The slowdown in the Indian economy could be cyclical, with deep structural problems requiring 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 report said. State of the economy While diagnosis is difficult and “hard to disentangle cleanly”, there was a broad-based cyclical downturn 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. For now, 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”. “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.The investment rate — measured by the ratio of gross capital formation to GDP — had fallen to 32.3 per cent in 2017-18. 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 report noted.
Surveys show higher than a trend level of capacity utilisation, which should trigger investment, but the capex cycle remains muted, which indicated that firms are preferring to intensely utilise the existing capacity to meet demand rather than expand it. A slump in sales is also affecting sentiment. “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 report said. The farm sector needs urgent reforms, such as cold storage facilities and reforms in the market mechanism, for doubling the farmers’ incomes. The financial sector Banks are staging a recovery, thanks to recpitalisation, and the 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 this year 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 overall objective, according to the RBI, “is to ring-fence future build-ups of NPA stress and protect the banking sector”. However, in non-banking financial companies (NBFC), there were “irrational exuberance and considerable overleveraging, with asset-liability mismatches”. In 2018-19, retail electronic payment transactions increased by 59 per cent to Rs 23.3 billion from Rs 14.6 billion in the previous year, resulting in an increase in the share of electronic transactions in the volume of retail payments to 95.4 per cent during the year from 92.6 per cent in the previous year. In this context, the conduct of monetary policy “had to be two-sided to contend with opposite shifts in evolving inflation and growth dynamics”. During 2019-20, the focus will be on refining the liquidity forecasting framework, sharpening the estimation of the currency in circulation at various frequencies, 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. The RBI will issue draft guidelines on corporate governance in banks, and a revised standardised approach for calculating minimum capital requirement for operational risk in order to align the current regulatory framework with global best practices.