Identifying the slowdown

The Indian economy has started showing signs of a slowdown after an unprecedented and prolonged growth streak. India has been the fastest-growing emerging market, outperforming China from 2014 till 2019.

However, according to IMF’s database, India is marginally behind China in GDP growth rate terms for 2019, where India stood at 6.124% and China’s GDP growth is 6.14%. (IMF , 2019) Moreover, India’s GDP growth rate has fallen to its lowest level since 2014. (IMF , 2019) The figure 1 below, comprises of GDP growth rates for India and China.

Figure 1.

Source: World Economic Outlook, October 2019, IMF

Furthermore, after assessing internal productivity indicators the picture starts to look grimmer than ever before. Conferring to MOSPI press release, 18 out of 23 industries have shown negative growth during October 2019 as compared to the corresponding month of the previous year. (MOSPI, 2019)

In figure 2 below, it is apparent that the production growth of consumer non-durables has come to a standstill and capital goods production growth has been negative for the entire 2019.

Figure 2.

After evaluating the aforementioned Macro-economic indicators, it is safe to say that the Indian economy has been facing challenges that have to be addressed, otherwise, this down-trend could easily translate into a vicious downward helix.

The Core Issue

The root cause of this abrupt slowdown is the Four Balance Sheet (FBS) Crisis in Banking, Infrastructure, NBFCs, and Real Estate industries. A Balance Sheet crisis is when widely held and highly leveraged assets lose their value due to a fall in prices and pose a systemic risk to an economy. (Gjerstad & Smith, 2013)

Stressed firms (firms that are not able to service their loan repayments) accounted for 40% of the Total Indian Corporate Debt. (Subramanian & Felman, 2019)

All major Indian banks are encumbered with bad loans; which account for 9.5% of total banks’ assets, this NPA ratio is the highest in the world. This situation is severer with PSU Banks where NPA ratio is 12% and this is where the main problem lies. (Subramanian & Felman, 2019) Figure 3 below is a comparison between NPAs of India and China.

Figure 3.

Source: The World Bank, Database 2019

These non-performing assets (NPAs) are worth ₹ 9.2 Lakh Crores but this does not show the entire picture as there are additional ₹ 2.5 Lakh Crores in loans that are under inter-creditor agreements and not classified as NPA. (Subramanian & Felman, 2019) However, in essence, these are also stressed assets for banks and should be reported as NPAs.

Talking about recourse, through the Insolvency and Bankruptcy Code (IBC) only ₹ 2 Lakh Crores have been resolved with just ₹ 83,000 Crores recoveries. (Subramanian & Felman, 2019)

NBFCs also have been facing a similar problem but their NPAs are majorly concentrated in the real estate sector. This can be concluded from the fact that NBFCs account for almost ₹ 2.5 Lakh Crores in loans given to the Real Estate sector. (Subramanian & Felman, 2019)

Real Estate and Infrastructure sectors are overleveraged and have been unable to cover loan repayments, causing a negative ripple effect for banks and NBFCs. To quantify the problems of the Real Estate sector, there are around 10 Lakh unsold units at end-June 2019 in top 8 cities in India. This unsold inventory is worth ₹ 8 Lakh Crores and if a wider set of cities is considered then almost ₹ 13 Lakh Crores worth of real estate has been unsold. (Subramanian & Felman, 2019)

These 4 sectors are the core of complications for our economy. If these issues are not taken care of, then any policy or measures will prove insignificant in rectification.

Secondary concerns for the slowdown

Some secondary concerns have also contributed to the slowdown which can be segregated into 2 categories which are as follows:

  • Structural problems: labor restrictions, land laws, overall governance, and income inequality.
  • Cyclical problems: decreasing aggregate demand, demonetization, GST reform, money tightness, and policy uncertainty.

Factors helping the economy until now

These problems have existed for a while but were not binding until now. The impact from Balance Sheet Crisis had been suppressed due to the following factors:

  • Fallen Global Crude Oil Prices – international crude oil prices started declining in mid-2014 and by 2016 had collapsed to one-third of their earlier prices. Between 2015-2017, this gave a boost of almost 1.5% to GDP growth rate.
  • Real depreciation of rupee – Indian economy saw a rise in non-oil exports because the rupee fell by 13% in real effective terms by late 2018. Thus, boosting world demand for Indian products as rupee became cheaper.
  • Fiscal stimulus (Government Expenditure) – In 2017, the central government shifted its spending off-budget into public sector units like Food Corporation of India (FCI) and National Highway Authority of India (NHAI). This has led to a consolidated fiscal deficit of 8.8% of GDP, this is the highest since GFC. (Subramanian & Felman, 2019)
  • NBFCs Credit Boom – After Demonetization, banks ended-up with large cash amounts that were lent to NBFCs. Later, NBFCs went on a lending spree which resulted in a credit boom.

