Economic slowdown has worsened in August despite active push by government with boosters to rejuvenate the economy. Furthermore, merger of PSU banks might increase the chances of recession hitting India in 2020.
India’s growing but highly volatile economy is amidst a monumental crisis. Economic growth has seemingly stagnated, hitting a seven-year low of 5 per cent in April to June quarter from 8 per cent a year ago. Former Prime Minister and seasoned economist Manmohan Singh spoke out over the weekend alleging “all around mis-management” as responsible for the “deeply worrying” state of economy. The former PM (also former RBI Governor) said of a prolonged slowdown that has engulfed India. And now, PSU Bank Merger Impact might add to chances that Recession hits India by 2020.
However, stagnation of core sectors like manufacturing and agriculture seem to continue unabated. And global trade slowdown compelled by US sanctions and US-China trade war has put demand and private investment out of the game. The RBI has cut lending rate four times (more than a percentage point in total) but has failed to shore up lending. Markets have seen a sharp decline in both revenue and profit growth numbers in the June quarter.
There are chances that mergers of banks impact might be the trigger to take India into recession in 2020.
The government has taken course-correction and relief injection measures. Economic boosters, policy rollbacks, Rs. 1.76 lakh crores windfall from the RBI and the PSU Bank mega-mergers are all intended to recover from the slowdown and strengthen the economy.
Slowdown in August: India moving towards Recession in 2020?
There are signs of stagnation everywhere – from manufacturing (0.6 per cent from 12.1 per cent in Q1 2018-19 and slowest in 15 months), demand death with an 18-month low consumption growth, 15-year low nominal GDP growth, faltering tax revenues, massive unemployment in lakhs and invisible investor sentiment. Likewise, Agriculture, forest and fishery slowdown (2 per cent from 5.1 per cent in Q1 2018-19) and put the rural economy in crisis. Foreign demand is slowest in 16 months.
The output grew at slowest pace in a year. India’s Nikkei Manufacturing Purchasing Managers’ Index declined to weakest since May 2018 and just short of the 50-mark separating growth from contraction. As per Pollyanna De Lima, principal economist at IHS Markit in a release, “August saw an undesirable combination of slowing economic growth and greater cost inflationary pressures in the Indian manufacturing industry.”
Mega-mergers may put NPA-laden banks at risk of more impactful collapse with chances of Recession by 2020.
A first drop in input buying for 15 months suggests a combination of shortage of available finance and intentional reductions in stock spelling tighter margins for corporates. The government’s active willingness to boost the economy and prioritize the private sector has given hope, as a survey showed expectations of future output are their highest level in over a year.
Government’s Boosters but what its forgetting – Private Demand
Finance Minister Nirmala Sitharaman has been announcing stimulus after stimulus to reverse the slowdown. Similarly, the latest measure – merging public sector banks to create bigger entities – is expected to ease credit and refine corporate affairs rules and systems to make businesses more transparent and accountable.
However, official stats signal that is not the factor causing the slowdown. Private demand growth has come to a virtual standstill. Private final consumption expenditure, grew 3.1 percent only at an 18-quarter low. As per Devendra Pant, Chief Economist, India Ratings and Research (Fitch Group), “Only government expenditure provided support to growth and increased 8.8 percent. While general elections in April-May 2019 had some impact on investment growth. Collapse of private consumption demand from 10.6 percent in Q4FY18 to 3.1 percent in Q1FY20 is real cause of concerns.”
Perhaps, the biggest challenge is the declining household savings. Resultantly, this is leading to structural growth slowdown.
For instance, the government is looking to provide short-term boost to the economy. This is immediate stimulus to automobile sector, relaxed FDI norms in mining and single brand retail. But as per market reports, the optimism may not be concrete and is already fizzling out. Foreign investment is seeing red as over Rs 15,700 crore worth of foreign capital was withdrawn from stock markets in August. The rupee has been massively hit. The August fall for the rupee has been steeper than last five years at 4.54%, which is also being hit by rising oil and gold prices.
Mega Bank Mergers might lead India to 2008-like Recession by 2020
Rs. 70,000 crore capital is being infused into public sector banks aimed at relieving the liquidity crunch and improving lending. However, there are rising concerns about the bank recapitalisation plan and its ability to lower interest rates or higher loan offtake. Already ridden with NPAs and bad loans, lending to borrowers will not spark immediately amid scepticism.
Reducing interest rates in order to boost consumption, may result in being counterproductive, and result in another down cycle for banks.
Firstly, Bank of Baroda, Vijaya Bank and Dena Bank became one. Likewise, Punjab National Bank, Oriental Bank of Commerce and United Bank are being merged into one with a total consolidated business of Rs 17,95,000 crore. Similarly, Union Bank, Andhra Bank and Corporation Bank will become a single entity with business of Rs 14,59,434 crore. Canara Bank and Syndicate Bank will merge with a combined business of 15,20,295 crore. Finally, Indian Bank and Allahabad Bank as a single entity with a business of Rs 8,07,859 crore.
However, this consolidation might spell bad luck. In simple terms, this is like consolidating all the individual savings in a household. Thus, the numbers become formidable and merging weaker banks with stronger ones creates protection for depositors and shareholders. But as former Finance Minister Late Arun Jaitley said in March 2016, “You need strong banks rather than numerically large numbers.” While the government aims for PSUs to match the private banking sector in scale and size, it puts up a new kind of a massive risk.
What Bank mergers create – Too big to fail Institutions
In fact, it hampers the ability of the said banks to indulge in immediate crisis resolution. Instead of focussing on revival of bank lending and recovery of bad loans, the managements of PSU Banks will be busy in integration. This might contribute to the slowdown of lending from the PSUs, which is the need of the hour.
Moreover, the mergers will mean that from 27 banking institutions in 2017, India will have 12 by 2020. And this creates the situation of most alarm. Consequently, the mega banks will automatically become systemically important institutions aka ones that are too big to fail. If one of them hits crisis, bailouts will be big enough hurt the government and destabilize the economy. Thus, this was perhaps the biggest learning India should have taken from the 2007-08 global recession. Large banks pose monumental systemic risks. Therefore, failure has high chances of putting the India at risk of recession by 2020.