Speaking at the 13th Jaipur Literature Festival on January 26, Nobel laureate and economist Abhijit Banerjee said that the banking sector in the country is "stressed" and the government is in no position to bail it out.
Slowdown In Automobile Industry
Banerjee said that the slipping demand in the automobile sector shows that people are lacking confidence in the economy.
According to the Society of Indian Automobile Manufacturers (SIAM), passenger vehicle sales fell by 17.98 per cent in April-November 2019, marking one of the worst years for the industry with slipping sales and rising inventory.
Crisis In Banking Sector
"Financial sector is the biggest stress point currently. There is no question that the finance sector is something we should worry about, the banking sector is stressed. The government really is not in a position to bail it out. We also know that due to a demand deficit in the economy, cars and two-wheelers are not selling, and those things are signs of a general fact that people lack confidence that the economy is going to grow fast so they are holding back, they are not spending," Banerjee said, speaking about the crisis in the banking sector.
Indian lenders have the highest percentage of bad loans as compared to 10 emerging economies that include Brazil, China, Indonesia, Philippines and Turkey, the Reserve Bank of India said in its report on Trend and Progress of Banking 2018-19.
Even though bad loans improved to 9.1% in March 2019 from an earlier 11.2% in the same period last year, most of those came down due to write-offs by banks.
Banerjee's comments come at a time when the country's banking sector is affected by bad loan menace and is hoping for massive capital infusion.
"The government should worry about this issue as foreign investors are getting nervous," Banerjee said, responding to how economic policies will function if people lose trust in the data.
Impact On Poverty
The Nobel laureate added that the slowdown in the economy will adversely impact poverty alleviation in the country as urban and rural sectors are interdependent on each other.
Niti Aayog's Sustainable Development Goals Index 2019, released on December 27, 2019, said that more Indians have fallen prey to poverty, hunger and income inequality in the past 2 years.
"Poverty alleviation has been happening mostly on the strength of the fact that the urban sector creates low skill jobs, and a lot of rural sector works in the urban sector and sends money back. That's the peak source of transmission of growth from the urban sector to rural sector. And as soon as the urban sector slows down the rural sector, the people in construction workers don't have as many jobs. All of that will feedback on the rural sector," said the Indian-American economist.
The growth rate of the Indian economy has fallen drastically over the last three years.
In the second quarter of 2019-20, the GDP recorded a six-year-low growth rate of 4.5%. The government has predicted that India will grow at just 5% for 2019-'20, the lowest in 11 years.
Meanwhile, retail inflation increased to a five-and-half year high of 7.35% in December 2019.
"They don't know where they are going, what they are getting into, I mean those are real issues the government should look into. If it wants to have more investment and more involvement in the global economy, then I think it needs to provide true data to people," said Banerjee.