Due to these above-mentioned factors, the negative impacts of the Balance Sheet Crisis did not affect our economic growth till now. However, the push from these factors has faded away.

Trigger of slowdown

The collapse of ILFS was the trigger of the slowdown. Its impacts were systemic as ILFS was a goliath with ₹90,000 Crores of loans and this shocked our financial system. After this event, suddenly markets woke-up and re-evaluated NBFCs.

A shocking discovery was that NBFCs had concentrated their exposure to just one sector, Real estate. As mentioned earlier, Real estate sector itself has been facing difficulties selling its inventory.

Due to this revelation, most lenders asked for higher risk premiums when lending to NBFCs. Sequentially, this led to a credit squeeze for NBFCs themselves, forcing them to cut back their credit boom. As commercial loans dry-up, companies face difficulties in gathering funds for operations which inevitably slows economic activities.

Why it is daunting now more than ever?

In 2014, companies borrowed money when the exchange rate was around ₹40/USD from external sources (i.e. foreign borrowing). Now the exchange rate is ₹70/USD, which makes repayment difficult for companies and decreases their profits. This takes a toll on firms’ financial projection, further diminishing their credibility.

Additionally, high-interest rates and low credit growth are forcing the economy to slow. This builds stress for the corporate sector and therefore the financial sector. As loans given to stressed companies are banks’ assets, banks become more cautious. This situation is self-reinforcing.

The best indicator of economic stress is the difference between interest rates (i) and nominal growth rate (g), (i-g).

In times of economic boom, revenues and profits of sustainable firms grow at a nominal growth rate. If economic growth rate exceeds interest rates on corporate loans (negative i-g) then companies can service debts easily.

In times of economic slowdown, (i-g) rises to make it harder for corporates to service their loan repayments. Currently, the weighted average interest rate for corporates is 10.4% and the nominal growth rate is 6.1%. (Subramanian & Felman, 2019) Figure 4 below represents interest-growth rate differential.

Source: Subramanian & Felman, 2019

Interest-Growth rate differential (percent) Figure 4.

Thus, (i-g) differential is 4.3% which is astonishingly high.

Government Measures

Any government has two options when it comes to regulating economic activity. First, fiscal policy i.e. public expenditure which is controlled by the central government. Second, monetary policy i.e. controlling money supply through cash reserve requirements and interest rates which is controlled by Reserve Bank of India (RBI).

Our central government and RBI have adopted policies that usually work for the short-term revival of any slowing economy, which are as follows:

Expansionary Fiscal policy

India has experienced one of the largest Corporate Tax rate cut. The effective tax rate was reduced to 25.17% from 35%. This was undertaken with the hope that it would increase company profits by reducing their tax burden. With an increase in profitability, repaying loans would be easier.

The central government announced a ₹100 Lakh Crore expenditure plan on infrastructure for the next 5 years. By spending on infrastructure developments, the government aims to inject money into the economy. This should help our slowing economy to rebound.

However, India’s consolidated fiscal deficit is 8.8% of GDP in 2018-19. Unprecedented high fiscal deficit makes the government’s ability to issue more debt insecure. Thus, fiscal policy alone would not be beneficial as the financial system will face difficulties in absorbing the issue.

Expansionary Monetary policy

In 2019, RBI has adopted an interest rate cut of 135 bps (cumulative) on Repos. Effectively, this means a lower cost of funds for banks. This rate cut should have been passed on, making loans cheaper for individuals and corporates.

However, in the current situation, monetary policies will remain ineffective until the repo rate cut is transferred to lending rate reduction. Due to the Balance Sheet Crisis, this transmission mechanism is broken as banks are busy handling their balance sheets.


It seems that India is stuck in this downward helix. The best possible way to look at the reality is the growing interest-growth differential, which indicates the severity of the matter. The cost of borrowing beats productivity by more than 4%. As time passes, this will build more stress for firms hampering growth, which further increases stress. Hence, this problem is spiral in nature. Under current conditions, standard macro-economic measures will be useless.

It is time to be realistic and being realistic demands recognition of the Balance Sheet Crisis, which will certainly take time. This issue is majorly domestic and self-imposed. A slow and passive approach has gotten us where we are. The economy needs recognition, resolution, and reform.


IMF . (2019, October ). World Economic Outlook Database, October 2019. Retrieved from International Monetary Fund:

MOSPI. (2019, December ). Press Release. Retrieved from Ministry of Statistics and Programme Implementation:

Gjerstad , S., & Smith, V. L. (2013). Balance Sheet Crises: Causes, Consequences, and Responses. Cato Journal, Vol. 33, No. 3 , 437-470.

Subramanian, A., & Felman, J. (2019, December ). India’s Great Slowdown: What Happened? What’s the Way Out? Retrieved from Harvard Kennedy School :

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