Recently, it was in the news that FITCH has graded India as BBB- because of the economic slowdown. Let’s see about the Indian economy slowdown in detail.
In a famous paper written by Arvind Subramanian, he compares the current slowdown with the crisis of 1991. Important economic indicators like Imports, Industrial Production, Electricity are very similar to the 1991 counterparts. But the readers might think why is the economy facing a sudden slowdown when India has been growing from the past few years.
The current slowdown is not of a cyclical nature but it’s more of a structural slowdown and it’s going to persist for a long time. This is more of a structural problem because this slowdown is attributed to the outstanding problems in the economy, for example- labour laws and land restrictions. But these problems cannot suddenly restrict the growth of India as the Indian GDP has been growing in double digits from the past ten years. In his paper, he evaluated another hypothesis of income inequality.
The theory is stated like this – a small group of people who have benefited from the IT boom has majorly contributed to the economic growth rate from over the past 20 years. They were the main drivers of consumption in India. But at the same time, he mentions that the Indian economy grew in the last decade majorly because of the investments and exports. Therefore, it will be inaccurate to say that consumption is the reason for the current slowdown.
GST and Demonetisation cannot be blamed as the economy was still doing great despite these events happening. But Arvind Subramanian quotes the current slowdown as both structural and cyclical. He comes up with his own theory named “Four Balance Sheet Challenge”. Basically, it is the aggregate of “The Old Twin Balance Sheet Problem” with “The New Twin Balance Sheet Problem”.
The Old Twin Balance Sheet Problem – During the Global Financial Crisis 2008, majority of the Indian companies made huge investments in the expectation that the Indian economy will continue to grow and when the economy was hit and did not show good growth, the companies had large amount of debts on their books which they simply cannot get away off.
After all this the banks started realizing that they were also in a troubled spot because they have lent money to these folks. Soon the repayments ceased and the banks were trying to provide loans to companies in trouble so that they can make repayments.
This actually solved the problem but just for a while until the RBI forced them to clean their books. Now, this led to the New Balance Sheet Problem.