Dear Readers,

Economy gathers momentum: Although the revival of domestic demand and private investment was a little delayed, the economy seems to have gathered some momentum in Q2:FY22, riding on a surge in exports, and rising consumer demand. India’s exports jumped 45.17% to $33.14 billion in August on account of healthy growth in demand mostly in developed markets. Imports in August rose 51.47 % to $47.01 billion as against $31.03 billion in the corresponding month of 2020. The trade deficit stood at $55.9 billion during April-August 2021 as compared to $22.7 billion during the same period of the previous year. The Central government’s fiscal deficit stood 21.3% higher than the budget estimate at the end of July. Good monsoons have helped agriculture, which has shown a growth of 4.5%, where last year it was 3.5%. In a further boost, on top of a record year for foreign investments, as part of joint efforts to tackle climate change, India and the UK agreed on a $1.2 billion investment plan for green projects and renewable energy in India.

If quicker vaccinations result in further normalisation of economic activities, and there is no major third wave, India may well be on track to emerge as the world’s fastest growing major economy once again.

Factors affecting risk appetite and investments: In recent speeches, the Prime Minister has called for businesses to step up investments to generate employment and ramp up growth, while acknowledging that these are tied to businesses’ risk appetite. Finance Minister, Nirmala Sitharaman has emphasized that reciprocal trust between business and government is the need of the hour. One way to address both, along with allocation of funds by the government for new projects and schemes, is to expedite approvals and clearances, so that investments are put to productive uses. Another is to expedite delayed payments, honour arbitration awards, and shorten the time, energy and resources wasted in disputes. Taken together, these may help win back the private sector’s trust and revive their investment appetite.

Supporting stressed borrowers: If businesses have to be supported in increasing their investments, then the banking sector and financial institutions have to be given proper guidance to help distressed borrowers. Businesses that become suddenly and temporarily distressed need time for restructuring. Moratorium on debt servicing, more lenient renegotiated terms of interest are some well known norms of helping genuinely distressed borrowers. In addition, any resolution or renegotiation process should contain improved diligence on the factors behind business stress, particularly external factors, and addressed fittingly. Such factors include, but are not limited to an a) unexpected rise in prices due to supply shocks (b) sudden excess capacity due to contraction of demand, (c) changes in global trade and tariff regimes, (d) impact of regulatory changes on the business landscape, including foreign investment regulations.

In addition, banking regulations constitute a special set of factors that also affect stressed business investments, and must be addressed at the soonest. These include: (a) RBI provisioning norms which are not always aligned to market realities (b) abrupt stoppage of funds (c) high rates of front charges penal rates of interest, (d) banking administrative delays leading to heavy cost overruns in projects, (e) lack of adequate professional expertise in loan evaluations, (f) inadequate funds given for modernisation and/or balancing equipment, and (g) frequent policy changes and compliance norms by regulatory authorities.

Reducing business stress keeping these factors in mind, has to be an imperative of policymaking, for business demand to be revived.

Sectoral sights: Aviation — The past and pandemic continue to beleaguer the sector. Due to various factors, many private airlines operations have ceased, while the government’s undertaking Indian Airlines has losses of over Rs.66,000 crore, a fact that would be intolerable for the private sector and would qualify for immediate investigation. Ratings agency ICRA predicts that due to the pandemic, the Indian aviation sector will report a net loss of over Rs.25,000-26,000 crore during the ongoing fiscal, while debt levels may increase to Rs.1.2 lakh crore. Aviation is critical not only as a sector but in supporting other vital sectors such as hospitality, tourism and business services. Resuscitation of this sector with security and health safeguards in place is vital for economic lift off.

NBFCs: The NBFCs segment has established itself as a vital arm of the financial system of the nation by meeting the credit needs of the vast base of MSMEs - the self employed wholesalers and retailers, transporters, households, small and medium contractors for infrastructure, construction and mining, among others. When the financial crisis of the previous
decade hit the banking sector, it was the NBFC sector that stepped in to fill the breach. NBFCs have not only addressed the needs of MSMEs, but played a vital role in the healthcare, hospitality and other sectors as well for greenfield projects.

NBFCs have been severely impacted by pandemic induced disruptions, but for some time now, they have been at the receiving end of regulatory asymmetry vis a vis banks, even though many NBFCs actually perform the same functions or support the functioning of banks. An excessive approvals regime has further thwarted their operational abilities. Since the COVID-19 pandemic, the directives from the RBI to NBFCs to extend moratorium to their borrowers and allow a one-time restructuring of stressed accounts, have impacted NBFCs’ cash flows. NBFCs were not accorded the same moratorium and forbearance as their borrowers, leading to a severe cramping in their receipts and ability to service debt. ICRA has reported that NBFCs will require crores of additional funding to continue their role in the growth of the economy. The government and RBI need to be pragmatic and take well measured steps to ensure that NBFCs are able to carry on their functions and overcome temporary setbacks in recovering dues from their borrowers.

MSMEs: This sector, already the backbone of the economy, is widening its presence across myriad sectors of the economy, especially exports; producing a diverse range of products and services to meet demands of domestic as well as global markets. Currently, around 6.5 crore micro, small and medium enterprises (MSMEs) contribute 30 per cent to GDP, and employment upwards of 110 million people. The government has recently approved a re-definition of MSME categories. It has also revised the definition of MSMEs to include retail and wholesale trade as MSMEs. With the revised guidelines the retail and wholesale trades will now be allowed to register on the Udyam Registration Portal and participate in MSME schemes. While it is good that the government is taking measures to bring more units under the MSME umbrella from where they can avail of schemes, etc, the reality is that many MSMEs do not get their finances from the banking system, as banks require collateral against loans. Loans against other measures such as invoice discounting carry prohibitively large margins, beyond the serviceability of most SMSEs. This makes the presence of alternative loan providers, such as NBFCs and new fintech players, even more necessary. Thus, in order to really support MSMEs, the government and regulators need to take a holistic view of the MSME ecosystem, and ensure fund flows where they are genuinely needed.

International Events: Evergrande, one of China’s top property developers, has been on the verge of default and sent shocks in the international system. This is being projected as China’s ‘Lehman Moment’. The shock may just about be contained as the Chinese Government has declared a rescue package, by allowing a gradual phasing-in of leverage ratios for the real estate sector rather than imposing them at one go – which created the present crisis in the first place. With such adroit government help, it is likely that Evergrande will be able to come out of its present crisis and resume full scale construction as their holding of lands is large.

This is the kind of fast and supportive thinking that is required in many sections of the Indian economy today - the MSMEs, NBFCs, the aviation sector, for the Prime Minister’s call to businesses to be answered, and for India to surge ahead. Wealth creators of Bharat have an intense inherent risk appetite. They have been successful in wealth creation globally.

Dr. H.P. Kanoria

Editor in chief