Skip to main content

Indian economy’s illness 'severe, unusually so', situation 'puzzling and frustrating'

Arvind Subramanian, Josh Felman
Counterview Desk
In a fresh paper published by the Harvard University Center for International Development, “India’s Great Slowdown: What Happened? What’s the Way Out?”, Arvind Subramanian, former chief economic adviser to the Narendra Modi government, and Josh Felman, Director of JH Consulting, California, have said that “standard structural and cyclical factors cannot explain the long slowdown, followed by a sharp collapse.”
According to them, “In the immediate aftermath of the Global Financial Crisis (GFC), two key drivers of growth decelerated. Export growth slowed sharply as world trade stagnated, while investment fell victim to a homegrown Balance Sheet crisis, which came in two waves. The first wave -- the Twin Balance Sheet crisis, encompassing banks and infrastructure companies -- arrived when the infrastructure projects started during India’s investment boom of the mid-2000s began to go sour.”
While admitting that “the economy nonetheless continued to grow, despite temporary, adverse demonetization and GST shocks, propelled first by income gains from the large fall in international oil prices, then by government spending and a non-bank financial company (NBFC)-led credit boom”, the paper states, inflating bubble “finally burst in 2019”, as could be seen in consumption getting “sputtered, causing growth to collapse.”

Excerpt:

Seemingly suddenly, India’s economy has taken ill. The official numbers are worrisome enough, showing that growth slowed in the second quarter of this fiscal year to just 4.5 percent, the worst for a long time. But the disaggregated data are even more distressing. The growth of consumer goods production has virtually ground to a halt; production of investment goods is falling (Figure 1a). Indicators of exports, imports, and government revenues are all close to negative territory (Figure 1b).
These indicators suggest the economy’s illness is severe, unusually so. In fact, if one compares the indicators for the first seven months of this year with two previous episodes, the current slowdown seems closer to the 1991 balance of payment crisis (not in the conventional macro-economic stability sense but in terms of the real economy) than the 2000-02 recession (Figure 2a). Electricity generation figures suggest an even grimmer diagnosis: growth is feeble, worse than it was in 1991 or indeed at any other point in the past three decades.1 Clearly, this is not an ordinary slowdown. It is India’s Great Slowdown, where the economy seems headed for the intensive care unit.
The situation is puzzling and frustrating in equal measure. Puzzling because until recently India’s economy had seemed in perfect health, growing according to the official numbers at around 7 percent, the fastest rate of any major economy in the world. Nor has the economy been hit by any of the standard triggers of slowdowns, what Harish Damodaran has called the 3 Fs. Food harvests haven’t failed. World fuel prices haven’t risen. The fisc has not spiraled out of control. So, what has happened—why have things suddenly gone wrong?
Various answers to this question have been proposed; there seem to be as many explanations as analysts. Yet the very number of answers hints at the problem, namely that none of the explanations seems satisfying. Commentators point to various flaws in India’s economy, but the economy has always had flaws, and only rarely have they led to predicaments like the current situation.
At the same time, there is frustration. The government and RBI have been trying vigorously to bring the economy back to health. Every few weeks they announce new measures, some of them quite major. Most notably, the government has introduced a large corporate tax cut, perhaps the most sweeping corporate measure ever, in the hopes of reviving investment; and recently it announced a plan to privatize four major public sector undertakings (PSUs). 
Meanwhile, the RBI cut interest rates by a cumulative 135 basis points during 2019, more than any other central bank in the world over the period and one of the largest rate reductions in India’s history, in the hopes of reviving lending. But lending continues to decelerate, and investment remains mired in its slump.
Hence, the current predicament. It is not obvious what more can be done to remedy the downturn, especially because it is still unclear what has caused it. Yet one cannot just accept the current situation; a remedy must be found. Accordingly, this paper attempts to make a contribution. It offers a different diagnosis of the problem, and provides a prescription, identifying a path that could lead the economy out of the current slowdown.
Our thesis can be summarized briefly. India’s economy has been weighed down by both structural and cyclical factors, with finance as the distinctive, unifying element. India is suffering from a Balance Sheet crisis, a crisis that has arrived in two waves. The first wave -- the Twin Balance Sheet crisis, encompassing banks and infrastructure companies -- arrived after the Global Financial Crisis (GFC), when the world economy slowed and the infrastructure projects started during India’s investment boom of the mid-2000s began to go sour. These problems were not addressed adequately, causing investment and exports, the two engines propelling rapid growth, to sputter.
*For the period April-October 2019 compared to the same period in 2018
But the economy was still able to achieve reasonable growth, on the back of a series of temporary expedients: initially, a large windfall from the precipitous fall in international oil prices; later, an NBFC credit boom accompanied by a large but hidden fiscal stimulus. It is the end of this credit boom beginning late 2018 that has led to the current predicament. All major engines of growth, this time also including consumption, have sputtered, causing growth to collapse.
With growth collapsing, India is now facing a Four Balance Sheet challenge -- the original two sectors, plus NBFCs and real estate companies. In this situation, the standard remedies are no longer available. Monetary policy cannot revive the economy because the transmission mechanism is broken. Fiscal policy cannot be used because the financial system would have difficulty absorbing the large bond issues that stimulus would entail. The traditional structural reform agenda -- land and labour market measures -- will not address the current problems.
Yet something must be done to get India out of its current vicious cycle, in which low growth is further damaging balance sheets, and deteriorating balance sheets are bringing down growth. In fact, there is only one way out, difficult and slow as it may be. The Four Balance Sheet problem must finally be addressed decisively. Until and unless this is done, the economy will not really recover on a sustainable basis. This argument is not new; it has been made before, in the Economic Survey 2017. But it is even more true today. 
---
Click HERE to download paper

