Why 2018-19 holds the promise of delivering above-normal growth

Yet, if 8% eludes, it'll be due to legacy issues to do with banks and companies-the stubborn "twin balance sheet" problem of excessive debt, writes T N Ninan

By all accounts, the new financial year will be a year of recovery. Buoyed by the prospect of a normal monsoon and a return to normalcy after a period of disruptions, the economy is generally predicted to deliver growth that is distinctly better than the trend rate for India, post-financial crisis, of 7.0 per cent. Five of the last 10 years have seen sub-seven growth rates, while three have seen growth touch 8 per cent or more. Of those three, one year saw double-digit growth. The objective of policy should be to achieve more even growth henceforth with clear acceleration.

The changes in economic tempo during the past decade are explained mostly by the onset of the crisis of 2008, the sharp recovery that followed, and the big swings in oil prices that first depressed growth and then boosted it. There have also been consecutive drought years that affected agriculture. Only the slowdown of the last one year can be attributed to deliberate government action. Against this backdrop, 2018-19 promises to be a better-than-normal year that should logically deliver above-normal growth.

Inflation is well within the band set for monetary policy. The monsoon has been forecast to be normal. Oil prices have moved up, but no one expects it to go up much further. There has been some fiscal loosening, but not by much. The trade deficit is growing, and capital inflows have slackened, so that there is some pressure on the rupee—but since the currency is clearly over-valued, this happens to be what the doctor would have ordered. In any case, the over-all inflows continue to be such as to deliver a net increase in foreign exchange reserves.

Meanwhile, an upturn has already been reported in the numbers on industrial production, which has grown at 7 per cent since November—compared to less than half that previously. Non-oil exports last year recorded the first real growth in five or six years. One should have hoped that the good news would continue and that the new year would deliver over-all economic growth closer to 8 per cent—especially since favourable winds have been blowing around the globe. The world economy is tripping along at a growth rate of close to 4 per cent, and world trade has recovered smartly after a slump.

Yet, if no one is predicting 8 per cent, it will be on account of legacy issues to do with banks and companies—the stubborn “twin balance sheet” problem of excessive debt that has received much attention since at least 2015. Resolving it through the new bankruptcy process has just got under way, and will take another couple of years to work itself through. The early indications are that troubled debt owned by large companies would translate into an average write-off of about half the loan amount, and a sharper hair-cut in the case of smaller companies. If the loan provisioning is as it should be, the banks may not need to take too much of an additional hit on the existing problem loans. As for companies, four out of every 10 are said to be unable to pay even the interest on loans. Their fate hinges on the economic upturn, revenue growth and improved margins—all of which has been predicted for long, but may finally materialise in the new year.

Meanwhile, management issues with banks, especially but not only those owned by the government, remain to be addressed. The usual window-dressing by banks at the tail end of the last financial year managed to boost credit growth to 10.3 per cent, but it was barely half that rate in mid-February—reflecting a more accurate position on the credit front. What is more, such growth in credit as is taking place is going to individuals, not companies. Clearly, the financial system is still a drag on the economy and underlines the need for improving banking practice, regulation and oversight. Without that, and an end to the cronyism that caused part of the problem, one can kiss good-bye to 8 per cent growth.