ECONOMY IN

DISARRAY
What's Wrong and What to
Do About it

Ishan Jharkharia
Anirudh Anil Ojha
 Overview

Reasons for Economic Slowdown

NBFC Crisis
Impact of NBFC Crisis on Economy
Measures and Suggestions
 "12 OUT OF 16 EARLY
ECONOMIC INDICATORS
DISPLAYED A
DETERIOARATION IN YoY
GROWTH IN JUNE 2019"

ADITI NAYAR
PRINCIPAL ECONOMIST, ICRA
 REASONS FOR
ECONOMIC
SLOWDOWN

Economic Disruption due to Structural Reforms

Tight Monetary and Fiscal Policy
Sluggish Global Economy
Rural Distress
Middle-income Trap
NPAs in Financial Sector
ECONOMIC DISRUPTION DUE TO
STRUCTURAL REFORMS 

DEMONETISATION, GST REFORMS,

NOV 16 JULY 17
Blow to consumption, Knock-on effect on Export
vicious cycle of job loss Growth due to delay in
and low income leading refunds to exporters
to further drop in demand (in the year of
(Multiplier effect) implementation)
 TIGHT MONETARY AND FISCAL
POLICY

MONETARY POLICY FISCAL POLICY

Hard interest rates Decreased Government
maintained by the RBI to spending in infrastructure
control inflation, leading to lower fiscal deficit,
to constricted spending in leading to no economic
an already struggling stimulus
economy (no pump-priming)
 SLUGGISH GLOBAL ECONOMY

US-CHINA RISING OIL

BREXIT
TRADE WAR PRICES
US-China tariff war and Ongoing Brexit Rising crude oil prices
other trade conflicts negotiations created a after a long period of
led global trade sense of ‘pervasive price decline would
volumes of uncertainty' lead to inflationary
manufactured goods downgrading global pressure
to contract growth
 RURAL DISTRESS

Non-food inflation exceeded food inflation in past

two years
Resulted in income transfers from rural to urban
areas
Declining rural wage growth, farm distress and
liquidity crunch led to a reduction in household
savings
This impacted the Consumer Staple Sector due to
decreased consumption
 MIDDLE-INCOME TRAP

India has an ever-increasing gap between different economic strata

Indian economy is primarily driven by the power of its consumers
(consumption-led growth) and not trade (export-led growth).
The lack of inclusive growth can lead to economic stagnation as
the demand of people on the top of the country’s socio-economic
pyramid begins to exhaust itself.
The greater the gaps between strata, by this analysis, the slower the
upward mobility of families that are at lower levels.
 NON-PERFORMING ASSETS

Late or non-payment of loans results in them becoming Non-

Performing Assets (NPAs).
NPAs have increased due to relaxed lending norms adopted by
banks, especially to the big corporate houses, foregoing analysis of
their financials and their credit ratings.
This leads to a vicious cycle wherein bad debts and Demand
Collapse lead to no lending and no fresh investment in addition to
any consumption.
NPA ratio worsened throughout UPA II term, as it began improving
by fiscal 2019, NBFC stress started building up.
 NBFC CRISIS

IL&FS DHFL RELIANCE HOME

Infrastructure Leasing & The CR of Dewan Housing FINANCE
Financial Services (IL&FS) ran Finance (DHFL) and PNB
The credit rating of Reliance
out of money in 2018. The Housing Finance was
Home Finance, a Housing
government had to step in and downgraded and they were put
Finance Company (HFC), was
supersede the board to avert a on credit watch. This made
downgraded to “default”,
blow up leading to banks being raising money to fund
implying they faced trouble
averse to lending to NBFC operations an uphill task for the
paying their dues.
sector shadow banks.
 WHAT IS THE NBFC CRISIS?

