The Reserve Bank of India, in its 2016-17 Annual Report, made a number of interesting points regarding its assessment of the period. Here are some of the most fascinating things the RBI said and their possible interpretations:
1. In 2016-17, Gross Domestic Product (GDP) growth moderated due to a slowdown in gross capital formation as waning business confidence and flagging entrepreneurial energies took their toll on the appetite for new investment.
Flagging entrepreneurial energies? What does this term mean and what other factors does it represent? For instance, did demonetisation cause entrepreneurs' energies to flag? Was it the imminent arrival of the GST? Or was it frustration at cautious banks?
2. There has also been an improvement in households’ financial savings, post demonetisation.
The RBI elaborates on this statement in another section: In terms of financing, household financial savings - the most important source of funds for investment in the economy - picked up to 7.8 per cent of Gross National Disposable Income (GNDI) in 2015-16 on the back of improvement in real income (a function of income vs inflation)... As per preliminary estimates, household financial savings rate increased further to 8.1 per cent of GNDI in 2016-17 on account of an increase in households’ assets in bank deposits, life insurance, and mutual funds, even though currency with the public contracted during the year. So what the RBI is saying is: Low inflation and a rush to deposit currency has led to households saving more in an organised and measurable fashion. Alternately, it says that there ought to be plenty of money to invest.
3. The slowdown was pronounced in H2 as construction and real estate sectors, which relied to a large extent on cash transactions, were severely impacted following demonetisation.
No surprises here. But why then, has the RBI been reposing so much faith in the housing sector of late?
4. During the year, there was the highest ever awarding and construction of national highway projects. The resolution of stalled projects, development of roads under Bharat Mala project, steps taken to streamline land acquisition, inter alia, helped to speed up road construction. Capacity addition in major ports was also the highest ever in a single year with improvement in total turn-around time and average output per ship berth.
Road Transport, Highways and Shipping Minister Nitin Gadkari 'likes' this
5. In addition, India turned around from a net importer to a net exporter of electricity for the first time. Concomitant to the impetus for cleaner energy, the renewable energy sector surpassed thermal power in annual capacity addition, also for the first time.
This deserves to be highlighted as a model for the whole world to see: India isn't just talking a good environment game — it's proving there's hope. Now if the 'developed countries' would only care to help India out with financing and tech-transfer!
6A. In the aftermath of the asset quality review (AQR) undertaken by the Reserve Bank beginning July 2015 and concomitantly with better recognition of non-performing assets (NPAs), the asset quality of banks, particularly the PSBs, deteriorated sharply. As of end-March 2017, 12.1% of the advances of the banking system were stressed (sum of gross NPAs and restructured standard advances). A sharp increase in provisioning for NPAs adversely impacted the profitability of banks, with the PSBs as a whole continuing to incur net losses during 2016-17. The large amount of bad loans circumscribed the ability of banks to lend, as reflected in the declining credit growth in recent years.
Essentially, the RBI has told banks to be more stringent in recognising and accounting for bad loans. As a result, the overall number has spiked (or hit the appropriate figure, depending on how you look at it). And now banks are in the red and are unable(unwilling) to lend.
6B. Large NPAs also led to risk aversion on the part of banks as apprehensions of loans turning into NPAs intensified. Furthermore, banks engaged in diversifying their credit portfolios, reducing their exposure from large industries and shifting towards the relatively less stressed categories of housing, personal loans and services.
Lend to people, not businesses, appears to be the banks' logic here. And again, housing keeps coming up, but why?
6C. Credit growth touched a low in more than two decades on account of factors such as subdued state of economic activity, risk aversion of the banking sector, capital adequacy requirements, loan write-offs, substitution of bank credit by UDAY bonds, loan repayment by use of specified bank notes (SBNs) and banks’ pre-occupation with exchange of notes and deposits following demonetisation.
Make no mistake: This is a stinging attack aimed squarely at the government (apart from the 'risk aversion of the banking sector'.) The part about "banks’ pre-occupation with exchange of notes and deposits following demonetisation" is particularly savage.
7. The stock market gained on account of optimism over the Union Budget proposals, passage of the GST Bill, favourable monsoon, expectations of steady progress of economic reforms, better macroeconomic data, higher than expected Q3 earnings of companies and huge buying by institutional investors amid positive cues from global equity markets.
a.k.a., Despite everything, sentiment and faith in the Indian economy remains high!