Comments

SAMIR SARDANA said…
What is Modi doing to India ?

People of Hindoosthan have to understand that GOI is bankrupt,Banks are bankrupt.Therefore,the GOI HAS TO privatise and outsource – NOT TO RAISE CAPITAL – but to DOWNSIZE STAFF FOREVER.Those Jobs will go forever. dindooo hindoo

The Methodology is Simple – Take Banks,ports,Hotels … of GOI.`1st the GOI destroys these PSUs,by corruption and mismanagement and overstaffing – and then PAID NEWS IN THE BANIA MEDIA – HIGHLIGHTS THE “OPPORTUNITY” to PRIVATISE, and that the savings will be used for GAU MATA.Then comes in the “INDIAN CONSULTANT”, who is paid a bribe to make a PRIVATISATION RECOMMENDATION.

Then ANOTHER CONSULTANT IS HIRED,FOR RFQ/RFI/RFP,to rig the tender in favour of the pets of Chaiwala and Fat Pancho – Amit Shah.

Another SOP of Chaiwala ! Set up a sea port where there is NO SEA or an AIRPORT where a plane CANNOT LAND.So it will make losses. Losses are good,as it ENSURES THAT NO STAFF IS HIRED (which is a good excuse NOT TO HIRE).Then privatise – FOR THE REAL ESTATE.

FOR THE PSUs which are NOT privatised,the GOI INCREASES THE QUOTAS,BUT ALSO THE QUALIFICATIONS,AND THESE JOBS ARE NEVER FILLED (as the Dalits have no education and cannot pass or meet the standards). Total Job Destruction !

Then we come to the Banks,which are bust.What does the GOI do ? Demonetisation of deposits – through sleight of hand. 1st, REDUCE SAVINGS BANKS INTEREST RATES,so the BANKS GET RECAPITALISED BY PROFITS,and the POOR DEPOSITOR GETS NIL REAL INTEREST,AS THE “TINA” OPTION comes in.The Option is the DISASTER OF CHIT FUNDS & CO-OPERATIVES !

