In a report by The Indian Express, former Chief Economic Adviser Arvind Subramanian has called the current economic slowdown as the “second wave” of the Twin Balance Sheet (TBS) crisis which will soon turn into a “Great slowdown.”
Subramanian said in a draft working paper for the Harvard University’s Centre for International Development, “Clearly, this is not an ordinary slowdown. It is India’s Great Slowdown, where the economy seems headed for the intensive care unit.”
While Subramanian was CEA to the Narendra Modi government in 2014, he had flagged the TBS problem. In his new paper for the Harvard co-authored by the former head of the International Monetary Fund’s India office Josh Felman, Subramanian draws parallels between the first YBS crisis and the current situation that is likely to become TBS 2.
The original TBS was regarding the loans granted to steel, power and infrastructure companies during the good investment period of 2004 to 2011 that took a sharp wrong turn. Whereas, TBS 2 is a post-demonetization effect involving real estate firms and non-banking financial companies (NBFCs).
Post-demonetisation, a large amount of cash was deposited in banks, a big chunk of which was then lent to the real estate sector which wasn’t doing very well at the time. According to Subramanian, the fall of the IL&FS in September 2018 was a result of several factors and not only the huge-sum of Rs 90,000 crore-plus debts of the infrastructure debts.
Towards the end of June 2019, there were a total of 10 lakh houses accounting for Rs 8 lakh crores in top eight cities of India. Soon the downfall was realised and many banks and mutual fund firms stopped lending to NBFCs. On which Subramanian and Felman argue, “In some ways, this may have been India’s version of the US housing bubble.”
The decision to stop lending money also created pressure in banks as some of them had accumulated credits of about 10-14% of their loan books to NBFCs. Amid blacklisting of the NBFCs, which had emerged as the major source of money lending for small businesses, the commercial credit flow collapsed from Rs 20 lakh crore in 2018-19 to “virtually nothing” in the first six months.
Subramanian and Felman say that India is facing another TBS crisis along with the dues of the original TBS which is speeding up the downfall of the economy in current times. The duo says that the current slowdown is extremely worrisome and the decreased GDP growth to 4.5 per cent in the second quarter of 2019-20 is not the sole reason.
They say, “The growth of consumer goods production has virtually ground to a halt; production of investment goods is falling. Indicators of exports, imports, and government revenues are all close to negative territory. These indicators suggest the economy’s illness is severe…[this] slowdown seems closer to the 1991 balance of payments crisis.”
