‘Triple Balance Sheet’ Problem May Pull India GDP Growth Down To 4.9% In 2019-20: Nomura
A worker looks down from a house under construction in Leh, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

‘Triple Balance Sheet’ Problem May Pull India GDP Growth Down To 4.9% In 2019-20: Nomura

Weakness across India’s non-bank lenders, coming at a time when banks are still recovering from a bad loan problem and corporations are deleveraging, has left the country grappling with a “triple balance sheet” problem, said Nomura Global Market Research in a report on Friday.

As a consequence of the myriad issues being faced by the economy, GDP growth may fall to 4.8 percent in 2019-20, wrote Sonal Varma and Aurodeep Nandi, economists at Nomura. Their forecast is the most pessimistic among recent projections put out for India’s GDP growth in the current year and well below the Reserve Bank of India’s forecast of 6.1 percent.

Nomura also said that it expects India’s potential growth to remain near 6.5 percent over the next five years, if the underwhelming investment trend continues.

The key reasons for the downward projections are the triple balance sheet problem, weaker global growth, macro policy easing being countered by transmission challenges and weak investment and jobs outlook due to a prolonged balance sheet deleveraging cycle.
Nomura Global Market Research

Triple Balancesheet Problem

According to the research house, non-bank lenders are now facing a fight for survival.

Total outstanding funding raised by NBFCs via banks and mutual funds rose just 9 percent year-to-date in FY20 compared to a peak growth of 30 percent in FY18. “In addition, with weak growth and rising credit risk, there is still wide differentiation among shadow banks, both in terms of funding availability as well as cost,” Nomura said.

On the other hand, while bank bad loans may have peaked, they remain elevated and industries such as power, metals, mining, telecom, infrastructure and textiles remain “perilously” over-leveraged, Nomura said. The glacial pace of insolvency proceedings has meant that much of banking capital remains locked into bad loans, it said.

The Demand & Supply Problems

The slowdown is because of cyclical and structural reasons, some of which are demand side while others are supply side, said Varma, who is chief economist for India.

“Among domestic factors, the broader economic slowdown has led to a drop in demand, causing capacity under-utilisation, and capping impetus for fresh investments,” she said. There is also evidence of accentuated joblessness, Varma said, while noting the absence of reliable and historically comparable data on employment in India.

The government’s latest Periodic Labour Force Survey for 2017-18 had pegged the unemployment rate at an elevated level of 6.1 percent.

Further, Nomura, while citing data from CMIE said that real wage growth across corporations was negative in 2018-19. The rural sector, too, has seen both agricultural and non-agricultural wage growth turn negative.

‘Triple Balance Sheet’ Problem May Pull India GDP Growth Down To 4.9% In 2019-20: Nomura
In the face of poorer job prospects and lower real wages, household savings have come off considerably in the past few years, said Nomura, adding that lower levels of income have meant that households are increasingly relying on leverage to sustain consumption. “Not surprisingly, consumption demand has slowed, which is reflected somewhat in the falling growth in revenues of fast moving consumer goods companies,” Nomura said. 

Part of India’s slowdown is also due to weaker global demand. The RBI estimates that every 0.5 percentage point decline in global growth translates to a 0.1-0.2 percentage point fall in domestic GDP growth, said Nomura.

Corrective Measures

To what extent will monetary and fiscal policy help revive growth? This depends on transmission, which is partially clogged, said Nomura. The current cumulative 135 basis points of repo rate cuts in this cycle has evoked only a 25-basis-point fall in the deposit rate, a 2-basis-point reduction in the base lending rate and a 45-basis-point reduction in the marginal cost of fund-based lending rate.

Higher credit risk spreads, higher small savings rates set by the government, a more rigid deposit profile and legacy loans standing at about 30 percent of outstanding loans linked to the more sticky base rate and especially weak bank balance sheets, are responsible for the transmission, explained the research note.

The ensuing conditions, however, are likely to keep structural reforms going, Nomura said.

Watch | Nomura’s India Chief Economist Sonal Varma explains why they expect Indian economy to slow down.

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