“India is growing at around 5.2%, which is not bad, considering the growth rate of other countries. In fact, the global growth rate is propelled by India and China. And if not for them, the rates would have been much lesser,” remarked M R Sivaraman, formerly Revenue Secretary, Government of India.
Speaking at an interaction on the topic ‘State of the Economy' held on 7 September 2019 at Observer Research Foundation, Chennai, Sivaraman said there was a contraction in global growth rates, primarily due to a liquidity preference. “This is on account of fear of an impending recession which compels people to hold on to cash and as such they don’t want to buy goods, services and even short-term bonds,” he said.
Sivaraman also mentioned the need to look at the current slowdown from a ‘Kondratieff cycle’ perspective, which he said was one of the established truths of economic growth after every long-term. According to it, every long-term economic cycle was characterised by alternating intervals of high sectoral growth and intervals of relatively slow growth.
“The steep fall in auto sales has set industry-people worrying. In addition, this dip in sales will also lead to contraction in component purchases from engineers,” noted Sivaraman. Pointing to research statistics, he said that for every new car produced, an additional 3.9 man years of employment was generated, and for every new truck, 2.4 man years of employment, he said.
“This sharp fall in car and truck sales affects the Indian economy comprehensively because the industry is a huge contributor to the growth figures,” remarked Sivaraman. He stated that one reason for the fall in sales could be attributed to the leapfrogging from BS-IV to BS-VI Emission Norms. “Since petrol and diesel have to become BS-VI compliant by 1 April 2020, consumers choose to wait for vehicles also to come compliant with such capacities,” he said.
Another reason for the fall in sales, he believed, was on account of the series of natural disasters in various parts of the country over the last one year. “Will they focus on rebuilding their houses or buying cars? The fall in demand in reasonably prosperous States on account of such disasters will pick-up only when they recuperate from the crises,” Sivaraman noted.
He believed that the government should bring about a rate cut in the GST for the auto industry to help in the pick-up of demand.
Sivaraman remarked that the Non-Banking Financial Companies (NBFCs) were facing a liquidity crunch. “Most NBFCs float short-term bonds and make short-term borrowings from banks but lend out in the form of long-term borrowings, like to the infrastructure sector. The gestation period for such lendouts is very high and therefore there is no inflow, leading to a liquidity crunch. There is no money for meeting even day-to-day expenses,” he pointed out.
He also noted that the government had promised a guarantee of Rs 1 lakh crore to ‘good NBFCs.’
Sivaraman pointed out that though the resolution of Non-Performing Assets (NPAs) was taking place slowly, banks had been able to recoup a lot of money. He also said that they exercise more care now while lending. “Now, with additional capital infusion from the government, Public Sector banks (PSBs) have more money to lend. But will their risk appetite increase? No, because ‘once bitten twice shy’. They are more stringent now while lending, especially after multiple cases of fugitive economic offenders,” he said.
Sivaraman stated that the faith that public had on banks had significantly eroded and that there was a feeling of insecurity with regards to their money with the banks. He also stated that subsidising something which shouldn’t have happened was a moral hazard. “By additional capital infusion, government has made the banks under the Prompt Corrective Action (PCA) framework only ‘seemingly strong’. However, it is also important to note that this additional infusion was needed for meeting working capital needs,” he said.
“Once the PCA framework needs are met, the PSBs can start lending again,” Sivaraman said. On the question as to whether the past NPAs’ recovery would be pursued by the banks, he responded by stating that they will be recovered and will not be allowed to rot.
Sivaraman pointed out that perception mattered in the outlook of the economy. “Industrialists are not optimistic. They do not know for how long this uncertainty will continue. Expectations of a sharp reduction in corporate tax rate didn’t happen, leading to some anger against the government. Added to this is the fact that the increase in personal taxes on the rich and the super-rich affected corporate honchos,” he pointed out.
He also noted that the oil industry had suffered in terms of lack of growth. “Steel production has grown only 1.6%. The cement industry has grown, but not in adequate terms,” he said.
Sivaraman also stated that in order to achieve the $5-T economy, notwithstanding the internal factors, the external environment has to be very favourable. “Even if domestic consumption were to increase, if external consumption remained mute, growth in export-oriented sectors would come down, meaning, overall growth too would come down,” he said.
He pointed out that the total borrowings of India (as % of GDP) stood at 48%, which was one of the lowest in the world.
Sivaraman emphasised that the investors must ensure that their products continue to possess a market beyond the horizon, before making any investments. “It is also important to factor in the increased automation levels and the impact of Artificial Intelligence (AI) on the economy. In Chennai, a number of restaurants have robo-waiters, and information/services in banks are provided by automated machines. We must look at how this will have an impact on employment,” he said.
On the Air India issue, Sivaraman, who was also formerly the Director General, DGCA, said that although the airlines had a debt of around Rs 52,000 crore, he felt it could be transferred to a ‘Special Purpose Vehicle’. “This will lead to more buyers showing interest in acquiring the airlines, as its total property estimates around the world are anywhere between $20-25 billion,” he noted.
This report was prepared by Arjun Sundar, Research Associate, Observer Research Foundation, Chennai.
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