The consumption slump, a major challenge afflicting the economy, cannot be attributed to the NBFC crisis as it predates the first default by infra lender IL&FS, says a brokerage, which has also slashed growth forecast to 6 per cent with a downward bias.
Many people attribute the deepening slowdown in consumption to the NBFC crisis that began in September 2018 when IL&FS went belly up following which consumption financing - a forte of shadow banks, stopped with a chill in disbursements by these players.
According to Prachi Mishra, chief economist at Wall Street brokerage Goldman Sachs, her analysis indicates that consumption has been falling since January 2018, which is much before then the end August 2018 default by IL&FS which triggered the liquidity crisis for NBFCs.
She said the fall in consumption is responsible for a third of the overall dip in overall growth, with the global slowdown coupled with funding constraints.
"There is a slowdown and the growth numbers have fallen by 2 percentage points," Mishra said, speaking at an event.
However, she expects growth to tick up in the second half, courtesy the easy money policy of the RBI which has slashed the key policy rates by a record five times or by 135 bps to a decadal low of 5.15 per cent since February and also the push to sentiment from the growth enhancing measures like the recent massive tax giveaways to corporates.
Mishra said investments and exports have been sliding for a long time, but it is the steep consumption slump which has is the new pain area.
"The present slowdown is protracted and has lasted for over 20 months now," Mishra said, adding this is different from the growth headwinds like demonetisation or even the 2008 financial crisis, which were temporary in nature.
The comments come amid growth slowing down to a six- year low of 5 per cent in the June quarter, which has been followed by a rash of downward revision in growth estimates to the tune of 70-110 bps, including by the RBI which now expects the economy to expand by 6.1 per cent and also by multilateral agencies like IMF and the World Bank.
Research by the brokerage points out that 40 per cent of the pain is coming from the slump in global trade, over 30 per cent from consumption slowdown and the rest is due to the severe funding constraints. Addressing the same event, Srei Infra Finance chairman Hemant Kanoria said there is a need for the economy not to be "messed" around for political gains.
Kanoria said his company has cut down on disbursements and chosen to focus on holding on to liquidity for the rainy day, which has resulted in a sharp 30 per cent dip in new construction equipment hiring.
Highlighting that this is a broader trend among the shadow banks, Mishra said NBFCs' credit growth has dipped to 13-14 per cent now as against a growth of 24 per cent till the recent past and blamed it on the slowing demand for loans, the increased regulatory pressures and a risk aversion.
NBFCs are show shy of lending that they are preferring to invest in government bonds rather than making loans, she said, adding this aspect needs to be broken.