The ill-conceived demonetisation and ill-timed rollout of the Goods and Services Tax have been widely blamed for India’s current economic problems. A recent working paper co-authored by former chief economic adviser Arvind Subramanian and Joshua Felman, IMF’s senior resident representative in New Delhi, again attributes the slowdown to the November 8, 2016 note ban. The paper claims that excess liquidity at banks in the aftermath of demonetisation found its way to Non-Banking Financial Companies (NBFCs). Most of the money lent to NBFCs finally ended up funding overpriced real estate projects, especially in Mumbai and Delhi, that led to what Mr Subramanian calls the Twin Balance Sheet (TBS) crisis — a technical phrase indicating that both lenders and borrowers are in trouble.
The slowdown also indicates the failure of the banking system. It’s caused by lazy tactics used by banks to get business. Of late, the banks found it easier to lend money to NBFCs and microfinance companies than to get their hands dirty by lending to people directly. If banks lend people or businesses directly, the Reserve Bank ensures that lenders don’t have excessive exposure to any one sector. But neither the lender’s management nor the RBI bothered to check the final destination of NBFC loans, which became an albatross on the economy. The most unpalatable feature of the working paper for the Narendra Modi government is its authors’ labelling the current slump as “India’s Great Slowdown” and comparing it with the infamous incident in India’s economic history, the 1991 balance of payments crisis. One needn’t tell Prime Minister Narendra Modi about the importance of simple words, if they catch people’s imagination. Let’s hope Mr Modi takes some immediate remedial measures swiftly to prevent the Great Slowdown from turning into another Watergate for him.
