The current economic debate..!!

There is no denying the fact India is facing a economic slowdown . The debate right now is whether it is structural slowdown (long term)  or cyclical (short term). Whether it is because of global factors or is it because of government policies. Is it because of global factors or self inflicted. Is India's  growth story over. Have we lost out ? Also is this a demand led slow down over supply side slow down. Lets try to ans. some of these question and the general economic road-map of India. An answer to all this is a mix of everything.

Global  effect

This is a global slowdown as the data from IMF points out. China's GDP nos came in at lowest in 3 decades.  Japan , Indonesia  and US also showed the signs of slowing down as pointed out in the RBI monetary review and and IMF an world bank indicators. So there is no denying the fact that the global growth is slowing down mainly due to US China trade war. So does that mean everything in India is fine domestically and we are just facing this slow growth because of only the global factors?? The  ans clearly to that is a NO.  The global factors might have added to the Indian slowdown but surely India has its no domestic issues to handle and cater to.

Domestic  problems

Lets lists this problem and this then will lead us to the answer of structural or cyclical and demand driven or supply driven slowdown questions . The 1st and the foremost reason is the drying up of the liquidity ( money in the hands of the business)in the market . This is because the NPA issue is not fully solved in the Indian banking system. India started the recognize the bad loans in the system since late 2013 when the NPA in the system was said to be around 2% which is a healthy average. Since then the NPA has increased to 9% as of today which means a lot of NPA which were hidden in the system were actually recognized till date. Recognizing the NPA is one part but there was no resolution mechanism to do away with this NPA which is why the IBC was brought in. Post bringing in of IBC the resolutions have started happening but not at the pace that was assumed. IBC has a 54% success rate so far. So this means a lot of money is till stuck in the NPA accounts. A point to remember is at about 11% NPA levels the sub-prime was triggered in the US. Thus no banking system can continue serious lending to the projects without NPA resolution. Second while the banks were lending to corporate's and salaried individuals the NBFC sector was lending to MSMEs , construction companies  and small business for their working capital needs. The NBFC as a source of funding take money from the banks who lend there surplus money to NBFCs. Post the crisis in IL&FS and DHFL banks who were themselves facing the crunch because of the  NPAs and who use to lend to NBFCs post  NBFC crisis stopped lending money to NBFC.  Thus the NBFC who were the drivers of growth in the construction and MSMEs sector were left with almost no money to lend to these business people. The RBI data shows the lending to business has come down from 7 trillion rupees in 2018 Apr- March to 1 trillion in the same period of 2019 indicating a credit freeze.Also the repo rates which are the bench mark interest rates in India were high in spite of inflation begin very low in the economy the average being closer to 3% which is lower than RBI benchmark of 4% with a room to climb to 6%. The high rates meant that the cost of borrowing money in the market remained high in spite of lower inflation. Also the structural changes like the GST  which the businesses had to adjust to. This Macro factors added with a not so good union budget gave the signal that the gov in spite of historic mandate was against business in policy while PM talked about wealth creators in his speeches which did not go down well with the markets.  Markets don't show you the economic picture but surely they give us the directions as they gauge the realities better on ground and this was seen in the steep market fall post budget.

The Demand side : I don't believe that the Indian economy which has such a huge aspiring population and a growing economy can have a consumption problem. There might be a temporary reset but a population as large as India has to consume there are no two ways about it. The Auto sales slow down is more on the disruptions from moving to the BS-VI framework  and the lack of clarity from the government side on the EV roll out.  The only major piece to address in the  demand side of economy is the construction segment which is facing a clear problem in specially in the metros , some of the problem is also their own doing of indiscriminate expansion by flouting all rules. That said the gov has to intervene, regulate the industry and then withdraw when the market forces play out.

The conclusion and Remedies.

The conclusion is thus that the slowdown is both due to domestic and global factors but the one which is clearly cyclical and more to do with the last mile funding as the overall liquidity in the market is surplus the last mile funding is a problem and also thus, the problem with the supply side of the liquidity more than the demand side which is prevalent only in certain sectors like auto and high end construction. So this in crux is the slowdown issue which IMO is cyclical and India is in the last legs of the slow down and this phase should be over by end by another 6 months. The government has clearly reversed the sentiments in the market with corporate tax cuts and signal of intent for privatisation. The fact that the monsoon was higher than normal will clearly help in whatever little demand slowdown was there in the rural economy. The sign of which were visible in the current food inflation which was a 2 year high. Also the Amazon and flipkart sales numbers should lay rest the demand problem in the general consumption economy. The market has reacted positively and the on ground situation will start reversing post the festive quarter.

5 Steps to address.

1) RBI  and judiciary : The RBI and judiciary should ensure speedy NPA resolution and IBC process via NCLT and bring NPAs back to the 2% mark on priority.

2) Commercial banks should come back to lending  and taking exposures to NBFC and general market and not just play safe by G sec investments.

3) Government should address the construction sector and enhance the scope and pool of the 20kcr. created for resolution of stressed assets beyond affordable housing immediately and continue the reform path of lower Taxes and privatisation. Construction is a largest non-agri. labor market in India.

4) Crisis is an opportunity, so having a better and a simpler GST structure to beef up revenues and  easy for the people to file taxes and flatter structure is the need of the hour.

5) Pushing  the land and labor and agriculture reforms and improve labor market and competition.

6) This is more of a Wish : Finance minister should lower and simplify direct taxes before Diwali as a festive gift,  the thing that is surely coming in the Union budget.

All this with a caveat that Indian business should also now adjust to the cleaner and fairer systems without the phone banking access.