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Flashpoint In India

Flashpoint In India

As we enter the New Year, India Inc. seems to be heading towards another crisis. Be it the economic situation or the social thread, things do not seem to be in harmony with each other. Even before the protests against the Citizenship Amendment Act (CAA) ended, the government has started another discussion with the announcement of initiating the National Population Register (NPR) alongside the census.

As if the current crisis was not enough, it has started another controversy. Home Minister Amit Shah has been outrightly denying any connection of NPR with the National Register of Citizens (NRC). However, the old records suggest otherwise, especially the statements given by the Ministry of Home Affairs itself. There are statements that show NPR as a first step towards implementation of NRC. In other words, things are not expected to fall in place soon.

In such circumstances, it is pertinent to note the recent statement given by the International Monetary Fund (IMF). In its report released last week, the IMF directors have highlighted the current economic slowdown and have urged the government to take urgent policy decisions to address the prolonged downturn.

The IMF has acknowledged the fact that India’s rapid expansion in the last few decades has lifted millions of people out of poverty. However, in the first half of 2019, a variety of factors have led to a subdued growth. Though, the IMF has termed this slowdown as cyclical, instead of structural, it has also said that recovery from the current situation does not seem to be as quick as they initially thought it to be.

The IMF has termed the crisis in the financial sector as the main reason for the slowdown. It needs a “comprehensive financial sector resolution plan. There were earlier thoughts in this area by the government and we think those should be pursued again, because there are certain complications related to the financial sector that don’t necessarily work well in a simple kind of an insolvency and bankruptcy code. It would be important to have a more comprehensive framework specifically for the financial sector,” says Ranil Salgado, the mission chief in an interview to the PTI.

In his recent paper published for the Harvard University, former chief economic adviser (CEA) Arvind Subramanian, too, has expressed similar concerns. In fact, he has termed the current crisis as a “great slowdown”. While the IMF has raised major concern over the financial sector, Subramanian says India has been facing “four balance-sheet problems comprising banks, infrastructure, NBFCs and real-estate companies”. Back in 2014 when he was the CEA to the Modi government, he flagged the issue of twin balance-sheet (TBS) problem – debt accumulated by the private companies becoming non-performing assets (NPAs) of banks.

The TBS-1 was about loans made to steel, power, infrastructure sector companies during 2004-11 turning bad, TBS-2 is the phase after demonetisation, involving NBFCs and real-estate firms. A slowdown in investments and exports accompanied with lower consumption has brought down the GDP rate to the six-year low of 4.5 per cent in the July-September quarter.

"Indeed, the economy seems locked in a downward spiral," he said. "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."

The only way to bring the stimulus back in the Indian economy is to “publish the unreleased reports together with a strategy for improving the official statistics in at least three areas – the real sector (GDP, consumption and employment), fiscal accounts and stressed assets in the banking sector”. 

The next step could be to conduct an asset quality review of banks and NBFCs coupled with modification in the insolvency code, ensuring that the affected parties actually have incentives to solve the problem. In fact, Subramanian has suggested formation of two executive-led public sector asset restructuring companies, one each for real estate and power sector and adequate measures for strengthening the NBFC sector. 

Now the question is why the country is faced with such a huge crisis. After demonetisation, the banks had a considerable amount of cash, which was largely lent to NBFCs, adds Subramanian. The money was channelised into the real-estate sector. By 2017-18, the real-estate companies accounted for half of the estimated outstanding loans of around Rs. 5 lakh crore. The collapse of ILF&S was a “seismic event”, mainly because it highlighted the precarious state of the NBFC sector, which had huge stake in the real-estate sector, already in bad shape.

In other words, demonetisation not only affected small traders/businessmen but also the NBFC and the real-estate sectors. What made things worse was the haphazard implementation of GST. And then came ILF&S with its debt of Rs. 90,000 crore, leaving the government clueless. With no assets in hand, the company largely depends on its shareholders, especially LIC of India, which holds more than 25 per cent of its shares. India has not recovered from these economic shocks.

In fact, Subramanian has compared the current crisis to that of 1991 when India had to send gold held in the central bank’s vaults over to London to borrow money from the Bank of England. The event resulted in a 360-degree turnaround in the economic policies with the government shedding its control over production and imports. The emergence of the IT sector, especially the software service industry, lifted hundreds of millions out of poverty. Liberalisation certainly became a starting point of two decades of prosperity.

At that time, the then Finance Minister took a strong resolve, something that is missing at present to bring the country out of the current crisis. Finance Minister Nirmala Sitharaman has made several appearances before the media, with her set of bandages, but none of them appeared akin to what Manmohan Singh did in 1991. 

In fact, her appearance looked like that of Anil Kapoor in “Mr. India” who would do wonders with his magical wrist watch. Even he had some effect and was able to save the country from Mogambo, the villain. Here the Finance Minister is close to invisible when it comes to saving the economy. Or her magic wand seems to have no effect.

A hard-core politician like Narendra Modi who got a resounding popular mandate in 2019 for a second five-year term has too many slogans in his kitty. Especially spectacular is his promise to usher in a $5-trillion economy. Alas, he has no vision of achieving it. Except for the recent move of making India a low-tax regime for manufacturing units, there seems to be no plan in place.

It seems the government thinks the economy will revive automatically just like phoenix that rises again from its ashes. Had the government been serious about reviving the economy, the recent discussion would not have been on citizenship, population register or NRC. Instead of Amit Shah, we would have seen Nirmala Sitharaman more often on our television sets, trying to win the hearts of her fellow colleagues in Parliament, generating opinion and finally taking action.

The recent news shows that she is busy in consultations with the industry, albeit for the 2020-21 Union Budget. However, the question whether she would be able to do a complete rejig or not has no answer. After all, acceptance of an issue alone can lead to an effective strategy. So far, the government is on denial mode. Whether the jolt given by the IMF or Subramanian would help the government in getting out of its deep slumber is yet to be seen.

(The writer, a company secretary, can be reached at

(Published on 06th January 2020, Volume XXXII, Issue 01)