With the coming of a new decade, the Indian economy faces a bunch of new problems. GDP growth has slowed down to 4.5% in the Q2 of the fiscal year 2020, the government is sure to miss its fiscal deficit target for the year and the gross non-performing assets (NPA’s) have touched 9.1%, the highest among the emerging markets. The situation, however, is expected to get worse in the coming decade, at least for the initial few years. The World Bank in its Global economic prospects report has lowered India’s GDP growth forecast to 5% for the year 2020-2021, and 5.8% for the year 2021-2022. The world bank cited “lingering” credit weakness emanating from non-banking financial companies (NBFCs) as one of the key reasons for the downgrade.
If the slow credit growth wasn’t bad enough, things are made worse by the rising NPA’s. The gross NPA’s are expected to rise to 9.9% next year. What can be the possible reasons that got us into this problem? Well, there is a section that holds former RBI Governor YV Reddy responsible for India’s NPA crisis. The rising credit growth during his tenure when the economy was growing at over 9% is said to have led to overheating. While others blame the United Progressive Alliance (UPA) for the same. A new perspective was added by former governor Raghuram Rajan who blames the lack of due diligence on part of the banks for the crisis.
Well, this is all past news but what concerns us now is how will the government and RBI deal with this situation. As the World Bank said in its report that the credit growth is expected to slow down in the next few years, the government finds itself in a tricky situation. In order to boost the Indian GDP growth, the government needs private sector investment to pick pace, but this may not happen as the private sector seems reluctant to make any new investments. To help lift the Indian economy, the government has come out with a slew of measures. We have already seen the government reduce the corporate tax rates to 22% from the earlier 30% last year and the Finance Ministry is mulling a reduction in the income tax rate to boost the consumption in the economy. Though it is still not clear as to whether the government will come out with a fiscal stimulus for the economy in the current fiscal year or wait for the budget.
In the new decade, we will see what measures the government introduces in the budget to stabilize the economy. We may even see the fiscal deficit target get revised upwards. Then there is the consolidation of a number of banks that is bound to happen, this will lead to the emergence of some large banks. This consolidation is expected to lead to better governance of banks and might even help deal with the NPA problem. In the coming year, we can hope the government manages to pull the Indian economy back on track.