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“India’s Great Slowdown”

Paper (URL, PDF) by Arvind Subramanian, India’s former Chief Economic Advisor, and Josh Felman, former IMF representative to India. Part of the abstract:

In the immediate aftermath of the Global Financial Crisis (GFC), two key drivers of growth decelerated. Export growth slowed sharply as world trade stagnated, while investment fell victim to a homegrown Balance Sheet crisis, which came in two waves. The first wave—the Twin Balance Sheet crisis, encompassing banks and infrastructure companies—arrived when the infrastructure projects started during India’s investment boom of the mid-2000s began to go sour. The economy nonetheless continued to grow, despite temporary, adverse demonetization and GST shocks, propelled first by income gains from the large fall in international oil prices, then by government spending and a non-bank financial company (NBFC)-led credit boom. This credit boom financed unsustainable real estate inventory accumulation, inflating a bubble that finally burst in 2019. Consequently, consumption too has now sputtered, causing growth to collapse. As a result, India is now facing a Four Balance Sheet challenge—the original two sectors, plus NBFCs and real estate companies—and is trapped in an adverse interest- growth dynamic, in which risk aversion is leading to high interest rates, depressing growth, and generating more risk aversion.

That there are no easy solutions is encouraging. It means policymakers and regulators are going to have to confront the problems of bad debt head-on: account for it, speed up resolution, speed up divestment of poorly managed public banks and infrastructure companies, and set up more transparent data collection/publishing in place.