India slips to 7th largest economy in 2018: World Bank

Highlights

 The US remains the top economy with a GDP of $20.5 trillion in 2018
 India has been pushed to the seventh place in the global GDP rankings in 2018
 China was the second largest economy with $13.6 trillion, while Japan took the third place with $5
trillion

NEW DELHI: India has been pushed to the seventh place in the global GDP rankings in 2018 with the UK and
France forging ahead to the fifth and sixth spots, data compiled by the World Bank showed. In 2017, India had
emerged as the sixth largest economy, while France was pushed to the seventh place in the global GDP league table.

The US remains the top economy with a GDP of $20.5 trillion in 2018. China was the second largest economy with
$13.6 trillion, while Japan took the third place with $5 trillion. India’s GDP was at $2.7 trillion in 2018, while UK
and France were at $2.8 trillion.

In 2017, India was at $2.65 trillion, UK at $2.64 trillion and France at $2.5 trillion, helping the third-largest economy
in Asia to emerge as the fifth largest economy at that time. Economists said India taking the seventh largest global
economy tag in 2018 was largely due to the currency fluctuations and slowdown in growth.

“In 2017, the rupee appreciated against the dollar, and in 2018 it depreciated against the dollar. So, it is largely due to
currency fluctuation and the growth slowdown,” said Devendra Pant, chief economist at India Ratings and research.
He added that the ranking could change if growth picks up.

India still remains the fastest-growing major economy in the world, although growth is estimated to slow to 7% in the
current fiscal year that ends in March. China is expected to face a sharper slowdown due to the ongoing tariff war
with the US. Last month, research firm IHS Markit had said that India will overtake the UK as the fifth largest
economy in the world in 2019 and is likely to shoot past Japan to emerge as the third-largest economy by 2025.

The government has unveiled a plan to emerge as a $5 trillion economy by 2024-25 and the Economic survey for
2018-19 has said that the country needs to sustain a real GDP growth rate of 8% to achieve the goal. While growth is
expected to be in the 7% range in the current fiscal year, most economists and multilateral agencies expect it to gather
momentum and push past over the 7% mark next year as the impact of the measures unveiled by the government
takes hold.

The growth grind-down is a fallout of policy blunders

and failure to revive public funding
One day Raja Krishnachandra, the 18th-century zamindar of Krishnanagar, Nadia, in today’s West Bengal, decided
he wanted a Lake of Milk to be spun into sweetmeats for his people to eat and sell far and wide, spreading happiness
and wealth. Earthworks complete, Krishnachandra said that on new moon night, each householder should pour one
pot of milk into the excavation. Everyone agreed.

But on the given night, Chaturanan thought it would be smart for him to pour a pot of water into the lake. With
everybody else pouring milk, who’d be the wiser? Well, next morning, Krishnachandra was aghast: his lake was full,
but with water, not milk. Everybody had reasoned the same way as Chaturanan, and the king’s grand project was a
flop.
The brilliant economist Mihir Rakshit told us this tale long ago, to illustrate something called ‘the paradox of
composition’. Sometimes, decisions that are rational for one person, lead to disastrous outcomes if everybody acts
likewise.

John Maynard Keynes never met Raja Krishnachandra. But the heart of the economist’s diagnosis and cure for the
Great Depression of 1929-40 hewed closely to this story. He reckoned that in shrinking economies, belt-tightening
and ‘save more’ strategies would fail. If everybody became tight-fisted together, demand would crash, jobs lost,
businesses bust and hopes — or ‘expectations’ — for a better tomorrow evaporate.

At the heart of Keynes’ diagnosis was the supreme role played by our expectations about the future: the optimism of
a salaried person that led her or him to take a mortgage on a home, the ‘animal spirits’ that impelled business to
invest for higher returns, etc.

If this spirit left an economy, the outcome is a death spiral — falling demand, sales and inventory pileups, unpaid
debt, bank distress, finances drying up, layoffs across sectors, repeat ad infinitum. Keynes had lived through all this
in the interwar years.

Then, it was said, New York hotel clerks booking guests would ask, ‘For the night, sir? Or just for jumping?’

The New Abnormal

Here, folk theorem on the streets is gloomy. Manufacturing and farm growth have dropped off a cliff, construction,
the largest employer of ‘contract’ workers — more than 90% of labourers — is stalled. Many of our largest builders
and shadow-banking lenders are technically belly-up.

Even the government has wearied of trying to conceal unwelcome numbers. Last week, the Central Statistics Office
(CSO) released pan-economy growth numbers for the April-June quarter. We are now crawling at 5%, the lowest
growth since 2014-15, when Prime Minister Narendra Modi first stormed to power.

Credit Suisse (CS) is a global financial giant that publishes the state of bad debt in Indian companies. From 2012,
when it circulated its first report, ‘House of Debt’, these reports illuminate the murky landscape of corporate debt,
dispute settlement and lenders’ health.

These papers have appeared more or less every year since. They show how companies borrowed to build projects that
never materialised — either because of sarkari apathy, tardy policy implementation or managements’ eagerness to
bite off more than they could chew — and pushed financial markets into a corner.

