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

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".

Examples of support to Hindu temples, scriptures, saints by 'Muslim' rulers galore

Siya Ram coin issued by Akbar By Bharat Dogra* At a time when the country as well as the world are passing through very difficult times leading to more urgent need for strengthening national unity for meeting several big challenges ahead, unfortunately disputes relating to religious places have been allowed to raise their ugly head once again. It is well-realized by now by many people that it is not historical facts but narrow considerations of political gain and spreading of fanatic ideas of intolerance which are behind such mischief, but due to the increasing threat of mob violence and patronage available at higher levels to groups spreading intolerance many people are reluctant to openly and fearlessly express their views. Hence there is urgent need for broad-based peace committees with wider social support to spread the message of communal harmony and to appeal against the dangers of spreading false messages regarding places of worship which can ultimate

Barefoot women solar engineers join farmers, 'rediscover' benefits of biodiversity

Leela Devi, Monica By Bharat Dogra*  At a time of increasing concern over climate change, contributions of several women, farmers and innovators have given reason for increasing hope in mitigation as well as adaptation work in villages of India. When Leela Devi was married in Tilonia village (Ajmer district of Rajasthan), she had not heard of solar energy. But making use of the existence of solar centre of the Barefoot College (BC) near her new home, she learnt adequate skills within a year to set up rural solar units and assemble solar lanterns. Later as India’s External Affairs Ministry teamed up with BC to start an international program for training women in rural solar energy systems, Leela teamed up with other friends from BC to form a team of trainers. A training programme has been designed for training women as barefoot solar engineers. When I visited the Tilonia campus (before the training program was temporarily discontinued due to COVID) , a group of women (several of them Gr

Swami Vivekananda's views on caste and sexuality were 'painfully' regressive

By Bhaskar Sur* Swami Vivekananda now belongs more to the modern Hindu mythology than reality. It makes a daunting job to discover the real human being who knew unemployment, humiliation of losing a teaching job for 'incompetence', longed in vain for the bliss of a happy conjugal life only to suffer the consequent frustration.

Himalayan tragedy: Labour laws for migrant workers violated at Ramganga dam site

By Bharat Dogra* The extremely tragic death of 10 workers at a tunnel construction site in Ramban on Jammu-Srinagar highway has again drawn attention to the serious hazards faced by workers employed in highways and dams in Himalayan region, several of them in very remote areas. These workers were trapped after a landslide hit the under-construction tunnel on May 19, followed later by one more landslide. Apart from these deaths, the remaining workers suffered injuries. While overall conditions at many such construction sites are known to be hazardous, according to preliminary reports the risks here increased due to sub-contracts which resulted in work being handled by those who did not have much experience or knowledge of such hazardous conditions. Sub-contracting is a common practice in such work and the principal employer gets away with less legal liability for hazardous conditions. Workers face more risks under this system and their rights are adversely affected. This

Why there's strong likelihood India may resurrect its presence in Afghan capital

By Anand K Sahay* Since India evacuated its mission in Afghanistan once the Taliban re-took Kabul last August practically under American aegis, following what came to be called the Taliban’s Doha “negotiations” with the US, New Delhi is evidently doing a re-think. It is considered likely that an Indian representation will soon be restored in Kabul, even if this will be small and not at the level of ambassador. This is reflective of realistic thinking. Of course, there can be no question at present of according recognition to the Taliban regime. That is likely to happen when a broad consensus amongst the leading powers emerges. Currently the Taliban government is not helping its own cause of gaining world recognition- which will help it access overseas funds at a time when the country is in dire straits- by imposing severe restrictions on women and girls in serious violation of human rights. More basic is the issue that the Taliban regime is not considered r

Dalit scholar's comment on Lord Shiva 'harming' Muslims, 'damaging' secular cause

Shahid Siddiqui, Bobby Naqvi By Our Representative   Bobby Naqvi, who is with the "Gulf News", and is a well-known name among Muslim intellectuals, strongly objecting to the social media post of Prof Ratan Lal, has said that "a big reason for majoritarian hatred against Muslims is irresponsible remarks by people like Prof Ratan Lal of Delhi University." In a Facebook comment , which has attracted paise, among others, from journaliat-politician Shahid Siddiqui, Naqvi said, "Their commentary on Hinduism and icons of Hinduism (while angering religious and liberal Hindus alike) also triggers a massive backlash against Muslims. When the likes of Prof Lal criticize Hinduism on social media, Hindus bring Islam and Islamic practices and ask 'what about this' or 'what about that'." Naqvi insists, "Muslims (without their fault) and Islam get caught in this crossfire between the so called Hindu liberal class and the religious Hindus. And the ult

Message to 'high caste' attackers? Dalit leader's daughter rides elephant in wedding march

By Our Representative  In what has been termed as “jumbo celebration”, a Gujarat Dalit rights leader belonging to Saurashtra region ensured that his daughter rides an elephant as part of wedding celebrations which took place in Vadhwan town of Surendranagar district. Natubhai Parmar, who shot into prominence for organising a unique protest against the notorious Una flogging incident in 2016, in which five Dalit boys were flogged as they allegedly slaughtered a cow. Belonging to the Rohit community, whose traditionally live by skinning dead cows, in 2016, Parmar reached Surendranagar district collector’s office with vehicles full of carcasses of cows asking him to organise them disposal of, declaring, his community had decided not to continue with the caste occupation, as it had been termed cow slaughter by saffron vigilantes. The decision to make his daughter ride the elephant, which he brought to Ahmedabad, was to send a message to members of the dominant castes, whose aggressive atta

Govt of India 'ignores' GMO regulation, 'overlooks' Constitutional process

Counterview Desk Dr Narasimha Reddy Donthi, independent public policy expert, in a letter to Nareshpal Gangwar, additional secretary, Ministry of Environment, Forest and Climate Change (MoEFCC), New Delhi, has expressed “seriously concern” that a recent office memorandum (OM) has sought to exempt certain types of gene-edited plants from the country's genetically modified organism  (GMO) regulations, without any reason or basis or representation. Dr Reddy regretted, “Such a serious decision, with an impact scale of unimaginable proportions, in terms of time and ecology, is being pushed through an ordinary office memorandum”, insisting, “This is circumvention of the processes enshrined in Indian Constitution, which has defined democratic participation in matters of critical importance.” Stating that the exemption from regulation is a policy decision and has legal implications, he demanded immediate withdrawal the OM, insisting, the government should take a "strong stand again

This varsity succumbed to extra-academic mobocracy, 'ignored' Hindutva archives

By Shamsul Islam* Open letter to Sharda University vice-chancellor Sub: Discarding a Question on Linkages of Hindutva with Nazism/Fascism is blatant Academic Dishonesty! Dear Professor Sibaram Khara Saheb, Namaskaar! According to your esteemed University’s portal: “The name of University, 'Sharda' is synonymous to 'Goddess of knowledge and learning-Saraswati'. She is identified with 'veena', an Indian musical instrument and the ‘lotus’, where she resides. The lotus in our logo symbolizes the seat of learning that the University is created for.  "Variety of colours signify the variety of disciplines the university offers and the overlap between petals creating new colours demonstrate the ethos of collaboration between students and teachers of different programme, nationality, creed and colour working towards creating new knowledge…the University's cherished mission to provide education beyond boundaries and to facilitate the students and faculty to achie