Indian economy is losing its growth momentum (Part 1)

ECONOMY

TOPIC: General Studies 3:

• Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Indian economy is losing its growth momentum (Part 1)

Daily Current Affairs IAS | UPSC Prelims and Mains Exam – 18th December 2019

SRC: Financial Express 

Context:

• In April, the IMF had that predicted India will grow at a rate of 7.2 per cent in FY20, but recent data indicates a falling GDP growth (4.5 per cent). 
• The IMF particularly spoke of the “slow growth in rural incomes, domestic demand (as reflected in a sharp drop in sales of automobiles) and credit from non-banking financial companies (NBFCs)” as plausible causes.
• According to the World Inequality Report 2018, the top 10 per cent of India’s population got 54 per cent of all income while the bottom 50 per cent shared only 15 per cent.
• Low wages and income inequality have led to a fall in demand.

Fundamental equation in macroeconomics:

GDP = C + G + I + (NX)

In other words, four drivers determine a country’s GDP.

These are:

C – the total expenditure (demand) by private individuals 

G – the total expenditure (demand) by the Government 

I – the total expenditure (demand) on investments made businesses in the country 

NX – the net effect of imports and exports 

Current status of Indian Economy:

• Indian economy is facing both structural (that is, more long-term issues related to the overall framework of the economy such as the flexibility or inflexibility of labour laws etc.) and cyclical (that is, more short-term issues such as a bad monsoon that disrupts production of food articles etc.) challenges.
• Since the causes are both structural and cyclical, Experts say, arresting this economic slowdown is proving to be so difficult.

Two balance sheets- TBS:

• The two balance sheets are referred to the Indian banks (especially public sector banks or the government-owned banks) and the corporate sector, respectively.
• The balance sheets of Indian banks were burdened by a high proportion of non-performing loans and the balance sheet of corporate were clogged because they had over-borrowed and were unable to pay. 

Economic boom 2005-09:

• The origins of India’s TBS is credited to the economic boom that happened between 2005 and 2009.

• This was a period when economic prospects were rosy and the economy was growing at near double-digit growth rates.

•  Companies borrowed heavily in the hope of making profits in the future.
• The banks, especially the government-owned ones, too, ignored prudential norms and lent a lot of money to companies in the hope that this would help boost economic growth. 
• As it happened, economic prospects collapsed quite sharply after the Global Financial Crisis (GFC) and companies found that their projects were no longer viable. 
• The end result was that the companies were left with huge loans they could not pay back in time and the banks were left with huge loans that had turned to  NPA.
• This meant that neither the Indian companies were in position to invest nor were the Indian banks in a position to lend. 

Economic growth 2010-12:

• Economy continue to grow faster  between 2010 and 2012 9% to 10% in the succeeding years (2010 and 2011).
• Between 2009 and 2013, companies were in no position to invest. So the “I” (total expenditure (demand) on investments made businesses in the country )component became weak.
• During this period There was a  hit to India’s exports because of a decline in global demand. So “NX” component also weakened.
• But unlike in the developed world, where such companies would have been declared bankrupt and liquidated, in India, both the companies and the banks survived.
• Why? Because most of the struggling banks were owned by the government and so there was no risk associated with them because it was always believed that the government would bail them out. 
• Most companies survived because banks took a call that giving these companies more time will help the companies repay and many banks lent new loans to such companies so that these companies stayed afloat.
• Another reason why India continued to grow fast in the immediate aftermath of the GFC. That had to do with the robust demand from the other two components – C the total expenditure (demand) by private individuals and G– the total expenditure (demand) by the Government . In particular, private consumer demand — which is quite weak these days

Economy going from 2014 to 2018

• Even though the TBS problem remained unsolved – in other words, the bank NPAs continued to climb and share of debt-ridden companies unable to pay interest payments continued to rise – yet,  due to sharp fall in crude oil prices, Indians experienced an income boost. 

• During 2015 and 2016, international crude oil prices fell to a third of what they were in 2014. This essentially meant that Indians could spend more and the “C” component of the equation boosted the GDP.  Experts claim this gave a 1 to 1.5 percentage point boost to the GDP.

• 2017 and 2018 saw an uptick in world demand and a real depreciation of the rupee, resulted non-oil export growth rose from -8.6 percent in 2015-16 to 8.9 percent in 2017-18”.the “NX” component helped bump up the GDP growth.

• Increased government spending increased the “G” component

• India’s growth was boosted by a lending spree provided by non-banking financial companies (NBFCs) like IL&FS and DHFL.

• NBFCs took over the leading role of lending to the economy because banks were still struggling with NPAs and were largely unwilling to lend directly to businesses. T

• he credit provided by NBFCs fuelled both private consumption (C) and business investment (I), and through this route fuelled GDP growth.

Connecting the dots:

• Do you think govt shouldn’t bail out Public sector banks during distress?
• Do you think NPA problems of the Banks can be resolved ?