Loans from banks, insurers, shadow banks and so on have to be repaid with interest, otherwise, underperforming
shareholders have to exit, companies taken over and assets sold off. Today, India has a mechanism to clean up. It’s
called the Insolvency and Bankruptcy Code (IBC), to shake out non-performers and get stalled companies back on
their feet. On August 22, CS published its ‘India Corporate Health Tracker’. This says that between April 2018 and
April 2019, companies’ bad loans fell from 12% of total debt to 9.5%, a good thing. But between April 2019 and
now, it has gone up to 9.6%. Worryingly, another 3% of debt will soon turn sour unless lenders carve up their burden
of woe and share it.

This mechanism is called inter-creditor agreements (ICAs) and is the only so-so option now left to recover a few
paise from every rupee lent. Assume lenders can’t agree to ICAs, of which 70% is anyway unrecoverable. Then, total
corporate bad debt climbs to more than 12% of all loans. Remember, the corresponding number for China, around
4%, is about a third of ours.

Three years ago, the government brought IBC into law. Assumed to be a silver bullet to resolve debt and management
hassles at the time, it has proved to be anything but. CS shows the IBC now takes 450 days to get through a case,
compared to 250-odd days in March 2018. After all that struggle, the system manages to recover about 15 paise from
every rupee lent, compared to 70 paise last March.
The Keynes to Success
Today’s crisis is the grinding fallout from the destruction of positive expectations after the notebandi of November
2016 and policy blunders afterwards. Keynes would have told New Delhi to revive public funding for programmes
like the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) scheme, pump funds into
healthcare and other areas where it can make a difference.

The alternative is gloom, belt-tightening — and Raja Krishnachandra’s horror on finding a lake of water instead of
one brimming with milk.

Bank mergers are no silver bullet for India

With the bank mergers, the gains will take time time to become evident,
even as the pain gets visibly worse.
A hefty injection of Rs 552.5 billion of taxpayers’ money into the merged banks will only help them provide for the
bad loans that will get lumped together.

By Andy Mukherjee

With every passing day, India’s economic indicators are turning a little bleaker. The situation is bad enough to
warrant using the word “crisis,” arriving just as the government’s fiscal ammunition is spent.

The announcement Friday of 5% GDP growth in the June quarter showed the economy growing at its weakest pace in
six years. On Sunday, the top six car makers reported a 29% drop in August sales, stoking fears that the slowdown
could get still worse. The Rs 98,200 crore ($13.7 billion) collected in August via the goods and services tax, the main
tax on consumption, was the smallest in six months.

This adds pressure on the central bank — both to cut its policy rate and to ensure that commercial lenders pass them
on to borrowers. To the extent that the more inefficient state-run banks are a drag on credit, New Delhi said Friday
that as many as 10 of them will be merged into four.

Whether folding one weak bank into another will make the combined entity any stronger remains to be seen. What’s
clearer is that these lenders will spend the next six months on integration. Putting their balance sheets to work may
take a backseat. Pending consolidation, the lenders might also be hesitant to issue new bank guarantees, especially to
private-sector bidders for road projects. Thus, one of the few areas where there’s new investment may be affected,
especially with a sharp rise in debt levels of the government agency that gives out the contracts.

A hefty injection of Rs 55,250 crore of taxpayers’ money into the merged banks will only help them provide for the
bad loans that will get lumped together. Capital for growth remains elusive. State Bank of India, the largest lender,
will require Rs 15,000 crore in the current fiscal year, according to ICRA Ltd., an affiliate of Moody’s Investors
Service.

The benefits will only be evident in a few years. The new round of consolidation will bring down the number of state-
run banks to 12 from 27 just a few years ago. These lenders will have no choice but to become more competitive
because they’ll have to price consumer loans by linking them to the central bank’s policy rate. Since they aren’t very
good at lending against cash flows, the government wants them to originate loans together with non-bank financiers.
Currently, even the shadow banks are stressed. Over time, though, this should help boost the underwriting standards
of state-controlled lenders. Credit flows to smaller firms, which supply goods and services to larger companies, will
improve.
Making the most of vendor finance will require plugging India into global supply chains first. By offering the likes of
Apple Inc. and Ikea less restrictive access to its billion-plus population, New Delhi is hoping for long-term sourcing
wins from the rapidly deteriorating trade relations between Washington and Beijing.

But while taking much-neglected steps to position India as an alternative to China is a welcome move, the gains
won’t be immediate. Before committing to a new factory in India to both sell locally and to export, investors will
want to see steadier final demand in the domestic economy. Maruti Suzuki Ltd., the nation’s biggest carmaker, is
struggling to push out 100,000 cars in a month to dealers ahead of the festival season. That isn’t exactly a great
advertisement to dangle before new entrants.

Good things will come from all the tinkering – just not now. Weakening global growth means India can’t even use a
weak currency to export its way out of trouble. This isn’t the time to talk loudly about wanting to become the next
China. A hawkish Washington won’t want to see mercantile strategies being deployed by yet another large labor-
surplus nation.

Prime Minister Narendra Modi’s best hope will be to use the crisis to mend his government’s frayed relationship with
the private sector. Giving startups a reprieve from a seven-year-old law, one that was used by tax authorities to harass
them with impunity, is a good move.

Admitting that there are design flaws in the consumption tax and fixing them — perhaps by bringing separately taxed
petroleum products into its ambit — should be the next step. Like with the bank mergers, the gains will take time
time to become evident, even as the pain gets visibly worse.