India’s Non-Banking Financial Companies (NBFC) sector provides

services similar to traditional commercial banks but outside normal
banking regulations.
This sector is passing through a turbulent period following a series
of defaults by IL&FS and the subsequent liquidity crunch as banks
are wary of lending to it due to a rising risk-perception
“There is a credit squeeze, over-leveraging, excessive concentration,
massive mismatch between assets and liabilities, coupled with
some misadventures by some very large entities, which is a perfect
recipe for disaster,” Corporate Affairs Secretary on NBFC Crisis
SYSTEMIC RISK IN NBFC CRISIS
"Financial sector doesn't function in silos"

Stress in NBFC percolates faster than that in PSBs - greater

interconnectedness
If there is a default, then banks and mutual funds won’t be able to
recover the money lent to NBFCs. The overall market sentiment
ends up taking a beating.
For corporates, raising money from NBFCs is comparatively easier
than from banks. Therefore, if the shadow banks fail, the funding
tap will run dry for individuals and businesses seeking loans.
 IMPACT ON ECONOMY

NBFCs are important as they were lending in sectors where banks

refused to go or did not want to go.
Now that NBFCs are finding it difficult to raise money or having to
pay a huge cost for doing so due to their tainted reputation, this
will choke the flow of credit to the economy.
It will hit the Micro, Small and Medium Enterprises (MSME) sector
which is already suffering from the twin blows of demonetisation
and the Goods and Services Tax (GST).
 IMPACT ON REAL SECTOR

A slowdown in credit due to NBFC crisis lead to another pile of non-

performing assets (NPAs) in sectors such as commercial real estate
and infrastructure, which had economy-wide knockdown effects.
The real estate sector has forward and backward linkages with 250
ancillary industries.
When the real estate sector slows down, many other sectors, right
from steel and cement to furnishings, paints, etc., slow down too.
IMPACT ON AUTOMOBILE SECTOR

A deepening liquidity crunch among NBFC’s in India has been the

biggest single factor in an auto sales collapse, which some fear may
lead to more than a million job losses.
Non-banking finance companies (NBFCs) have dramatically slashed
lending following the collapse of one of the biggest, IL&FS, in late
2018.
To aggravate matters, the stress in the autos market has also
prompted banks to begin trimming their exposure to the sector.
 HOW TO DEAL WITH IT?

Evaluate the business models of NBFCs - sustainability, credit

underwriting standard, risk management architecture and how
they are taking care of provisions (planning for Black Swan events).
RBI should launch an Asset Quality Review (AQR) to deal with not-
so-impressive quality of assets of NBFCs.
RBI should not allow large banks to have NBFCs as their
subsidiaries, e.g. HDFC, Kotak Mahindra, which allows for regulatory
arbitrage and leads to compromised interests. This would reduce
the bank’s exposure to high risk ventures.
NBFCs must cut their growth aspirations to focus on realisation and
liability size.
MEASURES AND
SUGGESTIONS
HOW TO PREVENT THE ECONOMIC
SLOWDOWN?
 GOVERNMENT REFORMS
LAND REFORMS
Land acquisition laws need reform
LABOUR REFORMS
Ease labour laws to encourage employmentTAX REFORMS
TAX REFORMS
Fresh investments can now come to India with lower, competitive
tax rates

Profit-making companies should pass on a part of the benefits - due

to corporate tax cut and other reforms - to consumers by lowering
their product prices as that would also help increase their sales and
increasing consumption.
 SPENDING IN RURAL AREAS

Increasing rural people’s incomes can drive up the consumption

demand, which in turn will boost the industry.
To create more demand the Government needs to spend more in
rural areas, construction sector and the unorganised sector.
Government must improve the quality of healthcare, education
and skill development for the deprived masses as a long term
measure to prevent middle-income trap.
 OTHER REFORMS
Leverage Opportunities Presented by Trade war
The government must try to bring in foreign investment by making
the companies more productive, reducing trade restrictions, and
identifying gaps in the trade value chain that can be capitalised
Let Indian Rupee be Weaker
Stronger rupee is hurting both the exports and the business.
Imports are surging and they are eating into the domestic market
share.
Lower Lending Rates
The Reserve Bank needs to cut interest rates for banks, thereby
making borrowing cheaper for the industry and spurring
investment.
THANK YOU!