India's attempt to rid its banking system of distressed assets will keep bank lending and economic growth muted, according to the country's principal economic adviser Sanjeev Sanyal.
The clean-up of non-performing assets is an “absolute critical thing” but there will be a price to be paid for it, Sanyal told BloombergQuint on the sidelines of an event on Monday. “While we do the clean up, the banking system has not been expanding as it should be,” he said. “But that is a price we need to pay.” Sanyal, however, expects the system to stabilise by next year.
The bad loan pile-up is one of the problems holding back growth alongside a challenging global environment where demand is “tepid”, Sanyal said.
India's aspired 7 percent gross domestic product growth rate for 2017 can be difficult to achieve, Sanyal said, as the benefits of long-term reforms such as the Goods and Services Tax may take some time to filter into the economy.
Here are edited excerpts from the conversation.
We saw the growth numbers come below estimates. What exactly is defining this kind of growth?
I am quite surprised that the markets have been taken aback by the slowdown. The Economic Survey was clear that there were deflationary trends in the system. The exact numbers we didn't know. We are not at all surprised. Things have come off. And some of that happened due to factors like the run-up to GST rollout and the uncertainty and destocking and other things. Perhaps, demonetisation may have had an impact as well. But there are some bigger issues.
One, is that the global environment remains quite challenging. The global economy remains quite tepid. Now, we have new uncertainties in East Asia with the North Korea situation. Then there are domestic issues. We have been attempting to clean up the non-performing assets in our banking system. This is an absolutely critical thing that we need to do. But of course, there is a price to do the clean-up. The banking system has not been expanding the way it should be. So, that is the price we need to pay.
However, bank clean-up is progressing reasonably quickly and I think by the beginning of next year the banking system will be healthier and in a position to begin expanding again.
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Is 7 percent growth achievable this fiscal year given the kind of macroeconomic and global factors which are coming in?
Very high growth rate of 7 percent is to be aspired for but when conditions are difficult, it can be difficult to achieve. As I pointed out, there are major reforms which are carried out like the GST, bank clean-up and others like privatisation of Air India and so on. These are long-term changes. While there may be some small short-term price to be paid for it, I think you will see the growth momentum pick up once the benefits of these changes come through. Hopefully by then the global environment will also had picked up. But even if it doesn't, the fact that we have created through the GST for the first time, a proper, open, internal market is a very big deal.
Is there a way the government can boost this growth with through policy action?
I think there are two issues here. What are the supply side issues? Obviously, most of what I talked about are supply side issues – the clean-up of the banking system, GST, privatisation, etc. There, some degree of fiscal expansion can be done but we have committed to certain fiscal constraints. So, there are limits to how much it can be done. There may be space on the monetary side, that depends on the RBI and the monetary policy committee. But whatever space there is will be exploited.
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When do we see everything coming into place and the economy starting afresh?
A lot of pain may be felt in doing some of these things. But you have to understand that what we are attempting to do is to create an economy based on rule of law, based on entrepreneurship rather than rent seeking, an economy where people go out and make money but also pay their taxes. This is something which had to be done at some point in time. We happened to be doing it at this point of time because we have the space to do it. If it causes some slowdown or if there is a price we have to pay for some slowdown, it should be paid because at some point of time this has to be done and there is never a perfect time to do it. So, some of it is getting done now.
How long is the waiting period?
It's difficult to put a number to it but I think by early next year you will begin to see the effects of all of this clearly filtering through the economy.
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