The Finance Ministry on Thursday admitted that the economy might contract during the current fiscal. . However, recognition of reform measures is critical for higher anticipated growth in the coming years, it said.
Chief Economic Advisor Krishnamurthy V Subramanian, in a virtual press conference, said: “What is uncertain though is whether the recovery will happen in the second half of the year or in the next year and therefore the actual growth will depend critically on when the recovery happens. If recovery does not happen this year, the economy will basically have a decline in output and suppose in the second half there is a recovery, that may be limited.” He was responding to the growth projections by rating agency S&P and Fitch.
On Wednesday, S&P affirmed India’s sovereign rating at ‘BBB-’ with outlook as stable. This is the last investment grade and has been maintained by the agency for 13 years now. Though it felt the GDP growth may shrink by 5 per cent this fiscal, it expects the economy to bounce back next year with 8.5 per cent growth. Gobal agency Fitch had almost similar projections with 5 per cent contraction during the current fiscal but growth of 9.5 per cent during FY22.
Subramanian felt the country’s fundamentals demand a much better rating. “India’s ability and willingness to repay debt is gold standard,” he said while making a case for ratings upgrade. Earlier this month, global rating agency Moody’s decided to lower the sovereign rating by a notch to Baa3, which is the last investment grade. This downgrade comes nearly 22 years after it lowered India’s rating on June 19, 1998 in the aftermath of the country’s nuclear tests.
Bad bank
With pandemic affecting overall growth and the balance-sheet of corporates, there have been talks about creation of bad bank. When asked about this concept, Subramanian said that there are 28 functional Asset Reconstruction Companies (ARCs). Their job is to take bad loans from banks and act as bad bank. But one key part that needs to be kept in mind is when a bank sells bad loans, it has to take a haircut because when a loan goes bad on ₹100 that a bank lends, the actual amount that can be expected is lower than ₹100 and that leads to haircut.
“When it takes a haircut that will impact the Profit & Loss Account. And that is one of the key aspects that affect the selling of loans, So till that particular aspect is not addressed creating a new structure may not be as potent in addressing the problem,” he said.
Privatisation policy
On privatisation policy, he said banking will be part of the strategic sector and the government is working to identify strategic and non-strategic sectors. “In non-strategic sectors, all public sector enterprises will be privatised. In strategic sectors, the number of state-owned enterprises will be limited to one to four. In most strategic sectors, there is competition from private sector, where there isn't, that will be enabled,” Subramanian said.