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Worrying signs

In his first policy review since taking over as Reserve Bank of India Governor, Urjit Patel said that the central bank would deal with the bad loan situation “with firmness but also with pragmatism”. Irrespective of the assurances, the Indian public has to contend with the fact that the bad loan problem may get a lot worse in the coming months before any possible recovery. In a report filed by the noted international news agency, Reuters, bad loans in the Indian banking sector grew by 15 percent to approximately Rs 9.25 lakh crore ($138.5 billion) in June from Rs 8.08 lakh crore ($121 billion) in December 2015. The report cited numbers obtained from a Right to Information request. It further indicates that public sector banks account for 88 percent of the stressed assets. Financial analysts across the board have suggested state-run banks will require a much higher infusion of capital than the amount the Centre has pledged thus far. Finance Minister Arun Jaitley has assured the banks of his administration’s support. To the uninitiated, NPLs refer to loans which have not been serviced for 90 days or more. In the event of a restructured loan, banks change certain terms like interest rates, a moratorium on interest repayment and so on. Under the previous RBI governor Raghuram Rajan that data on bad loans was made available by Indian banks, once he ordered an asset quality review.  The central bank has set a March deadline for banks to reveal bad loans on their books thoroughly. NPLs as part of the stressed loans total jumped to about $101 billion, from $65 billion in December, Reuters reported. “Adding to the banks’ woes, the data shows another Rs 1,93,000 crore ($29 billion) worth of loans as of June that were not yet classified as 'stressed' but on which borrowers are more than 60 days behind on interest or principal payments, putting those at high risk of becoming NPLs,” according to a Mint report. Although the central bank and the government have both announced various measures to manage stressed assets, nothing much has been resolved. The ocean of bad debts has a negative cascading effect on not only banks but also the Centre’s attempt to revive investment growth, kick-start domestic manufacturing and bring stability back to the Indian economy. Has the Modi government found a way to crawl out of this web?

What it does know is that bank credit (loan) to the industrial sector has contracted for the first time in a decade.  “For the month of August 2016, the loan outstanding of scheduled commercial banks to the industrial sector contracted by 0.2 percent,” the Indian Express reported. Critical sectors like textiles, construction and petroleum have witnessed a sharp slump in bank credit. What’s worse, many leading economists believe that the RBI’s recent decision to cut the repo rate by 25 basis points will not spur the credit growth required to kick-start the secondary sector. In other words, a cut in the central bank’s short-term interest rates may not fuel the investments needed. Over the past couple of years, demand in the Indian economy has tanked to a point where capacity utilisation across industries still averages approximately 70-75 percent. Under these circumstances, it is hard to fathom any investor spending his hard earned cash and a minor 0.25 percent cut in lending rates will not suffice. India’s industrial output, meanwhile, has shrunk for the second consecutive month, falling by 0.7% in August. In July, the Index of Industrial Production had dropped by 2.5%. Insufficient private investment is a major stumbling block in the Centre’s urgent need to create more jobs for the burgeoning labour market. Prime Minister Narendra Modi’s pet project, ‘Make in India’ program, was set up to create these jobs, especially in the manufacturing sector.  This has not happened. Instead, the unemployment rate in India has shot up to a five-year high of 5 percent in 2015-‘16, according to an annual report by the Ministry of Labour and Employment. The figure is significantly higher at 8.7 percent for women as compared to 4.3 percent for men. Experts have pegged the manufacturing sector as the saviour for greater employment generation. But the Indian manufacturing sector today is highly automated. Thus, a booming manufacturing sector will contribute to higher growth, but not necessarily more jobs. Also, the pattern of hiring in the corporate sector has also changed, with an emphasis on increased productivity rather than greater absorption of labour.

The government has a lot on its plate—cleaning up of banks, dwindling credit growth, a faltering industrial sector, increasing unemployment and falling exports. These markers are threatening economic expansion and investment. Of course, the Centre possesses no magic wand to make these problems disappear. But it must acknowledge them and maintain its focus on fixing them.  
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