<b>T N Ninan:</b> Ready for a slowdown?

Last weekend’s Ruminations ended by saying that despite the problems confronting a paralysed corporate sector, it was “a minor miracle that an economy constrained by reduced investment levels can still hope to achieve 7.4 per cent economic growth”. That provoked a minor flurry of responses from economist-friends. They warned that the economy was about to slow down, not speed up as government spokesmen have routinely forecast. Their growth forecasts for next year (2016-17) ranged between five per cent and six per cent, using different assumptions and analytical points — from the state of the world economy to the limitations of the government’s track record and capability, from broad institutional constraints on the system to the state of the banking and corporate sectors, and veering also into the technical area of how GDP numbers are put together and how they could be impacted by changes in the different price indices.

These downbeat forecasts may, or may not, be off the mark. On his part, the government’s chief economic advisor, in the mid-year review of the economy released a week ago, has talked more than once of the economy showing signs of recovery. Yet, at the end of a sophisticated review of recent GDP trends, deconstructing complex and sometimes contradictory macroeconomic numbers, he has lowered the projected growth for this financial year to 7.0-7.5 per cent, from 8.1-8.5 per cent projected at the start of the year. Even more importantly, the review’s recommendations on action implicitly suggest that growth next year could slow down — precisely what the private economists too are saying.

The Reserve Bank has added its word of caution. In its annual financial stability report (FSR), released earlier this week, it flags rising concern with the health of the banking system, stating that “risks to the banking sector increased since the publication of the previous FSR, mainly on account of deteriorating asset quality, lower soundness and sluggish profitability”. On the broader domestic front, it notes that “risks arising from erratic climatic conditions, limited policy space, corporate performance…and low investment growth…could pose challenges”.

Where does this leave us? The unhappy truth is that we may be worse off at the end of 2015 than at the start. It is worth recalling the government’s upbeat assessment in its Economic Survey, last February. The economy, it said with a flourish, had “reached a sweet spot — rare in the history of nations — in which it could finally be launched on a double-digit medium-term growth trajectory”. More soberly, the same Survey had noted with good insight that the problem confronting companies and banks was a balance-sheet problem, and therefore that public investment would have to take the lead in spurring growth. Nearly a year later, the data on company debt show the picture deteriorating in terms of some key ratios, not getting better. The RBI has said that the government-owned banks’ health has deteriorated too. And the government’s debt-to-GDP ratio will get worse because rates of interest on its debt are now higher than nominal GDP growth. In other words, the balance-sheet problem has got worse, not better.

Meanwhile, the proposition put out in the mid-year review for dealing with a possible slowdown, that fiscal correction should be halted or slowed, has found few takers. Commentators have pointed out that India’s overall fiscal deficit (Centre and states) is still among the highest in the world, that inflation rates have fallen but remain among the highest if you take the major economies, and (as already noted) the debt-to-GDP ratio is set to go up. Adding to the deficit (and therefore debt) in such a situation could risk the macroeconomic stability that is the one definite economic claim that the government can make.

The culmination of this line of thought is that the country may have to reconcile itself to slower growth (and fewer jobs) till companies and banks sort out their problems. Not a happy year-end thought.