From a position of strength

The slumping Indian economy could now look towards days of restoration as the Union Finance Minister Nirmala Sitharaman offered measures to contain the economic slowdown. Addressing her second press briefing, her major announcements seek to give the industry a leg-up. This press conference comes just a day after RBI released its annual report and shortly before the GDP figures for the first quarter of FY20 will be announced. The highlight of Friday's press conference was, as speculated, a large-scale consolidation of public sector banks as a corrective measure for the ailing economy. This massive change comes after chief executives of ten state-run banks (which were seen as the top contenders for the merger) were consulted with the competent authority of the Union. RBI was also previously consulted for this purpose. It was on August 23 that the Union Finance Minister announced a slew of measures to nurse the ailing Indian economy back to health. These measures included an upfront release of Rs 70,000 crore to public sector banks, steps to remedy the slowdown in the auto sector, improve taxes compliance, and help MSMEs. Rs 55,250 crore upfront capital for credit growth and regulatory compliance are immediate steps to support the economy. The Union Finance Minister confirms that this step goes beyond the urgent purpose of consolidation and aims for growth in the longer term. Bank boards are also given the power to enhance the sitting fee of non-official directors as some administrative enhancements are also proposed. The aim is to strengthen the bank board committee; some specialised risk officers from the market are also to be appointed. With the merger of the banks, the boards will have more power to exercise and the number of public sector banks will come down from 27 to 12. Two prominent banks: Central Bank of India and Bank of India will continue their national presence, while Indian Bank and Allahabad Bank will be merged along with Andhra Bank, Union Bank, and Corporation Bank. From south India, Canara Bank and Syndicate Bank would be brought together to form the fourth-largest PSB with the business of Rs 15.20 lakh crore, as per the Finance Minister's announcement. Punjab National Bank, Oriental Bank, and United Bank will be consolidated to create the second-largest bank with a business of over 17.95 lakh crore; this will also have the second-largest branch network of 11,437 branches. After the consolidation, Bank of Baroda, Dena Bank, and Vijaya Bank, see no retrenchments and the best practices of all three banks are adopted for the benefit of all, announced the Finance Minister. It is declared that 14 out of 18 PSBs are now in profit and gross NPAs are down from Rs 8.65 lakh crore to Rs 7.9 crore. Loan recovery is said to be at a record high and gross NPAs have been reduced. With respect to administrative measures, selection for Banks Board Bureau is going to be professional and devoid of any political interference. Such is the intention to avoid Nirav Modi-like situations. SWIFT messaging has been linked to Core Banking System and specialised agencies will monitor every loan above Rs 250 crore. In order to create a strong foundation for the financial sector, the issue of liquidity will be adequately addressed. Sitharaman has announced that "Liquidity is reaching NBFCs, specially the housing finance companies. Four NBFCs have already found solutions related to liquidity with PSBs". Addressing the economic situation, the very first steps pertain to the banking sector.

John Lanchester wrote in How to Speak Money that "GDP can be thought of as a measure not so much of size… It measures the movement of money through and around the economy; it measures activity." It goes without saying that economic activities add to the GDP (the sum of private consumption expenditure, investment, government expenditure and net exports which excluded imports); one man's spending is another man's income. So as to bring order in the exchange of money, the role of banks is indispensable. The cycle of acquiring and spending money keeps in motion the cycle of economic activity and GDP. The urgency acknowledged on Friday evening was in the wake of the palpable slowdown of the economy since the start of 2019. The GDP growth from January to March 2019 had slowed down to 5.8 per cent. Looking at economic activity in the period of April to June 2019, it may be safely said that GDP growth would have slowed down further during the period. The slowdown in the last quarter reflects a slump in investment before the election but high-frequency indicators since then suggest that the economy's lack of momentum has persisted. The major contributors to the economy's investment pie are households and private corporations, their spending holds the key for reviving broad-based investment activity in the economy. Despite the current state of affairs on the economic scene, the long-term growth prospect of the Indian economy is positive given its imposing demographic dividend. India is blessed with one of the fastest-growing service sectors in the world with an annual growth rate of over 9 per cent since 2001. This contributed to 57 per cent of GDP in 2012–13. India has become a major exporter of IT services, BPO services, and software services. The IT industry continues to be the largest private-sector employer in India which is also the second-largest start-up hub in the world with over 3,100 technology start-ups in 2018–19. The Indian automobile industry is one of the largest in the world with an annual production of 21.48 million vehicles (mostly two and three-wheelers) in 2013–14. And when the economy is visibly under a crisis, it was the auto sector, which is facing the worst crisis in nearly two decades, that first gave away how critical the situation really is; the tremendous amounts of job cuts in this sector have been speaking volumes of the ailing economic situation. The economic slowdown is a matter of grave concern as market-based economies thrive on hope and belief of profit by private entrepreneurs. In the times of negative market sentiments, the government increases its expense to bring back hope. Prior to Friday's announcement, it was widely talked about that just when the government needs more money, tax collection has grown by just 1.4 per cent. So far has been the slowest growth rate of GDP since 2014-15. The previous low was 6.39 per cent in 2013-14 following which the Modi government swooped to power in 2014. With aggravated concerns of economic slowdown ominous signs show how deep the slowdown really is. The health of real estate is also a critical indicator of the state of Indian economy as it has links with about 250 ancillary industries (bricks, cement, steel, furniture, etc.) and affects them all if there is a boom or gloom in the sector. The volume of unsold houses over the past one year has increased in the top cities of the countries. According to real estate research company Liases Foras, the unsold inventory currently stands at 42 months. This indicates that it will take about three-and-a-half years for the existing unsold inventory (read flats/houses) to clear up. An efficient market maintains 8-12 months of inventory. Addressing the core issues of the economy and resorting to a top-down approach, the Finance Ministry has braced itself to contain the slowdown for the time being and boost economic growth in the long run.