are actions that the government cannot do (further
significant fiscal stimulus); must not do (reducing personal income tax rates
or raising GST rates); can do with only limited effectiveness (easing monetary
policy)."
According to Subramanian, first major
action -- almost a pre-condition for righting the economy -- could be a Data
Big Bang, which instill confidence and produce a reliable basis for policy
making.
"This must comprise the
publication of unreleased reports together with a strategy for improving
official statistics in at least three areas: the real sector (GDP, consumption,
and employment), fiscal accounts, and stressed assets in the banking
system," he said.
Next, a new asset quality review to
cover banks and NBFCs must be conducted. Also changes to the Insolvency and
Bankruptcy Code (IBC) be made to ensure that participants actually have
incentives to solve the problem.
He also advocated the creation of two
executive-led public sector asset restructuring companies (bad banks), one each
for the real estate and power sectors, while at the same time strengthening
oversight, especially of NBFCs. Recapitalization of banks should be linked to
resolution and reforms such as shrinking public sector banking should be
undertaken.
"There is, of course, a reason
why these policies have not been implemented before. They are politically
difficult and other, easier alternatives have seemed more attractive. But, the
government currently has a tremendous amount of political capital. And by now
all the alternatives have been tried and found wanting. So, finally, after a
long and difficult decade, the government has both the opportunity and the
clear need to resolve the Four Balance Sheet (FBS) problem," he said.
Dwelling into the current problem
facing the economy, he said, after demonetization, considerable amounts of cash
made their way to banks, who on-lent a major part of that to NBFCs. The NBFCs,
in turn, channelled this money to the real estate sector. By 2017-18, NBFCs
were accounting for roughly half of the estimated Rs 5 lakh crore of
outstanding real estate loans.
The collapse of IL&FS in
September 2018 was a "seismic event" not only because of the Rs
90,000 crore-plus debts of the infrastructure-cum-lending behemoth, but also
its "prompting markets to wake up and reassess the entire NBFC
sector," he said.
What the markets discovered was
profoundly disturbing. A lot of NBFC lending in the recent period was
concentrated in one particular industry -- real estate -- which itself was in a
precarious situation.
The current slowdown, the paper says,
is worrisome not just because GDP growth has slowed down to 4.5 percent in the
second quarter of 2019-20. Even more distressing is the disaggregated data.
"The growth of consumer goods
production has virtually ground to a halt; production of investment goods is
falling. Indicators of exports, imports, and government revenues are all close
to negative territory," it said. "These indicators suggest the
economy's illness is severe, unusually so. In fact, if one compares the
indicators for the first seven months of this year with two previous episodes,
the current slowdown seems closer to the 1991 slowdown than the 2000-02
recession." Electricity generation figures
suggest an even grimmer diagnosis: growth is feeble, worse than it was in 1991
or indeed at any other point in the past three decades, it added.
Comments
Post a Comment