By lowering bank savings interest,the govtt and corporate borrowing costs ALSO REDUCE.Corporate profits rise and the tax thereon,FLOWS TO THE GOI

SME and SME jobs ARE DESTROYED by GST and DEMO – as a part of a plan.EVEN COVID is AN OPPORTUNITY FOR THE STATE TO DESTROY SME.SME ARE A BURDEN ON POWER INFRA AND TAX INFRA.They pay No tax (GST and Profit Tax),No power,No PF,No ESI and deal in cash.All the SME business has gone to TYCOOONS,AND they are NOW PAYING TAX ON INCREMENTAL PROFITS.In the next BUDGET the TAX RATES ON THESE TYCOONS WILL BE LOWERED ! The Stock prices of these Tycoons has gone up and so has the STT earned by the GOI.SO THE DESTRUCTION OF THE SME HAS MET THE PURPOSE.

Agriculture is doomed.All inputs rate are up and farm gate prices are the same or lower.There is NO MSP in India.THE GOI HAS NO MONEY.THE GOI finds ingenious ways to,NOT PAY MSP.AI and Farm tebchology will DESTROY 90% OF INDIAN FARMERS.THEY ARE NOT REQUIRED ! ALL THAT THEY PRODUCE,CAN BE IMPORTED,AT HALF THE COST.THERE ARE NO JOBS FOR FARMERS – AS THEY HAVE NO EDUCATION OR SKILLS.THIS HUGE DISASTER WILL LOWER LABOUR COSTS (FOR THE BENEFIT OF TYCOONS)

Because of the LOOT of the BANIAS and MARWARIS over 70 years, EDIBLE OIL IS IMPORTED AT 100% DUTY,AND THERE IS A 200% TAX ON DIESEL ! And that is Y the savings banks rates,will go to NEAR ZERO – as the GOI needs the DUMB INDIANS,TO LEND MONEY AT ZERO RATES OR NEGATIVE REAL INTEREST RATES.

The RBI model is simple ! Con the DUMB INDIANS to put the money in banks (at close to zero rates),tax the interest,AND THEN LET THE BANIA COMPANY LOOT THE BANKS VIA LOANS AND PAY OFF THE NETAS.Y do the DUMB INDIANS put the money into banks ? Simple ! RBI has ensured that ALL OTHER OPTIONS ARE EITHER DISASTER (FRAUD) OR NO SECURED BENEFITS OR MUCH LOWER RATES.

The Last STEP of Chaiwala will be RETAIL.That will WIPE OUT THE BANIA SHOPKEEPERS AND BRING THE RETAIL PROFIT IN THE TAX NET !The excuse will be,that IT WILL RAISE FARM GATE PRICES !

NET CONCLUSION – THERE WILL BE NO GOVTT JOBS AND THERE WILL NO PRIVATE JOBS FOR THE SEMI SKILLED AND LOWER SKILLED PERSONS.dindooohindoo
SAMIR SARDANA said…

I do not blame Chaiwala – He has NO CHOICE ! And nor does Rakesh Tikait – except that Tikait does NOT REALISE that MSP is NOT the solution ! AGRI IS DOOMED – BY AI AND TECHNOLOGY – SOLUTION IS PARTITION !

If farmers get higher rates and higher yield,the GOI takes it back in the form of fertiliser and other prices (which lowers the subsidy bill).OUT OF ALL THE MONEY SAVED BY THE CHAIWALA – by KILLING THE JOBS,the farmers are paid a monthly dole of Rs 1000,AND THE FARMERS ARE MIGHTY THRILLED.dindooohindoo

TRENDING

Whither Govt of India strategy to reduce import dependence on crude oil, natural gas?

By NS Venkataraman*  India presently imports around 80% of it’s crude oil requirement and around 50% of its natural gas requirements . As the domestic production of crude oil and natural gas are virtually stagnant and the domestic demand is increasing at around 7% per annum, India’s steadily increasing dependence on import of the vital energy source is a matter of high energy security concern. This is particularly so, since the price of crude oil and natural gas are considerably fluctuating / increasing in the global market due to geo political factors, which are beyond the control of India. India has promised to achieve zero emission by the year 2070, which mean that the level of emission has to start declining at slow and steady rate from now onwards. It is now well recognized that global emission is caused largely due to use of coal as fuel and natural gas as fuel and feedstock. While burning of coal as fuel cause emission of global warming carbon dioxide gas and sulphur

