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Is India Economy facing a ‘Great Slowdown’? [Mains Articles]

Seemingly suddenly, India’s economy has taken ill. Indicators of exports, imports, and real government revenues are in negative territory, or close to it. Clearly, this is not an ordinary slowdown. It is India’s Great Slowdown.
By IT's Mains Articles Team
December 26, 2019


  • Why it was in news?
  • Introduction
  • What was the twin-balance sheet problem?
  • Background
  • How country’s GDP is calculated?
  • Suggestions
  • Conclusion

Is India Economy facing a ‘Great Slowdown’?

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Why it was in news?

Recently, former Chief Economic Adviser of said that 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.

Is India Economy facing a ‘Great Slowdown’


  • Until March 2017, the Indian economy was not only growing at a progressively rapid pace but was also the fastest-growing major economy in the world. However, it lost its momentum during 2012-13 due to Twin Balance sheet (TBS) problem.
  • While in Twin Balance sheet (TBS-1 from 2004 to 2011), loans were offered to big corporates in steel, power and infrastructure sectors, which later turned into NPAs, TBS-2 emerged after demonetisation, involving real estate firms and non-banking financial companies (NBFCs).

What is the twin-balance sheet problem?

In the Economic Survey of 2017-18, the former chief economic advisor of India said that Indian economy was facing a TBS problem. The two balance sheets he referred to belonged to the Indian banks (especially public sector banks or the government-owned banks) and the corporate sector, respectively.

the twin-balance sheet problem

He pointed out that the balance sheets of Indian banks were burdened by a high proportion of non-performing loans and the balance sheet of corporates were burdened because they had over-borrowed and were unable to pay.



the twin-balance sheet problem BACKGROUND

  • India’s TBS problem traced backed to the economic boom that happened between 2005 and 2009.
  • During 2005-09, economy was growing at near double-digit growth rates and companies borrowed heavily in the hope of making profits in the future. The banks also lent a lot of money to companies in the hope that this would help boost economic growth.
  • However, after the Global Financial Crisis (GFC) of 2008-09, many companies found that their projects were no longer viable. Hence, companies were left with huge loans they could not pay back in time.
  • This meant that neither the Indian companies were in position to invest nor were the Indian banks in a position to lend. This situation is called Twin Balance Sheet (TBS) problem.

How country’s GDP is calculated?

  • India’s Central Statistics Office (CSO)calculates the gross domestic product (GDP). India’s GDP is calculated with three different methods: i) Output method ii) Expenditure method and iii) Income method.

Expenditure method

GDP (Gross domestic product) = C + G + I + (NX)

C – the total expenditure (demand) by private individuals

G – the total expenditure (demand) by the Government

I – the total expenditure (demand) on investments made businesses in the country

NX (Net export) – the net effect of imports and exports (Exports minus imports).

Why did Indian economy continue to grow between 2010 and 2012 even after the GFC?

Most of the struggling banks were owned by the government and so there was no risk associated with them. On the other side, most companies survived because banks gave them enough time to repay. In fact, many banks actually lent new loans to such companies so that these companies do not became bankrupt. Private consumer demand also pushed during this phase.

What kept the economy going from 2014 to 2018?

  • During 2015 and 2016, international crude oil prices decreased. This meant that Indians could spend more, increasing total expenditure by private individuals, which gave boost to GDP.
  • In 2017 and 2018, non-oil export growth rose (from 8.6 % in 2015-16 to 8.9 % in 2017-18). This increased the Net Export, further boosting GDP. What further helped GDP growth in these years was increased government spending.

In 2017 and 2018, non-oil export growth rose

  • India’s growth was boosted by a lending spree provided by non-banking financial companies (NBFCs). NBFCs played key role in lending to the economy because banks were still struggling with NPAs and were largely unwilling to lend directly to businesses. The credit provided by NBFCs fuelled both private consumption (C) and business investment (I).

What derailed the economy in 2016 and 2017 (TBS-2)?

  • There are two interlinked reasons:
  1. i) Unresolved TBS problem and
  2. ii) Fall of NBFCs and the Real estate sector.

Together, they make for the Four Balance Sheet (FBS) Challenge (Banks, Infrastructure, plus NBFCs and Real estate companies) for the Indian economy.

  • Post-demonetisation, a large amount of cash was deposited in banks, a big part of which was then lent to the real estate sector which wasn’t doing very well at the time. As the downfall was realised, many banks stopped lending to NBFCs. (The NBFCs mainly falls due to the collapse of ILFS (Infrastructure Leasing & Financial Services) in September 2018).
  • The real sector falls due to inability of builder to pay back to the NBFC as most houses remained unsold.
  • Four Balance Sheet Challenge happened even after the introduction of the Insolvency and Bankruptcy Code (IBC) in 2016. As a result, the stressed enterprises faced difficulty as their old promoters have been removed but no new owners have assumed responsibility, their debts were increasing even as their capacity to pay is diminishing and their value as firms was deteriorating at ever increasing cost to the banks that lent to them.


Creation of special resolution mechanisms for Real estate and power sector

These special mechanisms are needed because even a strengthened IBC is not suitable for real estate and power sectors,

Where social considerations are as important as commercial criteria (when builders go bankrupt, prospective owners are left with neither pre-paid money nor flats)

Where public subsidies of one kind or another are inevitable;

Where coordination across government is critical: (demand for power depends on whether the state electricity boards are financially strong enough to buy the power that the public is demanding. Similarly, demand for the stressed assets depends on the pace at which the government phases out environmentally inefficient public sector plants).

Creation of executive-led public sector asset restructuring companies (bad banks)

Government has to take loans off the books of the banks. This will allow banks to focus again on their core business of supporting economic growth. After that, for asset management, a few of the plants could probably be sold off, once their debts are reduced to manageable levels. However, most of the plants would need to be stored until they can be returned to the private sector.

To do this, the government could create a holding company, which would purchase the assets and manage them. The holding company would buy power companies at prices based on the recommendations of independent parties, such as investment banks. Such an open, ruled-based procedure would allow the transaction to be seen as fair by all stakeholders.

However, such holding company take some time to establish, and will require difficult political choices, in particular about how to allocate the costs amongst creditors, promoters, homeowners, and taxpayers.

Other Suggestions

  • There must be a Data circulation among all stakeholders comprising the publication of unreleased reports together with a strategy for improving official statistics in at least three areas: the real sector, fiscal accounts, and stressed assets in the banking system. This will instil confidence and produce a reliable basis for policy.
  • A new asset quality review to cover banks and NBFCs must be conducted.
  • Changes to the Insolvency and Bankruptcy Code (IBC) should be made to ensure that participants actually have incentives to solve the problem.


India’s GDP has been affected by different factors at different times. For example, in the immediate aftermath of the Global Financial Crisis, it was private consumption that bailed India out. However, private consumption has become progressively weaker since 2017 and is today the main worry.

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