In the paper titled “India’s Great Slowdown: What happened? What’s the way out?”, Arvind Subramanian, along with IMF’s former India head Josh Felman, discuss the reasons for India’s current economic slowdown.
The paper argues that India’s “growth is feeble, worse than it was in 1991 or indeed at any other point in the past three decades,” both Subramanian and Felman state that the economy is headed for an Intensive Care Unit. He argues that India is facing four balance sheet challenge.
What is the ‘four balance sheet challenge’?
In his latest paper named ‘India’s Great Slowdown’, Arvind Subramanian mentions the new ‘Four balance sheet challenge’. The Four Balance Sheet challenge includes the original two sectors – infrastructure companies and banks, plus NBFCs and real estate companies.
Where do the roots lie?
The roots of India’s Four balance sheet challenge can be traced back to the Twin balance sheet problem. Subramanian discussed the twin balance sheet challenge in great detail in the Economic Survey of 2016-17. Twin balance sheet problem was a result of India’s over-leveraged companies and bad loan-saddled public sector banks. During the boom period of the mid-2000s, state-run banks kept on lending while the corporate sector — especially nfra companies — saw a period of robust growth fuelled by easily available credit.
How banks and infra companies failed?
India Inc started taking on more risks and accumulating more debt on its books. But as clearances for land and environment started showing signs of delay and financing costs began to escalate, debt servicing became an issue for companies. The failure on the part of the infrastructure companies to service debt reflected in the stress that started building on the balance sheets of state-run banks
What caused the ‘four balance sheet challenge’?
After the unexpected collapse of NBFC behemoth IL&FS, the markets began taking note of the wider issues that plagued the shadow banking sector. It carried a debt of Rs 90,000 crore on its books. NBFCs were a major participant in financing the real estate sector’s growth. But, when demand tapered, debt servicing by builders became difficult and the NBFC balance sheets started accumulating stress resulting in what became a four balance sheet problem.