Has India’s growth slowdown bottomed out?

Barendra Kumar Bhoi | Updated on: Oct 02, 2019
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Though several sectors of India’s economy still face problems, there are signs of green-shoots. The government’s booster doses and sound medium-term fundamentals should help revive growth

The near-term outlook of the Indian economy is disappointing. India’s real GDP growth slowed down to 5 per cent in the first quarter of 2019-20 — the lowest quarterly growth since 2012-13 Q4. Private investment is yet to pick up despite capacity utilisation hovering around 75 per cent. India’s export sector is facing unusual global headwinds such as cyclical slowdown of the world economy, escalation of tariff war between the US and China, and geo-political risks.

In such a milieu, capital flows to emerging market economies have become highly uncertain. Although India could attract large foreign direct investment, foreign portfolio flows have become highly volatile.

Legacy problem

In the domestic front, the twin balance-sheet problem remains unresolved for an extended period. Although the NPA (non-performing asset) cycle seems to have turned around, the magnitude of NPAs remains at an elevated level, particularly in public sector banks (PSBs).

Large corporate borrowers find it difficult to come out of the legal imbroglio under the Insolvency and Bankruptcy Code (IBC). Despite freedom given to banks to resolve the NPA problem under the RBI’s revised guidelines, most large borrowers are being pushed to the National Company Law Tribunal (NCLT).

Although the 180-day timeframe, stipulated earlier to resolve NCLT cases, has been revised, most NCLT cases face time over-run, which is holding back revival of investment by large corporate houses. Cleaning operation is a legacy issue, which cannot be abandoned midway and, therefore, the industrial sector has to pass through a phase of painful de-leveraging.

There has been an animated debate as to whether India is passing through a cyclical or structural slowdown. The RBI has taken a view that India’s recent slowdown is cyclical, while many experts believe that it is both cyclical and structural. India’s structural problems are not new and these are being addressed at a rapid pace.

Gross fixed capital formation (GFCF) as proportion to GDP at current prices has declined from 39.8 per cent in 2010-11 to 28.6 per cent in 2017-18, before rising modestly to 29.3 per cent in 2018-19. As developing countries like India are mostly investment driven, accelerating growth is not feasible without regaining high level of investment.

Consumption as a proportion to GDP is more or less sustained during recent years, although the growth rate is not impressive due to slowdown of the economy. Gross domestic savings as proportion to GDP has come down to 30.1 per cent in 2017-18 from 36.9 per cent in 2010-11. In a low saving and low investment scenario, India’s growth can be sustained at high level only if there is improvement in productivity.

In India, productivity in agriculture is one of the lowest among its peers. The industrial sector is passing through a period of de-leveraging and, therefore, productivity gain is ruled out. Services sector productivity growth has also moderated in recent years. According to RBI Annual Report 2018-19, India’s total factor productivity growth has decelerated from 1.8 per cent during 2003-07 to 0.8 per cent during 2008-16.

Sectoral problems are idiosyncratic in nature. Auto sector, real estate, consumer durables, etc., are not doing well for several reasons. Removal of check gates after the implementation of GST has made the economy flexible and, therefore, large fleet of commercial vehicles are not required. This has not only made the existing fleet redundant, but also considerably reduced demand for commercial vehicles.

Similarly, after the introduction of aggregators like Ola/Uber and fiscal incentive for electric vehicles, demand for passenger vehicles has come down significantly. Construction activities have slowed, mostly in the private sector, after the Real Estate Regulatory Authority (RERA) was set up.

The government is in a catch-22 situation. While the agenda of cleaning up of the banking, NBFC and real estate sectors cannot be abandoned midway, the IBC, RERA and GST are found to be disruptive in the short-run, although they have the potential to accelerate growth in the medium-term.

The silver lining

The other side of the story has a silver lining. According to the IMF, India is still the fastest growing major economy of the world. There are early signs of green-shoots, which may lead to a turnaround of GDP growth. Although the monsoon was delayed by a week, it turned out to be above the long-period average. India’s agriculture has developed considerable amount of resilience over time.

Agricultural output has been at a peak for several years although the growth rate could not be sustained at a high level. The government has been addressing structural problems to their logical end besides tackling sectoral impediments. Recapitalisation of public sector banks has been front-loaded. Credit growth has improved to double-digit despite high NPAs.

According to RBI’s industrial survey, the capacity utilisation stood at 76 per cent in 2018-19 Q4, which augurs well for fresh investment to kick-in. July IIP growth at 4.3 per cent is encouraging, despite teething problem being faced by industries.

Medium-term fundamentals

India’s medium-term fundamentals are sound. Average CPI inflation is below 4 per cent for the second year in succession. Forward-looking inflation expectations are benign. The government is committed to fiscal discipline. The external current account deficit is sustainable despite global headwinds. India’s foreign exchange reserves are at a historic high that provides enough cushion to impart stability to the exchange rate.

The recent slowdown is certainly a major concern. But there is no need for panic. This should be seen in the context of the global slowdown. Given the government’s commitment to pursue structural reforms, India may adjust to global headwinds better than its peers. GDP growth in 2019-20 Q2 is likely to be marginally higher than 5 per cent.

The second-half GDP growth is likely to be gradually higher than that of the first half, at least due to the base effect. Booster doses given by the government may also contribute to growth revival. Monetary policy continues to be accommodative. According to a technical paper by this author, jointly with Abhishek Kumar and Prashant Mehul Parab (available at http://www.igidr.ac.in/pdf/publication/WP-2019-029.pdf ), there is space for reduction in repo rate going forward.

The author is a Visiting Fellow at IGIDR and former Principal Adviser, Monetary Policy Department of RBI.

Published on October 03, 2019

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