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What's delaying the economic recovery?
Thu, 21 May Pre-Open

In a recent article, we had highlighted the huge bad debt menace that Indian banking sector is exposed to. Further to that, it is worth mentioning that infrastructure is one of the sectors highly overburdened with the debt. This is the debt that Indian infrastructure firms had undertaken few years back when all seemed hunky dory in the Indian economy. Capacities were expanded using the borrowed money assuming that the good times would continue forever. However, in a highly coupled global economy, India could not shield itself completely from the global slowdown and financial crisis that hit the world few years back. And these firms were left with huge debt, under utilized capacities and slowdown in the demand.

And while the sentiments in the economy and market have witnessed a significant shift, the ghosts of these times continue to haunt the infrastructure sector till date. Bad debts in the banking system are still high and as per RBI governor Raghuram Rajan, have not yet peaked. And the infrastructure sector is still reeling under huge debt burden. The demand is yet to take off and cheap imports from economies like China do not leave much hope either. Amidst such an environment, one should be prepared to wait longer for investment cycle to turn around. Even a delayed recovery will be contingent upon how fast the Government is able to address the policy matters.

A year is over since the new Government came to power. The external factors such as oil prices have worked in its favour during this period. That said, while there has been some progress on reform front, it falls way short of expectations. The latest earnings season is an eye opener to this fact. Going forward, the challenge to increase the rate of investment is likely to remain. And unless there is a growth in investments, real economic growth will only remain illusory.

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