'Blatant violation' of law by Central government in making NREGA payments

By Our Representative  In September third week, NREGA workers across the country were mobilised for two day so raise their issues and submit a memorandum to the Prime Minister. Organised the NREGA Sangharsh Morcha (NSM), a collective of groups that work with NREGA labourers across the country, workers from 13 states -- Andhra Pradesh, Bihar, Chhattisgarh, Gujarat, Haryana, Jharkhand, Karnataka, Madhya Pradesh, Odisha, Rajasthan, Telangana, Uttar Pradesh and West Bengal -- carried out Kaam Do Abhiyaan, staging demonstrations and rallies against what they called blatant violation of law by the Central government in making NREGA payments. While NREGA has had very positive impacts, it has lately become fruitless, exploiting labour, even though workers who have put in honest hard work have to wait for their wages endlessly, it was suggested.  In such a situation, there is a need to firm up NREGA implementation and end systematic corruption to ensure that workers get their basic NREGA entit

Fascism on prowl? Religious meet 'deeply pained' at silence of Church, bishops, priests

Counterview Desk  The ‘Forum of Religious for Justice and Peace’which held its 17th National Convention at the Montfort Social Institute, Hyderabad, Telangana from 22 to 24 September 2022 on the theme “Deepening our Identity as Religious: Responding to the Signs of the Times”, has expressed concern “at the deteriorating situation of our nation on every front”, especially stating, “Fascism seems to have come to stay” in India. At the same time, the convention, which took place with the participation of 60 persons from 16 states representing 20 religious congregations, in its unanimously-adopted statement added, “We have reached abysmal depths on every parameter: be it social, economic and political”, underlining, “The poor in India become poorer every day; the rich and powerful continue to profiteer at their expense and amass scandalous amounts of wealth.” Text: We, members (63 women and men Religious, from 16 states representing 20 Congregations) of the Forum of Religious for Justice

Muslim intellectuals met Bhagwat, extra-constitutional authority 'like Sanjay Gandhi'

By Shamsul Islam*  In a significant development a delegation of five Muslim intellectuals namely former chief election commissioner SY Quraishi; former senior bureaucrat Najeeb Jung; former AMU vice-chancellor and Lt Gen (retd) Zameer U Shah; politician-cum-journalist Shahid Siddiqui (presently with RLD); and businessman Saeed Shervani [Samajvadi Party] met RSS Supremo Mohan Bhagwat at RSS Delhi headquarters. The meeting was kept secret for reasons known to the participants and was held in August. According to the Muslim intellectuals the meeting held in “a very cordial” atmosphere continued for 75 minutes whereas time allotted was 30 minutes! In a post-meeting justification of the parleys Quraishi stated that their main concern was “the insecurity being increasingly felt by the Muslim community in the wake of recurring incidents of lynching of innocents, calls by Hindutva hotheads for genocide and the marginalisation of the community in almost every sphere”. This delegation consistin

Rajasthan cops 'halt' Gujarat Dalit women's rally: homage to untouchability victim boy

By Our Representative  In a surprise move, the Rajasthan police stopped a Dalit women's rally from Gujarat on the borders after it crossed Gujarat alleging that it would "disturb peace" in village Surana, Jalore district, where the gruesome incident of death of a Dalit boy took place on August 13 after he was brutally beaten up by his teacher on touching the drinking water pot. Sources said, while the Gujarat government had "no objection" in allowing the rally, which originated from the Dalit Shakti Kendra (DSK), an empowerment-cut-technical institute for teens founded by human rights leader Martin Macwan, on September 24 morning, the Rajasthan police stopped it for two and a half hours before allowing it to proceed to Surana. The decision to take out a women's rally was taken at a DSK meeting on September 5 following a condolence meeting of the NGO Navsarjan Trust, also founded by Macwan, activists committed to work against caste-based discrimination, orga

Why Bose's India Gate statue suggests RSS, BJP need violence-loving ‘Hindu’ Netaji

