The slowdown in the Indian economy could be cyclical, with deep structural problems that requires urgent reforms, according to the annual report of the Reserve Bank of India (RBI) released on Thursday.
The macroeconomic environment remains “unsettled and financial markets are experiencing considerable flux” as the financial year 2019-20 progresses, the report said.
“The key question that confronts the Indian economy as it looks ahead to the rest of 2019-20 is: are we dealing with a soft patch, or a cyclical downswing, or a structural slowdown? This will determine the policy responses.”
“The recent deceleration could be in the nature of a soft patch mutating into a cyclical downswing, rather than a deep structural slowdown. Nonetheless, there are still structural issues in land, labour, agricultural marketing and the like, which need to be addressed,” the annual report said.
State of the economy
While diagnosis is difficult, and "hard to disentangle cleanly”, there was a broadbased cyclical downturn is underway in several sectors – manufacturing; trade, hotels, transport, communication and broadcasting; construction, agriculture and real estate. Issues and challenges in these sectors need to be addressed for achieving broad-based upturn, the report said.
“Reviving consumption demand and private investment has assumed the highest priority in 2019-20. This may involve strengthening the banking and non-banking sectors, a big push for spending on infrastructure and implementation of much needed structural reforms in the areas of labour laws, taxation, and other legal reforms, which will also enhance ease of doing business in pursuit of fulfilling the vision of India becoming a $ 5 trillion economy by 2024-25,” the report said.
For now in India, a recovery in investments is losing momentum. While consumption drives the demand in India, “phases of sustained high growth in the economy are usually triggered by investment upturns and vice versa.”
The investment rate – measured by the ratio of gross capital formation to GDP (gross domestic product) – had fallen to 32.3 per cent in 2017-18. While it was staging a ‘tenuous recovery’ from the second half of 2017-18 “when in a span of barely 12 months, it is losing that momentum,” the annual report noted.
Surveys show higher than trend level of capacity utilisation, which should trigger new investments, but the capex cycle remains muted, which indicated that the firms are preferring to intensely utilise existing capacity to meet demand rather than expand it. Slump in sales is also impacting sentiments.
“What ails the animal spirits? At the core is the issue of domestic demand. And what should be the policy focus? Continuing focus on improving ease of doing business; reforms in factors of production, viz., land and labour; capitalising on opportunities opened up by the heightened trade tensions; and faster implementation of capital expenditures by public authorities, and similar other measures have the potential to inject growth impulses into the economy,” the annual report pointed out.
The farm sector needs urgent reforms, such as more cold storage facilities, and reforms in market mechanism, for doubling the farmers’ income.
The Financial Sector
In the financial sector though, banks are staging a recovery, thanks to recpitalisation, while insolvency and bankruptcy code (IBC) is proving to be a game changer.
The gross non-performing assets (GNPA) ratio of the banking system declined to 9.1 per cent in March 2019, from 11.2 per cent in the previous year, due to “steadfastly pursued recognition, repair and resolution.”
Fresh slippages declined and the system-level provision coverage ratio rose to 60.9 per cent, after hovering around 50 per cent until recently. Capital buffers have strengthened by recapitalisation of the order of Rs 2.7 trillion, including the budgetary allocations for 2019-20, it said. “The abatement of stress has rekindled bank credit flows, which are getting broad-based,” the report noted.
The overall objective, according to the RBI, “is to ring-fence future build-ups of NPA stress and protect the banking sector.”
However, in the non-banking financial companies (NBFC), there was “irrational exuberance and considerable overleveraging, with asset-liability mismatches.”
The value and volume of banknotes in circulation increased by 17 per cent and 6.2 per cent to Rs 21 trillion and 108,759 million pieces, respectively, during 2018-19.
“There was a sharp increase in the value of ₹500 banknotes in circulation—from 42.9 per cent to 51.0 per cent over the year.”
During 2019-20, the focus will be on refining the liquidity forecasting framework, sharpening the estimation of currency in circulation at various frequencies (such as yearly, quarterly, monthly, fortnightly and weekly) and an overall reviewing of operational aspects of the liquidity management framework, including aspects relating to structural liquidity balance and distributional asymmetry in liquidity, the RBI said.
Interestingly, the report said the RBI will allow international settlement of central government securities by International Central Securities Depositories (ICSDs) to permit non-resident clients of ICSDs to transact in central government securities offshore.
“This would open up a new channel for non-residents to undertake transactions in central government securities,” the annual report said.
RBI’s Balance Sheet
The balance sheet size of the Reserve Bank increased by 13.42 per cent to Rs 41,02,905 crore for the year ended June 30, 2019. While income for the year 2018-19 increased by 146.59 per cent, the expenditure decreased by 39.72 per cent. The year ended with an overall surplus of Rs 1,75,987 crore as against Rs 50,000 crore in the previous year, representing an increase of 251.97 per cent.
