Weak global demand biggest challenge: Finance ministry

Need to resolve bad loan problem of state-owned banks to increase credit supply

Weak global demand is among the “strongest challenges” in the near term for Indian economy, the finance ministry said on Wednesday, while outlining the need for resolving bad loans problem of state-owned banks to increase credit supply.
It said banks have passed on less than half of the 1.50 per cent rate reduction benefit to consumers between January 2015 and August this year and, hence, the transmission of monetary policy has remained incomplete.
“Weak global demand is one among the strongest challenges in the near term. Exports and imports together constitute 42 per cent of the GDP (gross domestic product), even at the reduced levels in 2015-16,” the ministry said in its background note for the 2-day Economic Editors’ conference beginning Thursday.

It identified the twin balance sheet problem of stressed financial positions of some large corporates leading to stressed assets of banks which might affect private investment as a “critical challenge”.
The gross non-performing assets (NPAs) of public sector banks (PSBs) increased sharply from 5.4 per cent in March 2015 to 9.8 per cent in March 2016, mainly on account of cleaning up of their balance sheets.
“The problem of non-performing assets needs to be resolved and bank lending needs to pick up. Already there are some signs of improvement,” the ministry said.

According to the Reserve Bank of India (RBI)’s Financial Stability Report, the proportion of leveraged companies declined sharply from 19 per cent in March 2015 to 14 per cent in March 2016 and their share in the total debt also declined from 33.8 per cent to 20.6 per cent.

The ministry said creating quality jobs is the imperative of the time and hence the government has focused its efforts on removing impediments to job creation, including addressing shortage of skills to the workforce.
The ministry noted however that reviving the savings and investment cycle in economy is challenging. The savings rate that stood at 34.6 per cent in 2011-12, declined to 33 per cent in 2014-15. Investment rate declined from 39 per cent of GDP in 2011-12 to 34.2 per cent in 2014-15.
The International Monetary Fund (IMF) has projected India to grow at 7.6 per cent in 2016-17 and 2017-18, while World Bank has estimated India to maintain a robust growth of 7.6 per cent in 2016 and 7.7 per cent in the following two years.

“This growth compares favourably with the growth of 3.2 per cent achieved by the global economy and 4 per cent by the emerging market and developing economies as a block in year 2015. Thus, against the global background, the current Indian growth is remarkable,” the ministry said.
It said that while RBI has cut rates by 1.50 per cent since January last year and brought repo rate down to 6.5 per cent at the end of August, “the transmission of monetary policy has remained incomplete. The reduction in average base rate has only been nearly 0.62 per cent”.