By Prem Singh*  In a TV channel debate, a BJP spokesperson and anchor shared and served a lie that Netaji Subhas Chandra Bose's daughter in her letter to the Prime Minister has alleged that the Congress kept devaluing Netaji to further Gandhi's non-violence; because Netaji had taken the path of liberating the country through violence mode by forming the Azad Hind Fauj (INA). They also praised the Bombay Royal Naval Mutiny of 1946 to confirm that the country got its independence through a violent route. I stated that I have read the letter of Netaji's daughter, and there is no such allegation in it. But a lie told in the intoxication of power is bound to be blatant. Netaji's daughter Anita Bose Pfaff, even in the past, has already requested some earlier prime ministers of the country to bring back the mortal remains of her father from Japan to India. In none of the letters she has spoken about devaluation of her father’s role in the freedom movement on the basis of Gandh

Buddhist shrines were 'massively destroyed' by Brahmanical rulers: Historian DN Jha

Nalanda mahavihara By Our Representative Prominent historian DN Jha, an expert in India's ancient and medieval past, in his new book , "Against the Grain: Notes on Identity, Intolerance and History", in a sharp critique of "Hindutva ideologues", who look at the ancient period of Indian history as "a golden age marked by social harmony, devoid of any religious violence", has said, "Demolition and desecration of rival religious establishments, and the appropriation of their idols, was not uncommon in India before the advent of Islam".

Is coal import dependence of more than 50% by 2047 of any relevance to India?

By Shankar Sharma*  I have read the article " Building Resilience in India’s Power Sector " by N Vedachalam, released by the Observer Research Foundation, with a lot of interest. I expected it to provide few useful recommendations to our authorities in charting out a sustainable pathway to green energy transition much before the climate catastrophe push our communities to the precipice. But I am sorry to say that the overall discussions or the message implied in the article disappointed me. I was expecting the article, coming from an engineer with past experience in the power sector, to discuss the much needed recommendations to put the power sector on a sustainable developmental pathway. But I could notice mostly technical jargon and a lot of statistical information, which may already be available in the public domain.   The article also seems to have simply accepted what some of the official agencies seem to have indicated as inevitable for the power sector in our country;

'True decolonisation move': Demand to name new Parliament building after Ambedkar

By Kancha Ilaiah Shepherd*  In recent weeks, there has been a demand for the new Parliament building being constructed on the revamped Central Vista in New Delhi to be named after the architect of the Constitution and anti-caste leader BR Ambedkar. On September 14, the Telangana Assembly passed a resolution urging the Centre to name the new Parliament building after Ambedkar. The Bharatiya Janata Party was absent during the debate about the resolution. The next day, the Telangana Rashtra Samithi-led government declared that the new secretariat in the centre of Hyderabad would be named after Ambedkar. Chief Minister K Chandrasekhar Rao added that he would write to Prime Minister Narendra Modi requesting him to name the new Parliament building in Delhi “Ambedkar Parliament”. The demand is finding resonance among civil society groups too and has led to social media discussions as well as public mobilisation.  But two questions arise: Should a Parliament that makes laws for a nation over a

Government 'fails to take up' Indian migrants' unpaid wages issue with other countries

By Rafeek Ravuther, Chandan Kumar, Dharmendra Kumar*  The migrant workers were one of the most vulnerable sections during the pandemic. India experiences large-scale movement of migrants internally and internationally. After the outbreak of the pandemic, migrant workers continued to face injustice especially in getting wages in expedited manner. In the international context, India, the home of 9 million cross-border temporary labour migrants, carried out the largest repatriation exercise ‘Vande Bharat Mission’. Even though the Indian government addressed the immediate requirement of repatriation, it failed to understand and recognise their post-arrival grievances, like back wages, social protection etc. Recently many workers were deported from the middle- east region. Amidst the establishment of grievance mechanisms such as Consular Services Management System (MADAD) and helplines in Pravasi Bharatiya Sahayata Kendra (PBSK), the unresolved grievances remain high. The number of unresolv