Feb, 2023
Many people fail to understand the "why now?" on the so called "India's economic decade". My version of it put simply - for any economic boom to get underway, a credit cycle needs to be kickstarted, where capital finds its way to productive assets, employing more people, etc.
Given India's an emerging economy with a relatively higher risk profile, you couldn't have expected private and foreign capital to jump in first. It was always going to have to be a government that opens the floodgates of the credit cycle, themselves spending and via state banks.
But the state banks were rotting with non performing assets. This meant, not only were the state banks lending ineffectively but also that the government had to divert money to keep them afloat at the expense of them spending on capex.
Subramanian and Felman are right to note India’s subpar growth performance in the last few years. But to ignore, in India's growth outcomes, the role of the financial crisis over the last decade is to ignore the elephant in the room. In the decade up to 2020, India faced severe financial system stress caused by an unsustainable lending boom that saw the private nonfinancial sector’s credit-to-GDP ratio rise from 58.8 percent in March 2000 to 113.6 percent by December 2010, according to data from the Bank for International Settlements. These loans could not be serviced as economic growth rates declined after the 2008 financial crisis, led by export growth. Bad debts in the banking system rose. Consequently, bank credit and overall credit growth in the economy were well below trend for the rest of the second decade of the millennium. The problem was compounded toward the end of the decade (in 2018 and 2019) by the collapse of some nonbanking finance companies, too. The debt-to-GDP ratio mentioned earlier went into reverse. It decreased from 113.6 percent in December 2010 to 83.8 percent in December 2018. As the private nonfinancial sector deleveraged, its investments in business equipment and other assets suffered.
~$110B of bad debt was paid off by the government in the last 5 years. That's equal to how much they spent on capex between 2018-21. The problem hasn't vanished but vastly improved, along with reinforcements such as a new insolvency law.
With clean balance sheets, the banks seem to be in a much better position to lend as seen in their improving business performance. The government also has freed up money to spend on capex. These historically have proven to be catalysts of credit booms.
