India has attained the status of fastest growing economy in the world. Implementation of GST from 1st July, 2017 is expected to lend further momentum to the growth trajectory. Despite several favorable factors, such as, low level of inflation, subdued global energy price scenario, strong fiscal consolidation of central government finances, low current account deficit, higher agricultural output, growing FDI, and higher wages in rural areas, certain sticky constraints arresting Indian growth story refuse to abate.
The most worrisome of these developments is the declining trend in gross saving and investment. The gross savings as percentage of GDP has fallen from 34.7 in 2011-12 to 29.8 in 2016-17. During the same period, gross investment has shrunk from 38.9 percent of GDP to 31.3 percent. These trends have significant implications for capacity of Indian economy to create fresh jobs in rural and urban India. They also create a wedge between the real and financial economy. Within this overall scenario, the decline in private sector investment is critical and needs strategic intervention. It has also severely affected the credit growth of banking sector, as corporate India refused to take investment calls and the growth of credit in the world’s fastest growing large economy was just 9.4% during 2016-17, a 53-year low.
The state of balance sheet of corporate sector, their declining bottom line and falling credit appetite have serious implications for the profitability of banks and (falling) prices of banking stocks. Put together, these developments shape the investment climate. Analyzing these developments, Financial Stability Report of RBI released on 30th June, 2017, concludes as follows:
“Weak investment demand, partly emanating from the twin balance sheet problem (a leveraged corporate sector alongside a stressed banking sector) is a major challenge. Retrenchment of credit by public sector banks is partly offset by NBFCs, mutual funds and the capital market but they cannot fully substitute for banks in a bank–based financial system like ours. Hence, steps to restore the health of the banks assume urgency.”
The concerted movement by the Government and RBI to fight black money, fake currency and terror financing, although laudable objectives, produce certain unintended consequences. Banks are still fighting with the adverse effects of demonetization on demand generation, credit delivery system, supply chain management, and logistics.
In addition to this, there are legitimate concerns about how markets would react, given uncertainties in the global economy, weaker exports, and the possibility of capital outflows.
India has experienced several highs and lows in the last year. Businesses faced several impediments in the form of excess capacity, regulatory and policy challenges, and rising corporate debts resulting in the slow growth. Private sector firms are also facing several internal problems such as leadership issues, IT sector downsizing etc. Startups are functioning on weak business model. On the other hand many other sectors– like Steel, Telecom, and Aviation are facing huge losses because of excess capacity, cut throat competition resulting in outright losses or low operating margins.
Government and RBI seem to be having different perspectives on various issues like interest rate, agricultural loan waivers and measures to stimulate demand and private investment. While Ministry of finance seems to be looking for a reduction in Bank Rate to stimulate investment, RBI is according higher priority to hold rate of interest for the present to contain inflationary expectations
RBI Governor has opined that loan waivers engender moral hazard. A debt waiver solution to farmers only provides short-term relief generally not to distressed and small farmers but large farmers who have cornered disproportionate gains of green and white revolution. It also leads to a bad credit culture, besides exerting pressure on state finances.
India now stands at a critical juncture and progress is required on many fronts. Many studies undertaken by international bodies have concluded that Indian economy is expected to emerge as one of the leading economies in the world and likely to become a $5 trillion economy by 2025. We have to marshal all possible resources and ignite the proverbial animal spirit of our entrepreneurial class to make it happen.
Prof S.C.Sharma, Director, IBS Gurgaon