Economy Poised To Shrug Off Second Wave

Business Standard     11th June 2021     Save    

Context: As the second wave of the pandemic subsides and economic activity revives, those in charge are confident that the economy will shrug off its impact.

Factors depicting the resilience of the Indian economy:

  • Decentralised nature of modern economies: So the aggregate output is hugely resilient in the face of a variety of physical shocks to supply.
    • Manpower, both skilled and unskilled, is plentiful enough to cope with any loss of lives in war or peacetime.
  • Nuanced approach to lockdowns: Instead of a nationwide lockdown, there were localised lockdowns. Interstate travel and transport are on. Firms have adapted to lockdowns, and there were no mindless prohibitions making the fatigues less intense.
  • Availability of vaccines: The availability of vaccines allows a quicker movement towards normalcy. It also affords a measure of protection against a third wave.
  • Improving “twin-balance sheet” problem:
    • Firms, especially large companies, have improved their debt serviceability through a combination of asset sales and deleveraging, cost reduction and lower borrowing costs.
    • Decline in expenditure is an important factor for improvement - the RBI notes that in the first three quarters of 2020-21, revenues declined by 11.6%, while expenditure 15.2%.
    • Indian banks today boast of capital adequacy of 15.9% on average, although the average at public sector banks is lower at 13.5%.
    • The average provision coverage ratio of 75.5% means that bad loans are well provided for.
    • NPAs at banks were 6.8% of advances in December 2020, way below the peak of 11.2% in 2017.
    • The data on moratorium on loan payments and restructuring suggests that the problems are mainly in retail assets and small enterprises, not in large corporate accounts.

Way Forward:

  • Banks have to increase their exposure to small and medium enterprises (SMEs) in order to drive credit growth.
  • As SME lending is riskier than lending to corporations, this cannot happen without a boost to banks’ capital buffers.
  • Government spending must be used for supporting growth by increasing capital at public sector banks and not for greater income transfers, as is widely urged.