India facing ‘Great Slowdown’ with economy headed for intensive care unit primarily: Subramanian

19 Dec 2019 Evaluate

Expressing concern over economic growth of India, former Chief Economic Adviser Arvind Subramanian, in new paper co-authored with the former head of the International Monetary Fund's India office Josh Felman, has said that the country 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. He noted that India is facing a ‘Four Balance Sheet’ challenge -- comprising banks, infrastructure, plus non-banking financial companies (NBFCs) and real estate companies -- and is trapped in an adverse interest growth dynamic. Besides, the nation’s Gross Domestic Product (GDP) growth in the July-September quarter slowed to a six-year low of 4.5%. This was the sixth consecutive quarter when the growth rate had fallen.

He said clearly, this is not an ordinary slowdown. It is India's Great Slowdown, where the economy seems headed for the intensive care unit. 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 NBFCs and real estate firms. He also said ‘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’.

Subramanian further said indeed, the economy seems locked in a downward spiral. 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 has caused a resurgence in the amount of stressed debt, a second wave of the Balance Sheet Crisis. He highlighted that if this process is left unchecked, the economy will continue to spiral downward, as stress reduces growth, which then intensifies the stress. He noted that clearly, action must be taken to stabilize the economy and get it back on the path of rapid growth.

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