Explained: Arvind Subramanian’s statement on great slowdown

Arvind Subramanian says real estate at the root of bank NPA crisis and economic slowdown
Subramanian describes the current ongoing economic slowdown as the second wave of the twin balance sheet crisis.

Comments made by former chief economic adviser Arvind Subramanian on the state of Indian economy has sent shockwaves through the policy circles and social media. Speaking at a discussion on his working paper published by Harvard University’s Centre for International Development, Subramanian said a great slowdown was just around the corner and the Indian economy was heading to the intensive care unit. The working paper Subramanian co-authored with Josh Felman, the former India head of the International Monetary Fund, describes the current economic slowdown as TBS-2 crisis. Here’s what he said about the current slowdown.

Subramanian explains why he calls the ongoing economic crisis the second wave of the twin balance sheet (TBS) crisis that can cripple the country’s economy. He says there is an unprecedented fall in electricity generation growth, which is why this is not just a normal slowdown. He says India is witnessing its own housing bubble, which is akin to the US asset bubble that led to the global meltdown in 2008. He says the IL&FS crisis has revealed the enormity of the crisis. The real estate sector was meeting most of their fund requirements through non-banking finance companies (NBFCs). Currently, the sector has unsold inventory of more than 10 lakh housing units worth Rs 8 lakh crore in the top eight cities of the country.

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Twin balance sheet crisis

TBS refers to the situation where the balance sheet of companies and banks come under pressure. Aggressive investment by companies resulted in a situation where a large number of them do not earn enough to pay interest on their outstanding loans. This led to huge non-performing asset pileups in banks whose balance sheet have come under pressure.

The TBS I was the result of expansion of Indian economy between 2004 and 2011 when loans were given to sectors such as power, steel and infrastructure. The TBS II is the result of heavy NBFC lending to real estate after demonetisation that had left the banks and NBFCs with huge amounts of cash. The paper says banks became over-cautious and stopped lending to micro, small and medium industries, cramping the credit flow to this key sector that contributes nearly a third of India’s gross domestic product.

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The impact of these two waves of TBS crises hit the economy hard in the last one year. The economy expended 4.5% in the second quarter (July-September) of the current fiscal year compared with 7% expansion in the corresponding period last year. The first quarter of 2019-20 also saw a dismal economic growth of 5%. The Reserve Bank has cut its growth forecast for the entire fiscal to 5%. The RBI has cut the repo rate by 135 basis points in five tranches to boost economic growth before taking a pause at the last monetary policy meeting earlier this month. The government also has taken several steps to address the slump in demand and low private investment, but the results of these actions are expected only in the next financial year starting April 2020.


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Anil Nair is Founder and Editor, Policy Circle.