Even as the government works on longer-term measures to revive the economy, it must find a way for businesses and individuals to be able to access loans and, at the same time, speed up payments so cash flows back into the economy.
Given the festive season was around the corner, one would have expected companies to have ramped up production somewhat in September. Under the circumstances, the sharp contraction in the IIP, to an eight-year low of a negative 4.3% year-on-year (y-o-y), comes as a bit of a shock. To be sure, auto manufacturers have been producing less in order to reduce inventories that piled up after the weak 2018 festive season. But, demand is clearly weaker than perceived and consumer confidence severely dented; else, how does one explain a near 10% y-o-y contraction in consumer durables? The infrastructure and construction sectors have been sluggish for a long time now, and it is possible the the late rains in many parts of the country exacerbated the situation. So, the poor data from this segment isn’t a big surprise. Neither is the steep 21% y-o-y fall in the capital goods segment because very few companies are adding capacity as the investment data has shown us. But, the discourse should now move on to how soon the economy can come out of the trough it has fallen into.
Right now, it would appear that, among other factors, tight credit conditions are making it hard for all, except for top-rated borrowers, to access loans at affordable rates, and this is hurting demand and business. After the NBFC crisis which started in August 2018, companies and individuals have been finding it harder to get affordable loans; disbursements by NBFCs and HFCs fell 32% y-o-y in Q2FY20—led by a 36% y-o-y drop at NBFCs—while bank credit growth slowed to 8% y-o-y. Overall loan growth seems to have slumped to 6%, as analysts at Credit Suisse have pointed out, these are levels seen during demonetisation. Even as the government works on longer-term measures to revive the economy, it must find a way for businesses and individuals to be able to access loans and, at the same time, speed up payments so cash flows back into the economy. One can’t blame lenders for being risk-averse since it is a fact that credit profiles of most companies are far from robust and, in many cases, are deteriorating. The onus is now on the government to spend more; schemes such as the Rs. 25,000 crore fund for the real estate sector will go some way in reviving demand. However, over the longer term, the government must ensure that regulation is unbiased, else, we will see wealth destruction of a colossal magnitude as we have seen in telecom. Moreover, investments by global corporations, as indeed local players, will slow down. It is no surprise that key sectors such as defence have attracted such little FDI. Without an investment revival, there is little hope of the economy clocking more than 6%.