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India is faced with a serious liquidity crisis, which will have a major adverse bearing on economic growth. The alert comes from none other than Niti Aayog vice chairman Rajiv Kumar, who stated past week that this is an unprecedented situation and that the nation had never faced such a grave scenario in the past 70 years since Independence. The accusing finger, one presumes, is pointed towards the present Union government which aggravated this scenario through steps like Demonetisation and GST rollout in patently defective manner and in quick succession. To which was added issues arising out of the Bankruptcy and Insolvency Code that, among other things, set a time-limit for insolvency resolution – which could not make investors and entrepreneurs feel secure and safe in the present atmosphere.
A liquidity crisis is a scenario of cash crunch to meet even urgent requirements. After demonetization which was followed by two months of financial paralysis affecting markets and even individual’s life, there is less of cash in circulation. If the idea was to rein in the sway of black money, the result was that several productive sectors were seriously affected by lack of cash flow in market. As for the component called ‘black money’, the quantum did not change. Only the people hoarding it changed. Everyone seems to think this is not the right time to take out their money. Every cash transaction above a lakh is today kept track of at the official level and cannot be done outside of the banking network. The booming real estate sector has crashed as it was supposedly black money that ran the market in the past. Even if that be true, there is no doubt that the construction sector contributed massively in creating jobs for both skilled and unskilled workforce. Now that has completely dried out. Similarly, the confusion created by insisting on implementation of Bharat Stage 6 pollution control level on automotives and also big talk of taking India into the electric car age by next year has only helped create apprehensions in the minds of the auto manufacturers as well as the consumers. Since no one wants to buy new cars now in anticipation of new technology that could make present vehicles redundant, that sector is already sunk. According to reports, India’s auto sector has been compelled to lay off nearly 3.5 lakh workers in the past two months. On the other side, even Banks are taking a huge beating. Again according to reports based on a press statement, the global HSBC Bank has itself admitted laying off 150 middle level employees from its Pune and Hyderabad offices. Biscuit giant Parle has announced a proposed retrenchment of 10,000 employees. The list goes on.
The panic is palpable and the situation is grim. This can be understood even by a lay man when one notices how the one and half month old Union Budget 2019-20 has been greatly altered in the past week by the Finance Minister (FM) Nirmala Sitharaman. Obviously the targets set by the annual budget could not have been met in such a short span of time. Therefore it can be safely assumed that those targets have been given a go-by because of the terrible situation facing the nation now which dictated and forced this haphazard change in course by the FM. It may, however, be a tad bit late for course correction now.
In the past two years, the government watched the scenario without coming up with steps to re-energize the markets. Raising of various bogeys aimed at political benefits alone consumed most of the time of our administrators. Freebies were distributed like never before.
Added to this is the hit the manufacturing sector in India took due to the flooding of markets with Chinese goods. Joblessness was a natural consequence and the services sector in India, on which excessive trust was reposed, failed to absorb larger numbers of youths. The only likely reason why public discontentment has not spilled out into the streets is probably because the edifice of India, built painstakingly over the past 70 plus years, is taking time to crumble. But crumbling has already commenced. Second, the average citizens in this country do not stand up and protest in large numbers because they wait for the day of Voting. That is a bit too far away.
A way forward for the government could be to spend more. The Vajpayee government had resorted to this method by setting in motion the huge highway projects. The food-for-work programme, transformed into MGNREGS, too was another mode adopted by previous UPA governments to reach money to the countryside. These are ongoing but to marginal help while liquidity crunch has worsened. Rajiv Kumar has asked the government to avoid stopping payments, for work done, to the private sector entities.
Banks are in serious trouble. They are caught in problems posed by NPAs arising out of wayward sanctioning of huge loans to business sharks who then failed in repayment. FM Nirmala Sitharaman has come up with plans to infuse additional funds to public sector banks, to the order of `70,000 crore. This may only help worsen the situation. On top of that, none should forget that this huge sum is no big deal for our sick Banks while the proposed step by the government only implies tax payers’ wealth getting cornered again.
Problems that many corporates such as Infrastructure Leasing and Financial Service (IS&FS) faced in the past two years added to the struggles of the banking sector. The large number of agencies that functioned as shadow banks linked to IL&FS suffered and this is having a major adverse bearing on sectors like vehicle loan disbursals. As of now, however, the scenario looks bleak. The FM is also promising to come up with rescue components for the housing sector which is currently ailing.
India’s economy is slowing down according to figures released by International Monetary Fund. The government too admits the growth has slowed down, but is taking some comfort in the fact that the economies of both China and the US have not been performing better either. One is reminded of the Asian Tigers Meltdown of 1997 and the US Sub Prime crisis of 2008. While the whole world was reeling under economic distress during these two crises of not too far back in history, India managed to stay out of the muck by its sheer ability to internalize the market. The government drastically changed all those safety valves and went on sudden erratic spurts in the past half decade. Now the results are for everyone to see.
It may be easy to say that this is time for the government to end its lethargy and attend to the issues of economy with more seriousness. Sadly, it is politics over-powering economic preparedness in India today. Until and unless the two are clearly disentangled, the future may become even more difficult for the average citizen.
