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Explained: Why GDP slowdown isn’t a surprise and how Govt and RBI saw this coming more than a year ago

P Vaidyanathan Iyer
The financial sector is on the brink. The Reserve Bank of India and the government have been unable to address two critical needs of the industry, namely, cost of credit and availability of credit.

In just about a year-and-a-half, India has hurtled down the economic growth path. The GDP grew at a robust 8.1 per cent in January-March 2018. Since then, it has decelerated every consecutive quarter and latest figures show it is estimated at 4.5 per cent for July-September 2019. The bottom to the downward spiral is getting harder to predict.

This sharp powering down has disrupted the plans of Corporate India. Companies across sectors — from those making tractors to toothpaste — had, over the last two decades, been primed to plan for a trend growth rate of 8 per cent. Investments were made, loans taken, capacities built, and people employed accordingly. This normalised assumption has been wrecked, with an almost halving of the growth rate.

There have been tell-tale signs of this dramatic unravelling since the collapse of IL&FS a year ago in September 2018. A string of events since then has led to a freeze in the credit market. The financial sector is on the brink. The Reserve Bank of India and the government have been unable to address two critical needs of the industry, namely, cost of credit and availability of credit.

Cutting key policy rates was the easy part which the RBI did with alacrity, bending on the side of growth, and aligning itself with the political imperative. But when it comes to getting banks to drop lending rates, RBI has only helplessness to show. Since the beginning of this calendar year, it cut the key policy rate continuously and will probably do so again when it meets December 5.

These cuts have, however, meant little to nothing for companies and to retail borrowers. The cumulative cut of 135 basis points over the last nine months has translated into a meagre 29 basis points (just over a fifth), with banks still retaining a huge spread. Cost of credit continues to remain high for most companies and the worst affected are small and medium enterprises.

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Companies may still borrow despite higher costs, if only credit was available. When state-owned banks turned risk averse and almost closed the lending tap few years ago due to mounting bad loans, they turned to non-banking finance companies, more so after demonetisation in November 2016. NBFCs borrowed heavily from banks to on-lend to individuals as well as small companies. But after IL&FS, the NBFC story crumbled with their outstanding funding from banks plummeting from a peak of 30% in 2017-18 to lower single digits now. NBFCs have virtually stopped lending to the wholesale segment.

While this is what has left Corporate India gasping for breath, the slowdown has left government finances in shambles.

If the growth in collections from Goods and Services Tax and Direct Taxes is extrapolated for the full year, the Central government will be staring at a shortfall of a remarkable Rs 2.7 lakh crore in 2019-20. For the states, the tax shortfall cumulatively could be as high as Rs 1.7 lakh crore. Meanwhile, till October end, the fiscal deficit has already breached 100 per cent of its full-year target.

“One way out is to spend,” said an economist who is working with the government, “because core inflation is still around a very low 2 per cent.”

But the government has little leeway. In fact, some argue, that if the government is bent upon meeting its fiscal deficit target of 3.3 per cent of GDP, it will have to slash spending, which will only serve to hit growth further. After all, even the 4.5 per cent GDP growth rate in July-September 2019 was largely on the back of higher government consumption expenditure.

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