Budget 2019: Liquidity crisis to weigh down subsequent quarters? Financial Express Online Survey of economists throws light

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Published: July 2, 2019 10:45:24 PM

Union Budget 2019: India has several economic challenges to confront in the next few months, some of which will find space in the forthcoming Budget 2019.

Budget 2019: Liquidity crisis to weigh down subsequent quarters?Union Budget 2019 India: While efforts are on to not just inject adequate liquidity but also generate enough confidence in the system, there is uncertainty over how long the crisis is likely to prevail.

Union Budget 2019: India has several economic challenges to confront in the next few months, some of which will find space in the forthcoming Budget 2019. Slowing GDP growth, global trade wars, employment and rural distress are some of the top ones. However, the most immediate fire that needs to be doused relates to the liquidity problem being faced by the financial sector with its attendant undesired spill over into the real economy. While efforts are on to not just inject adequate liquidity but also generate enough confidence in the system, there is uncertainty over how long the crisis is likely to prevail. That is the finding of the Financial Express Online Budget Survey of eminent economists and analysts prior to Budget 2019. A majority of those polled were uncertain about the liquidity problem spilling over into the next few quarters. Some of those polled felt that the crisis will impact subsequent quarters as well. A lesser number were positive about the impact not spilling over into subsequent time periods.

CII in its comment said that a lot depends on how the NBFC crisis plays out. “Any more defaults could lead to rising risk aversion and shortage of credit even if liquidity is available”, the industry body told Financial Express Online. Sachchidanand Shukla, Chief Economist of Mahindra Group pointed out that it is not so much of a liquidity issue now, but, more of a solvency issue. “Large groups going bust can have a domino effect, it can continue to play in the minds of people’, he said. Arihant’s Whole Time Director Anita Gandhi felt the IL&FS problem was deep-rooted. “Many financial institutions have lent money to it. The quantum is quite big. NBFC crisis is also not completely sorted out. Demand is lower in real estate. Therefore, it may take time to recover”, she said.

The government has already taken several steps to address the liquidity issue and has sent out, what some say, policy signals on how it will deal with the solvency issues related to this crisis. But, even given these steps, some feel the pain will persist for some more time. “A lot of action has been initiated on the liquidity front, especially for NBFCs that have fuelled credit demand and consequently consumption demand. They have to find ground till the negative effects are neutralised. We could experience pain for another quarter or two”, said PWC’s Ranen Banerjee.

Some see the crisis continuing for a part of the financial market and not the entire industry. Madan Sabnavis of CARE Ratings felt the crisis will spill over for NBFCs but not for banks. Sharekhan’s Sanjeev Hota too felt the crisis is not over completely and that it will impact certain pockets.

There are some policy prescriptions as well which could set the tone for Budget 2019. “If the government sets up a special refinancing facility for NBFCs without any delay then there will not be a spill over of liquidity to the forthcoming quarters”’ suggested Rupa Rege-Nitsure, Group Chief Economist, L&T Finance Holdings. Vikas Vasal, National Leader – Tax, Grant Thornton India too pinned hope that the issue will get addressed through policy changes and intervention by the government. It remains to be seen how RBI and Budget 2019 move forward to address this critical issue weighing the economy down.

Edelweiss’ Sandeep Raina felt the situation is improving. Radhika Rao from DBS expects liquidity conditions to be supportive, with the target moved from neutral to moderate surplus. For one of the participants – a large lender – the issue goes beyond liquidity. “What is lacking confidence to lend. The regulator and the government need to provide the requisite confidence to the banking system to lend. One way to provide confidence is to ensure that honest mistakes will not be punished”, a representative told Financial Express Online, laying out the contours of a constructive policy response to this crisis.

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