Page 16 - 31JAN2020E3

CoverStory

is India’s Great Slowdown, where the economy seems — will not address the current problems.
headed for the intensive care unit.
The situation is puzzling and frustrating in equal IS THE SLOWDOWN STRUCTURAL OR CYCLICAL?
measure. Puzzling because until recently India’s econ- To begin with, since 1991, the medium term drivers
omy had seemed in perfect health, growing according of India’s growth have been exports and investment.
to the official numbers at around 7 percent, the fast- Insofar as consumption has any role in driving rather
est rate of any major economy in the world. Nor has than following growth, there is no serious evidence
the economy been hit by any of the standard triggers that it has been propelled solely by the top decile. To
of slowdowns, called the 3 Fs. Food harvests haven’t the contrary, liberalisation has lifted large segments
failed. World fuel prices haven’t risen. The fiscal has of the population above subsistence levels, allowing
not spiraled out of control. So, what has happened — them to consume marketed products, such as cosmet-
why have things suddenly gone wrong? ics and toiletries, resulting in a long boom in sales of
The government and RBI have been trying vigor- fast-moving consumption goods.
ously to bring the economy back to health. Every few The real question is why demand has suddenly
weeks they announce new measures, some of them
quite major. Most notably, the government has in-
troduced a large corporate tax cut, perhaps the most
sweeping corporate measure ever, in the hopes of Official numbers show
reviving investment; and recently it announced a
plan to privatize four major public sector undertak- that growth slowed in
ings (PSUs).
Meanwhile, the RBI cut interest rates by a cumu- the second quarter of
lative 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 this fiscal year to just
the hopes of reviving lending. But lending continues
to decelerate, and investment remains mired in its 4.5%, the worst for
slump. Hence, the current predicament. It is not obvi-
ous what more can be done to remedy the downturn, a long time. But the
especially because it is still unclear what has caused it.
The study suggests that India’s economy has been disaggregated data are
weighed down by both structural and cyclical factors,
with finance as the distinctive, unifying element. In- even more distressing,
dia 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 infra- says the latest
structure companies — arrived after the Global Fi-
nancial Crisis (GFC), when the world economy slowed Harvard study
and the infrastructure projects started during India’s
investment boom of the mid-2000s began to go sour.
These problems were not addressed adequately, caus-
ing investment and exports, the two engines propel- decelerated. The answers put forward are not truly
ling rapid growth, to sputter. satisfactory: GST and demonetization, for example,
All major engines of growth, this time also includ- surely depressed growth at the time the measures
ing consumption, have sputtered, causing growth to were introduced and might also have had some more
collapse. With growth collapsing, India is now facing durable adverse effects on the rural, informal econ-
a Four Balance Sheet challenge — the original two omy, but by 2017-18 the economy was rebounding
sectors, plus NBFCs and real estate companies. In this strongly.
situation, the standard remedies are no longer avail- So something else must have triggered the down-
able. Monetary policy cannot revive the economy be- turn now, two years later. And while there may be
cause the transmission mechanism is broken. Fiscal merit in the argument that policy uncertainty might
policy cannot be used because the financial system be dampening economic activity, its link to aggre-
would have difficulty absorbing the large bond issues gate demand is tenuous and difficult to establish. The
that stimulus would entail. The traditional structural annual average growth of investment collapsed by 10
reform agenda — land and labour market measures percentage points; credit to industry and profits by

16