First, fix the banks: 

First, fix the banks

Context:

From a peak of 9.2 per cent in January-March 2016,  India’ GDP growth has fallen every successive quarter.

Introduction:

  • India’s Gross Domestic Product or GDP growth rate has slumped down to 6.1 per cent in the January-March period, lowest in more than two years.
  • The Reserve Bank of India (RBI) revised its growth projection to 6.7 per cent for the current fiscal, from 7.3 per cent earlier, due to lower kharif foodgrain production and disruptions arising from the implementations of GST.
  • This alongwith the stressed assets in banks and their decreased lending ability, has made it hard for the economy to recover with Private sector being the worst hit.

Which sectors are hit?

1-       Manufacturing sector:

  • The manufacturing sector, led the growth tumble, expanding by just 1.2% in.
  • This was the worst quarter for Indian manufacturing sector.
  • Overall industrial output also collapsed to 1.6% growth from 7.4% a year ago and 3.1% in the previous quarter.

2-       Construction sector:

  • The construction sector that has been the bulwark of job creation grew by just 2%(in GVA terms) as it grapples with the headwinds of a new regulatory regime(RERA).

3-       Service sector:

  • The service sector offered some stability, growing at 8.7% compared with 9% in the same quarter last year, but a deeper look suggests this was driven by a rise in trade-related GVA to 11.1%.
  • Agriculture GVA dipped from 2.5% in the first quarter of last year to 2.3%, though crop output increased healthily, such as animal husbandry, have dragged down the sector’s overall growth.

Why growth has fallen?

A number of factors could be responsible for this:

  • Increased NPA’s in banks- With the banking sector finding it hard to recover from the crisis, the investment is finding it hard to recover. Massive tightening of working capital has affected the bulk of entrepreneurs across the country, especially public sector banks (PSBs). These entities, comprises 21 “nationalized banks” and six of the State Bank of India group, account for almost 70 per cent of the assets and liabilities of the system-split 48 per cent among the former and 22 per cent in the latter. Non-performing loan assets (NPAs). According to the RBI’s Statistical Tables Rating to Banks in India 2015-16, NPAs were 3 per cent of gross advances of all banks in India in 2013. By 2016, NPAs had grown to 9.3 per cent. The financing squeeze had played a big role in decelerating growth
  •  After the global financial crisis of 2008, large corporations conceived major projects proposals in capital-intensive sectors such as power, ports, airports, housing and highway construction. Banks were only too keen to lend, often without sufficient evaluation of risks and returns.
  •  Merchandise exports:  One of the major reasons for the current deficit is the greater increase in merchandise imports than export.    
  • Increase import of Gold: Imports increased because of a rise in demand for gold (almost threefold) due to the upcoming festive season and tweaks in trade pacts with countries such as South Korea.
  •  ServicesFall in exports of Services due to domestic industry issues and increased protectionism worldwide.
  • Agricultural vows :Shortage of agricultural goods and lower farm growth due to erratic monsoons, decreased government spending, hoarding, black marketing, inefficient procurement etc.
  • Demonetisation: The effects of demonetisation such as reduced purchasing power, supply side inflation with decreased procurement of raw material, increased transportation costs, delayed payments, etc. Here, the effects on the real estate and construction sector have been specifically marked.
  • Introduction of GST: The consequences of new tax regime such as uncertainty, delayed payments, increase in prices of commodities, increased vows of informal sector, etc.
  • Delayed reforms:  In the long term, Delayed reforms such as Labour reforms (with no exit policy in India) and liberalisation discourage foreign investors to set up firms in India.

How have the PSBs behaved in such circumstances?

  • With large losses on account of heavy provisioning and bad loans eroding their balance sheets, they have curtailed loans and advances.
  • From a growth of around 15 per cent four years ago, PSB advances grew by just 3 per cent in 2015-16.

What are the solutions?

  • Recapitalising  the Public sector banks so that these can get back to lending. With the solutions such as a’Bad Bank’ or the Public asset rehabilitation agency.
  • Suspend the fiscal road map for a limited period in order to pump prime the economy through increased capital spending by the government.
  • Government Policies should focus on country’s development and people should give ideas for better governance.
  • Niti Aayog Vice Chairman said transformational ideas are the need of the hour to boost economy.
  • There is a need to modernise agricultural sector to increase productivity and income of farmers.

Conclusion:

Recapitalising  the Public sector banks so that these can get back to lending. It will raise their enterprise value, which can then be leveraged through selective divestment. The RBIs has also taken steps to clean up bad loans. This is a welcome step to improve the health of the banking sector, especially public sector banks.

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