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Current Affairs

Credit flow and growth

Date: 03 December 2019 Tags: Basics of Economics

Issue

India’s nominal GDP in Q2FY20 is the lowest in more than 16 years at 6.1 %. The slowdown has been exaggerated by the extraordinarily low inflation and the 4.5% y-o-y growth in GDP is the lowest since Q4FY13.

 

Background

The nominal GDP has grown by just 6.1% y-o-y in a quarter when nominal government spending jumped 18.9% y-o-y, the biggest increase in 30 quarters. But the government spending likely to be constrained due to poor tax collections.

 

Details

  • The government has cited weakening global growth as a reason for India’s sharper-than-expected growth slump.

  • But India is a relatively closed economy, and domestic factors have played a bigger role in lowering the growth numbers.

  • when the economy is slowing, it is expected that tax collections too, will slow. And since the denominator, the nominal GDP, will be lower, the deficit-to-GDP will go up even more.

  • The fiscal deficit for the April-October period is at 102% of GDP. Much of the increase in the deficit is because the government has spent more , Rs 16.55 lakh crore versus Rs 14.55 lakh crore in the corresponding period of 2018-19.

  • The output of the core sector contracted 5.8% y-o-y in October, slightly more than it did in September. Demand for cars was subdued in the festival month, and has fallen in November.

  • Sales of two-wheelers fell 14% y-o-y in October, suggesting poor rural demand. Also, sales of commercial vehicles were weak, crashing by 23% y-o-y.

  • Consumers are not willing to spend, especially on big ticket items such as homes. Since there is no quick fix for the compression in credit growth, the growth in Q3 and Q4 will not be meaningfull.

  • One big reason why consumption demand has tapered off is rural stress. With prices of agri goods collapsing, farm incomes have been badly hurt.  Unless many more jobs are created, it is hard to see consumption getting a boost.

  • The services sector is in big trouble since the financials of a couple of large telcom players are fragile following adverse regulation. These companies are laying off people in large numbers.

  • The biggest challenge is to unclog credit flows to industry both small and large. This looks virtually impossible because banks have turned risk averse and are staying cautious in due to an extremely tough environment . This year has seen more than 3,300 companies being downgraded so far.

  • The lending by NBFCs has slowed sharply over the past year at 34% y-o-y in Q2FY20, with several of them in financial trouble.

  • With credit flows tight, more companies are likely to default on loan obligations, which, in turn, means rising loan losses.

  • There is the danger of many small and mid-sized businesses closing down, leading to more job losses.