India facing ‘great slowdown,’ says economist

India facing ‘great slowdown,’ says economist
Arvind Subramanian, former chief economic adviser to the Indian government. Photo: AFP

Former Modi government’s chief economic adviser says India’s economy may be headed to the intensive care unit

By KS Kumar 16 December 2019

India is battling an ongoing economic downturn, which former chief economic adviser Arvind Subramanian has described as a “great slowdown” in an academic paper.

Subramanian served during Narendra Modi’s first term from October 2014 to June 2018 and now teaches at the Harvard Kennedy School in the US.

“Clearly, this is not an ordinary slowdown. It is India’s Great Slowdown, where the economy seems headed for the intensive care unit,” Subramanian said in a draft working paper for the Harvard University’s Centre for International Development, the Indian Express reported.

He co-authored the paper with John Felman, the former head of the International Monetary Fund’s India office.

Subramanian said the Indian economy is now experiencing a “second wave” of the Twin Balance Sheet crisis, which is behind what he terms a “Great Slowdown.” He described the crisis as debts accumulated by private corporates becoming the non-performing assets of banks.

According to Subramanian, the first wave of this crisis happened when bank loans extended to steel, power and infrastructure sector companies during the investment boom of 2004-11 turned bad. The second crisis is largely a post-demonetization phenomenon involving non-banking financial companies, or shadow banks and real estate firms.

After high-value currency notes were banned, considerable amounts of cash made their way to banks, who lent a major part of that to shadow banks. They channeled this money to the real estate sector.

By 2017-18, the shadow banks were accounting for roughly half the estimated 5,000 billion rupees (US$70.6 billion) of outstanding real estate loans.

Subramanian said the collapse of the country’s largest shadow bank, IL&FS, in September 2018 was a “seismic event” which was responsible for “prompting markets to wake up and reassess the entire NBFC (non-bank financial company) sector.”

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. At the end of June 2019, the total number of unsold houses and flats in the top eight cities was almost one million, valued at 8 trillion rupees ($113 billion), or the equivalent to about four years of sales.

Once the extent of their exposure to real estate became known after IL&FS went belly-up, banks, as well as mutual funds, virtually stopped lending to NBFCs. “In some ways, this may have been India’s version of the US housing bubble,” Subramanian and Felman argue.

Worse, it has created a new wave of stress for banks, some of whose credit to shadow banks amount to 10-14% of their loan books. With banks turning cautious – on top of fund-starved NBFCs that had emerged as a key source of lending for small businesses and consumer durable purchases in the post-demonetization period – the flow of commercial credit has collapsed from a peak of 20 trillion rupees in 2018-19 to “virtually nothing” in the first six months of this fiscal year.

Subramanian and Felman say India is now facing a situation of an unresolved legacy balance sheet problem along with a fresh crisis, both of which have pushed the economy into a downward spiral.

The paper says high rates and little credit are causing the economy to slow, thereby intensifying the stress on the corporate sector and on the financial system itself. This has made the financial sector exercise greater caution while lending.

The current slowdown, they note, is worrisome, not only because gross domestic product growth has slowed to 4.5% 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. These indicators suggest the economy’s illness is severe … [this] slowdown seems closer to the 1991 balance of payments crisis,” they stated.

Second quarter growth of 4.5% was propped up by a 15.64% increase in government expenditure. If that component is left out from gross domestic product, the economy actually grew 3.05%. This non-government part – private consumption expenditure, investment and net exports – forms 87-92% of the economy.

The crisis in 1991 mentioned by Subramanian is considered the worst in independent India’s economic history. The country ran large deficits, accumulated over a long period of time, and as a result faced the balance of payment.

India had to pledge gold reserves, take loans from the IMF and carry other structural adjustments to its economy, sponsored by the IMF and World Bank. The country also changed its economic policies with a greater emphasis on private sector participation and did away with many controls. Various tax reforms were carried out with a view to promoting investment.

Former prime minister Manmohan Singh, the finance minister during that period, was instrumental in framing the new economic policies, which helped the country come out of the crisis as a stronger and more resilient economic power.'
Asia Times

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1 Comment

    samir sardana
    February 2, 2020, 3:06 am

    95% of the NPA and Bank Frauds in North India upto the borders of the Vindhyas are on account of Bania vermin ! No one talks of the said statistic as every media house is owned and managed by banias or has 75% of the advert revenue from Banias

    The entire banking system is designed as a wealth transfer system to move funds from Indian clowns in SB accounts and Fancy Bonds – which funds Banias ,who steal the money for Netas ,and then avail of CDR/OTS

    The Bania loot the banking system as a matter of right using netas and suck the blood of the poor by the route of arhatiyas and traders in the agri supply chain and then on on all food & consumer goods value chains as price gougers,hoarders, contaminators, counterfeiters etc.Since these vermin manipulate the supply and value chain of agri items – these vermin are now the owners of COMEX in agri items to control the whole value chain of manipulation,cheating and fraud.

    The vermin have no skills in any domain – except that of cheating and exploitation.The reason for the growth of the cluster mafia approach of the bania vermin, is that – they trade among themselves on clean credit basis and in cash.As time passes the cluster will naturally expand.This destroys the enterprise of all other races.If you analyse the bank managers and directors who sanctioned the loans of fraud, willful defaulters and NPAs -they are all banias,marwaris,gujaratis,kayasthas and brahmins

    Which is Y I support the 26/11 attacks on Hindoosthan ! They were designed to kill the Bania filth (Marwari-Gujarati-Kayastha scum) at one shot.

    Kasab and his ilk lost the plot – as they started the rape orgies. They lost focus.

    It is the Bania filth who worked as spies for each invader into Hindoosthan ! They also funded the wars of the Mughals and Sakas and Huns. There is not one 1 record in history of them having stood up for anything !

    The Birlas,Goenkas,Bajajs and other bania filth built their empire by sending their women to Nehru for his peccadilos.They also funded Ambedkar in London – result that – Ambedkar spoke not one word against the Bania vermin !

    What is a Gujarati – who are also called Bastards in the Mahabharata ! dindooohindoo

    The Mahabharata , Book 8: Karna Parva ,Section 45

    The Pancalas observe the duties enjoined in the Vedas; the Kauravas observe truth; the Matsyas and the Surasenas perform sacrifices, the Easterners follow the practices of the Shudras; the Southerners are fallen; the Vahikas are thieves; the Saurashtras are bastards.

    The Gujaratis are also termed as a race of Miscegnation – in the Mahabharata ! That word refers to those born of unnatural sex ! Gujaratis are a Bastard race ! They swap wives ! And they do it openly and ADVERTISE IT OPENLY !

    Similarly, The Rajasthanis are also sons of prostitutes as under :

    Sample these Rajasthani sons of harlots born out of Nata Pratha – which is basically child prostitution for a fee !

    And these Gujaratis like I said are a breed born of harlots and have a system of organised prostitution by registration – called Maitri Karar – which is registered by the DM

    These vermin have to be exterminated en masse. It was Kasab and the Mujahideen who reckoned their evil.Their evil is also recorded in the ,Mahabharata as a bastard race

    Kasab is a Che Clone ,with the look of Al Pacino ! May Allah rest his soul !


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