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Balance sheet recession to hit India's potential GDP growth, says expert

A balance sheet recession happens when highly indebted companies collectively focus on reducing debt instead of growth, causing rut in the economy

Aprajita Sharma New Delhi Last Updated: May 24, 2020 | 13:51 IST
Balance sheet recession to hit India's potential GDP growth, says expert
Munot points out that the RBI has been doing the heavy lifting so far

The economy is staring at a recession that the country has never seen in a century. After a spate of negative growth projections by various research houses, now the Reserve Bank of India (RBI) has stated that the gross domestic product (GDP) growth will remain in the negative territory for the financial year 2020-21. Discussing the current state of economy post the government's Rs 20 lakh crore economic package and the RBI's latest policy measures, Navneet Munot, Executive Director and Chief Investment Officer, SBI Mutual Fund, says that even as the central bank has delivered more than what is expected out of it, it will have to do a lot more so that the profit and loss (P&L) recession, which is certain, doesn't turn into a balance sheet recession. A balance sheet recession happens when highly indebted companies collectively focus on reducing debt instead of growth, causing rut in the economy.

"We need to think about creative ways to revive different industries, which will be in deepest trouble over the next few quarters. There will be P&L recession for sure due to several businesses recording a decline in profit. We need to ensure that it does not become a balance sheet recession, because if that happens, repairing it will take a much longer time. Our potential growth rate  will also come down in that case," he says in a conversation with Rahul Arora, CEO, Nirmal Bang Institutional Equities, in a webinar.

Munot points out that the RBI has been doing the heavy lifting so far from announcing loan moratorium to extending it, restructuring of loans in sectors like real estate and so on. But more efforts are needed. He notes the RBI is in a better position compared to other central banks in the world to support the economy.

"Philosophically, I am against any sort of loan relief because credit culture has to be maintained. But, at the same time, one-time restructuring will be required for a lot of businesses.  The RBI will have to take a lot of borrowing by the Centre and state governments on its own book. If you look at the size of the RBI balance sheet compared to that in several other states, our central bank still has some space. We might record current account surplus as our forex reserves are strong. We should find creative ways to use it," says Munot. The country's foreign exchange reserves increased by $1.73 billion to $487.04 billion in the week to May 15, which is equivalent to 12 months of imports, according to the RBI data.

Further, on the government's economic package, he says increasing the allocation for Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) was one of the good measures. "We need to see if we can employ migrant labourers to build long-term capital assets."

Keeping in view the collapse in oil prices, one of the creative ways, he says, is to build oil reserves in India with the help of migrant labourers. It will not only generate employment, but also create a capital asset that will stay for a long time.

"We should create a massive oil storage capacity at a war scale. Then we should buy oil from the futures markets and create reserves for several months," he says.

At the same time, he advises to look beyond fossil fuel. "What if something so bad happens in the world that ships just don't come to India. You never know! That is why we should think beyond fossil fuel now. Can we use technology to replace fossil fuel usage with renewable energy, natural gas, solar and wind energy? We need to prepare ourselves to live without oil over the next 10-20 years," he says.

The crux of his logic is to focus on both - having enough oil reserves and life beyond fossil fuel.

Also read: Coronavirus India Live Tracker: Delhi registers 508 new cases in 24 hours; tally over 13,400

Also read: Eid-ul-Fitr: Is the Indian stock market open or closed for trading tomorrow?

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