India Markets closed

Does PM Modi know there’s a crisis?

Shobhana Subramanian
india economy, economy slowdown, gdp growth, china, india, agricultural, economy, gdp, economic growth, FICCI, india GDP, GDP growth, IMF,

Wake up and smell the coffee, that's what the government needs to do. It's not clear whether the advisors-in the ministry and think tanks-aren't bringing in the right perspective or whether the government genuinely believes there's nothing much to worry about. If there is concern it's not showing. That must change; the government must acknowledge unambiguously the economy is in serious trouble. When the finance minister speaks of 7% growth, whose numbers is she working with? No top economist in India is talking of 7%; the most optimistic number is 6.9% and the average is closer to 6.6%. Very pertinently, these estimates are predicated on a favourable base effect in the second half of the year because growth in Q4FY19, remember, was an anaemic 5.8%.

If Maruti Suzuki is not able to sell even one lakh units a month-a number that had become par for the course-it means consumer confidence is well and truly damaged. The first signs of this weakness were apparent last Diwali but we chose to downplay that; rather than trying to meet industry halfway on lowering prices and making vehicles more affordable to spur demand, NITI Aayog asked two-wheeler makers to come up with an EV roadmap in two weeks! That sales of bikes and scooters should be falling the way they are means consumers either don't want to buy or they don't have the means to spend; both are bad news. It is true many HFCs and NBFCs were lending to customers who were not credit-worthy and that some of these businesses are unviable. But, if HDFC's loan growth in Q1FY20 was the slowest in its history and its asset quality the worst, we have a problem.

There is no doubt India's growth is correlated with global growth and trade, both of which are slowing, but the slide cannot all be blamed only on this. Surely the telecom sector is not bleeding-with the exception of one player-because the global economy is slowing. Bharti Airtel and Vodafone Idea did not report losses of `2,866 crore and `4,800 crore respectively in Q2FY20 because of the global market, but because of the unfriendly regulatory environment.

We need to look inwards and set our house in order; talking about a $5 trn economy will not help. This is not just another downcycle; the problem is, at least partly, a structural one. For example, if the elasticity in our exports is turning negative, one big reason is that we are simply not competitive, our wage structures are simply too high and our labour laws too rigid. But the government is doing little to address this; instead it wants to impose a minimum wage.

Making the environment friendly is critical.There is no doubt the IBC has been the best reform the country has seen and the government deserves full credit for making it clear to companies they can't simply default and get away with it. The clean-up in the NBFC and HFC spaces too was long overdue. But, now that there's effective legislation in place, we need to rekindle animal spirits, else the `100 lakh crore investment target will remain just that. NITI Aayog believes there is room for banks to lend-apparently we are among the most under-leveraged economies in the world. That may be so, but the fact is that to lend, banks need capital and the NPA cycle isn't quite over; sectors such as telecom, power-thermal and renewable-aviation, MSME and agriculture are all very stressed. CRISIL noted that some `15,000 crore of assets would be at risk if the AP discoms stop paying wind and solar power producers following the tiff over the revision of tariffs.

While bankers may have provided for some of the assets, one doubts they have provided for everything. More importantly, there need to be credit-worthy borrowers. Also, there is increasingly higher aversion to risk. A few months back, State Bank of India (SBI) tightened the lending norms for dealers of Hyundai and other car makers because it simply could not afford to take a chance when so many dealerships are closing down. Indeed, credit to industry is crawling, partly because companies remain over-leveraged and partly because bankers are cautious. Some private sector banks lend little or nothing to infrastructure; given how they have burnt their fingers, this time around they will be doubly cautious. Fresh slippages at SBI soared to a staggering `17,000 crore in Q1FY20. Even a much small lender like Axis Bank reported slippages of close to `5,000 crore and write-offs of around `3,000 crore; this, after a clean-up. Let's get real, the NPA cycle hasn't peaked.

If the private sector is to invest, and invest it must if the economy is to come out of the trough, it needs to get a much better deal; people cannot be jailed for not meeting CSR norms. Regulation needs to be non-partisan, whether for domestic or foreign players-favouring some players to the detriment of the others will cost the economy tens of thousands of jobs and this is clearly visible in the telecom sector. New rules cannot be forced on companies without their approval; it is their investments that are at stake.

The government is strapped for revenues, but if it taxes companies beyond a point and penalises them unnecessarily, it will leave companies with no resources to invest. The government's investments aren't enough to put the economy back on the high growth track or create the jobs needed, and so, it must incentivise the private sector to invest. Right now there are no signs this is happening.