The Reserve Bank of India’s (RBI) recently released its annual report for the fiscal year 2018-19, providing some vital insights into the current economic situation. A critical take away from this report is the dampening effect of low domestic demand on the ‘animal spirit’ of the economy. This term, coined by renowned British economist John Maynard Keynes, pertains to the financial decision-making process during economically uncertain times. The report underscores the urgent need for a revival in consumption and investment pattern in the economy for the year 2019-20.
Notably, the report suggests that the current slowdown may be cyclical rather than deeply structural. However, it does point out the need for significant reforms in land, labour, and agricultural marketing sectors. It also highlights the recovery of banks juxtaposed with the excessive overleveraging apparent in Non-banking financial companies (NBFCs). In terms of banking frauds, there was a 15% increase in cases reported in 2018-2019 compared to the previous year.
The Current State of India’s Economy
Drawing from the report, there is an observable general downturn in various sectors. Industries such as manufacturing, construction, transport and communication, hotels and trade, agriculture, and broadcasting are in need of urgent structural reforms. The focus on the farm sector comes with a recommendation for reforms in the cold storage facilities and market mechanism.
Specifically, these reforms could double the farmers’ income by the year 2022. The investment rate, measured by the ratio of gross capital formation to GDP, fell to 32.3% in 2017-18, and it calls for considerable attention. On a positive note, the Gross Non-Performing Assets (GNPA) ratio for the banking system declined to 9.1% in March 2019 from 11.2% the previous year, indicating a healthier financial system.
Gross Non-Performing Assets Explained
An asset, once it ceases to generate income for a bank or after the principal or interest payment remains overdue for 90 days, is classified as a non-performing asset (NPA). The gross NPA is the summarised value of all loan assets classified as NPAs following RBI’s guidelines. This classification leads to not just an interest income loss for the bank but also a principal loss.
Further categorisation of NPAs includes substandard, doubtful, and loss assets. Each category, based on the duration and likelihood of debt liquidation, indicates the level of credit risk.
| Category | Description |
|---|---|
| Substandard Assets | Assets that have been NPA for less than or equal to 12 months. These assets have significant credit weaknesses that may lead to a loss if uncorrected. |
| Doubtful Assets | Assets that have been in the substandard category for 12 months. The weaknesses in these assets make full collection or liquidation highly questionable and improbable. |
| Loss Asset | An asset where loss has been identified but the amount has not been fully written off. Such an asset is considered uncollectible but may still hold some salvage or recovery value. |
Positive Indicators and Required Reforms
Owing to recent reforms such as Recapitalization and the implementation of the Insolvency and Bankruptcy Code (IBC), banks are demonstrating signs of recovery. In 2018-19, retail electronic payment transactions rose by 59% to Rs 23.3 billion from Rs 14.6 billion in the previous fiscal year, thereby increasing the share of electronic transactions in retail payments.
The report stresses the urgency of reviving consumption demand and private investment. This revival would strengthen both banking and non-banking sectors and increase spending on infrastructure. Implementation of structural reforms in labour laws and taxation, along with other legal reforms, would enhance the ease of doing business in India. These measures, coupled with the faster implementation of capital expenditures by public authorities, could potentially reignite the growth of the economy.
