Why has India’s growth slowed?

Context: Analysing the reason for India’s slowed economic growth.

India’s slowed economic growth: The growth rate of gross domestic product (GDP) had decelerated for three consecutive years starting in 2016-17, falling to 4 % in 2019-20, well before the pandemic struck.

Factors which are supposed to be slowing the growth: While the following factors are thought of as the leading factors behind the slowed growth, their actual impact was quite low.

• Impact of demonetisation:
  • A paper by economist Gita Gopinath and others estimated that demonetisation had caused GDP to fall by two percentage points in one quarter but the impact dissipated over the next few months. This translates into an annualised impact on GDP of 0.5 %.
  • An RBI paper estimated the negative impact on gross value added of 33 basis points.
  • The Economic Survey of 2016-17 estimated an adverse impact on GDP of 0.25 to 0.5 %.
• Implementation of Goods and Services Tax (GST): It is said to have severely disrupted small-scale businesses as they struggled to comply with the requirements of data that is imposed.
• Reluctance of the government to embrace reforms: These include labour reforms, privatisation, administrative and judicial reforms.

Major factor slowing the growth

• Banking Crisis: While banks were constrained in their lending by the high level of bad loans, companies were constrained in their investment by the high level of debt.
  • Starting at 2.95 % of assets in 2011-12, NPAs rose to 4.27 % in 2014- 15 and thereafter to 7.8 % in 2015-16 and 11.18 % in 2017-18. An NPA level of 4.27 % is bad but manageable. A level of 11.8 % constitutes a banking crisis.
  • Contributory Factors for rising NPAs:
    • The sharp increase in NPAs in 2015-17 was not just on account of more loans of the past turning bad. The RBI’s Asset Quality Review (AQR) of 2015 contributed to the increase.
    • High real interest rates, as the monetary policy kept them high, again adversely impacted the demand for credit and hence growth.
    • Failure of I Insolvency and Bankruptcy Code (IBC) regime: The timeline for resolving the stressed assets within 180 days was considered too short by the bankers for the resolution process.
  • Implication of Rising NPA: It has led to a credit crunch. Provisioning for the higher level of NPAs eroded banks’ capital. Between 2008-09 and 2013-14, non-food credit had grown by 14-18 % annually; from 2014-15 to 2017-18, credit growth was down to single digits.

Recovering the banking sector: The good news is that the banking system is in much better shape today.

• Gross NPAs came down from 8.4 % of loans in March 2020 to 7.5 % in March 2021 after the first Covid shock.
• Banks have substantially provided for bad loans — the average provisioning coverage ratio is now 68 %.
• Banks have enough capital to weather further shocks — the average capital adequacy is 16 %, compared to the regulatory requirement of 10.875 %.

Conclusion: There is reason to believe that we will be out of the banking crisis in the near future. More than any factor, it is this prospect that holds out hope of an acceleration in the growth rate.

• Economists Carmen Reinhart and Kenneth Rogoff estimate that an economy takes, on average, eight years to come out of a banking crisis.
• If we mark 2011-12, the year from which non-performing assets (NPAs) started rising, as the beginning of our banking crisis, we are now in the 10th year.