The macroeconomic environment remains “unsettled and financial markets are experiencing considerable flux” as the financial year 2019-20 progresses, the report said.
“The key question that confronts the Indian economy as it looks ahead to the rest of 2019-20 is: are we dealing with a soft patch, or a cyclical downswing, or a structural slowdown? This will determine the policy responses.”
“The recent deceleration could be in the nature of a soft patch mutating into a cyclical downswing, rather than a deep structural slowdown. Nonetheless, there are still structural issues in land, labour, agricultural marketing and the like, which need to be addressed,” the annual report said.
State of the economy
While diagnosis is difficult, and "hard to disentangle cleanly”, there was a broadbased cyclical downturn is underway in several sectors – manufacturing; trade, hotels, transport, communication and broadcasting; construction, agriculture and real estate. Issues and challenges in these sectors need to be addressed for achieving broad-based upturn, the report said.
“Reviving consumption demand and private investment has assumed the highest priority in 2019-20. This may involve strengthening the banking and non-banking sectors, a big push for spending on infrastructure and implementation of much needed structural reforms in the areas of labour laws, taxation, and other legal reforms, which will also enhance ease of doing business in pursuit of fulfilling the vision of India becoming a $ 5 trillion economy by 2024-25,” the report said.
For now in India, a recovery in investments is losing momentum. While consumption drives the demand in India, “phases of sustained high growth in the economy are usually triggered by investment upturns and vice versa.”
The investment rate – measured by the ratio of gross capital formation to GDP (gross domestic product) – had fallen to 32.3 per cent in 2017-18. While it was staging a ‘tenuous recovery’ from the second half of 2017-18 “when in a span of barely 12 months, it is losing that momentum,” the annual report noted.
Surveys show higher than trend level of capacity utilisation, which should trigger new investments, but the capex cycle remains muted, which indicated that the firms are preferring to intensely utilise existing capacity to meet demand rather than expand it. Slump in sales is also impacting sentiments.
“What ails the animal spirits? At the core is the issue of domestic demand. And what should be the policy focus? Continuing focus on improving ease of doing business; reforms in factors of production, viz., land and labour; capitalising on opportunities opened up by the heightened trade tensions; and faster implementation of capital expenditures by public authorities, and similar other measures have the potential to inject growth impulses into the economy,” the annual report pointed out.
The farm sector needs urgent reforms, such as more cold storage facilities, and reforms in market mechanism, for doubling the farmers’ income.
The Financial Sector
In the financial sector though, banks are staging a recovery, thanks to recpitalisation, while insolvency and bankruptcy code (IBC) is proving to be a game changer.
The gross non-performing assets (GNPA) ratio of the banking system declined to 9.1 per cent in March 2019, from 11.2 per cent in the previous year, due to “steadfastly pursued recognition, repair and resolution.”
Fresh slippages declined and the system-level provision coverage ratio rose to 60.9 per cent, after hovering around 50 per cent until recently. Capital buffers have strengthened by recapitalisation of the order of Rs 2.7 trillion, including the budgetary allocations for 2019-20, it said. “The abatement of stress has rekindled bank credit flows, which are getting broad-based,” the report noted.
The overall objective, according to the RBI, “is to ring-fence future build-ups of NPA stress and protect the banking sector.”
However, in the non-banking financial companies (NBFC), there was “irrational exuberance and considerable overleveraging, with asset-liability mismatches.”
The value and volume of banknotes in circulation increased by 17 per cent and 6.2 per cent to Rs 21 trillion and 108,759 million pieces, respectively, during 2018-19.
“There was a sharp increase in the value of ₹500 banknotes in circulation—from 42.9 per cent to 51.0 per cent over the year.”
During 2019-20, the focus will be on refining the liquidity forecasting framework, sharpening the estimation of currency in circulation at various frequencies (such as yearly, quarterly, monthly, fortnightly and weekly) and an overall reviewing of operational aspects of the liquidity management framework, including aspects relating to structural liquidity balance and distributional asymmetry in liquidity, the RBI said.
Interestingly, the report said the RBI will allow international settlement of central government securities by International Central Securities Depositories (ICSDs) to permit non-resident clients of ICSDs to transact in central government securities offshore.
“This would open up a new channel for non-residents to undertake transactions in central government securities,” the annual report said.
RBI’s Balance Sheet
The balance sheet size of the Reserve Bank increased by 13.42 per cent to Rs 41,02,905 crore for the year ended June 30, 2019. While income for the year 2018-19 increased by 146.59 per cent, the expenditure decreased by 39.72 per cent. The year ended with an overall surplus of Rs 1,75,987 crore as against Rs 50,000 crore in the previous year, representing an increase of 251.97 per cent.
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