Is India's economic slowdown a passing phase or the new normal? Praveen Chakravarty, Visiting Senior Fellow at IDFC Institute, Sajjid Chinoy, Chief Economist at JPMorgan India, and Ajit Ranade, Chief Economist of the Aditya Birla Group debate the issue. Excerpts:
"Export Hit to Manufacturing
Ranade of Aditya Birla Group argued that slower exports and higher imports are impacting the manufacturing sector, which remains sluggish. Goods exports are highly correlated with manufacturing, said Ranade while adding that poor performance on the export front has translated into weakness in manufacturing.
The manufacturing sector grew at 1.2 percent in the first quarter of the current year.
Ranade blames the strong rupee for the weakness in exports. Chakravarty, while acknowledging that global growth may be a more dominant factor in export growth, questioned whether a relatively overvalued currency could have led to loss of market share in export segments such as textiles.
'I definitely think that exchange rate is a very important factor which impacts not just exports but non-export related industry too.'
Ajit Ranade, Chief Economist, Aditya Birla Group
Slowing Credit Growth to the Economy
While the export slowdown has added to pressure points in the economy, the lack of private investment remains the biggest challenge. Private investment, as measured by gross fixed capital formation, as a percent of GDP, has fallen to 27.5 percent from over 30 percent a few years ago.
Low capacity utilisation continues to be blamed for the lack of fresh investment but Chakravarty points to the close correlation between nominal GDP growth and the flow of credit to the commercial sector. The flow of credit to commercial sector has been declining, shows RBI data compiled by Chakravarty. Given that, the slowdown in nominal GDP growth should come as no surprise, he said.
'The argument being that credit will spur output. So using credit as the lead indicator, a one-year phased correlation works out to be 91 percent.
Praveen Chakravarty, Visiting Senior Fellow, IDFC Institute
A single word describes this phenomenon, said Chinoy. 'Deleveraging.' The process of deleveraging involves credit growth slowing more than nominal GDP growth, he explained.
India is facing what is being termed as a twin-balancesheet problem which refers to highly leveraged corporate balancesheets and, in turn, highly stressed bank balancesheets. Stressed loans, including restructured loans, on the books of Indian banks have risen to 12 percent of total loans, according to a presentation made by Reserve Bank of India Deputy Governor Viral Acharya on September 7. While the RBI and the government have been working to resolve bad assets, particularly through the new Insolvency Law, the process is a slow and grinding one.
This could continue to weigh on the economy, said all three economists."
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