The recently released Economic Survey does not seem very upbeat about the economy in their reports. Similar assessment is of the RBI on the economic slowdown in the country. However, the biggest cheerer, however, has been the normal south-westerly monsoon this year. Otherwise the economy's prospects would have looked gloomier. Both manufacturing and mining growth has slackened due to excessive inventories and there has been a near stagnant output of oil and oil refineries' products.
What is very worrying is that new investment announcements have fallen to a 12-year low in the first quarter of the current financial year. Capital goods production, so important for the GDP growth through the multiplier effect, has slowed down over time. There is low capacity utilisation and that is why machinery does not get replaced or refurbished. It is also alarming to see from the RBI Industrial Survey that business optimism is waning regarding the pick-up of demand conditions across all sectors, capacity utilisation, profit margins and increase in employment.
On the whole, the service sector is not looking too bad. The transportation subsector and freight carriage by air both rose on an annual basis. The hospitality sector has picked up with the help of more tourist arrivals and there has been an increase in passenger air traffic. The telecommunication subsector has been doing well and has shown sustained growth in the subscriber base and voice and data services.
Internationally, foreign investors seem to be upbeat about India's growth potential. Perhaps they are betting on a stable reformist government at the Centre to remain in charge of the economy for a while. Net FDI inflow doubled in April-May and went mainly to manufacturing, retail and wholesale trade and business services. FIIs have made net purchases of $15.2 billion in domestic debt and equity (July 31) and Forex reserves are higher at $392.9 billion. And the rupee has hardened against the dollar which is not good for exports.
So what is the main prognosis? Something is holding back India's growth and is leading to a lack of confidence in the business minds that is coming in the way of their undertaking new investments. There is global uncertainty for sure — regarding the new policies that President Trump might unleash and there is a lack of robustness in global demand.
But the main factors affecting the mood seem to be the two balance-sheet problems of banks and corporations. Both need immediate remedial action. The NPAs have to be reduced to make public sector banks healthy again. There is much corporate deleveraging going on and corporations are selling assets to reduce their debt ratios but it only shows the degree of stress and pile-up of unpaid debt that is stressing the corporate sector.
Unless the mountain of banks' NPAs (at Rs 10 trillion now) is removed, the economy would not pick up and GDP growth would suffer. According to the former Vice-Chairman of Niti Aayog, Arvind Panagariya, a solution to the NPAs will lead to faster credit expansion.
