EXPERT ANALYSES THE GREAT SLOWDOWN AMIDST SIGNS OF A TURNAROUND

Former Chief Economic Adviser Arvind Subramanian has said India is facing a “Great Slowdown” with its economy headed for intensive care unit primarily due to a “second wave” of the twin balance sheet crisis at banks.

Subramanian, who was Modi government’s first Chief Economic Adviser but quit in August last year, in new paper co-authored with the former head of the International Monetary Fund’s India office Josh Felman, said India is facing a “Four Balance Sheet” challenge — comprising banks, infrastructure, plus NBFCs and real estate companies — and is trapped in an adverse interest growth dynamic. “Clearly, this is not an ordinary slowdown. It is India’s Great Slowdown, where the economy seems headed for the intensive care unit,” he wrote in a draft working paper of the Harvard University’s Centre for International Development.

Subramanian had flagged the twin balance sheet (TBS) problem — debt accumulated by private corporates becoming non-performing assets (NPA) of banks — back in December 2014, while he was CEA to the Modi government.

In the circumstance, “standard remedies for getting out of the current predicament aren’t working. Monetary policy is stymied by a broken transmission mechanism, which impedes the pass-through of cuts in policy rates to lending rates. And the scope for fiscal stimulus is limited since fiscal deficits are already close to double-digits (when properly measured) and larger bond issues will only further crowd out the private sector, by pushing up already-high interest rates.”

GROWTH WILL REBOUND

Arvind Panagariya (Indian- American economist and a professor of economics at Columbia University, who served as first vice-chairman of the government of India thinktank NITI Aayog between January 2015 and August 2017) differs and argues that history shows there have been ups and downs in the past too and that the Indian economy has recovered when economists had predicted end of the growth story.