Arvind Subramanian, former chief economic adviser to the Indian government, has said that the economy is experiencing a second wave of the Twin Balance Sheet (TBS) crisis and is in the middle of a 'Great Slowdown', reports The Indian Express.
“Clearly, this is not an ordinary slowdown. It is India’s Great Slowdown, where the economy seems headed for the intensive care unit,” he said, in a draft working paper for the Harvard University Centre for International Development, co-authored with economist Josh Felman.
The TBS crisis refers to when companies took loans from banks during the economic boom of 2004-2011, but couldn't repay after the economy took a downturn resulting in a high percentage of non-performing assets (NPAs) with banks.
‘India’s Version of The US Housing Bubble’
According to Subramanian and Felman, the second wave (TBS-2) happened because, post-demonitisation, a lot of cash was deposited into banks as old notes were turned in. Banks lent this money to non-banking financial companies (NBFCs) which, in turn, invested heavily in the real estate sector.
When one of India's top NBFCs, IL&FS defaulted in September 2018, the markets woke up to find that a lot of NBFC lending was concentrated in real estate – a sector which wasn't doing so well.
“In some ways, this may have been India’s version of the US housing bubble.”Arvind Subramanian and Josh Felman
Banks became more cautious and cut their lending, which meant that NBFCs, which relied on banks, had to stop lending as well. This, according to the paper, has made the flow of commercial credit dry up to "virtually nothing" in the first half of FY20.
Subramanian’s observations coincide with rating agency Moody's prediction that India's NBFC crisis is far from over. "Banks in India, Mongolia, Sri Lanka and Vietnam... have lower starting capital ratios and higher starting problem loan ratios," the rating agency said, according to IANS.
Subramanian and Felman, according to The Indian Express, conclude that the unresolved TBS crisis and the new TBS-2 have together pushed the Indian economy into a downward spiral.
Earlier, in June 2019, the former chief economic adviser had invited controversy by claiming that India's growth had been overestimated by around 2.5 percentage points, between 2011-12 and 2016-17.
He had also, in 2018, called demonetisation “a massive, draconian, monetary shock” that accelerated the economic slide from 8 percent to 6.8 percent.
(With inputs from The Indian Express and IANS)
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