There's been a lot of talk recently about whether India's economy is going through a major crisis.
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| © The Indian Daily News |
Specifically, there's discussion about the bottom of the pyramid, meaning those who have low incomes, especially in rural areas. So, there are people taking out small loans but are unable to repay them, and we've suddenly seen a lot of defaults. Just look at the big banks here."
I'm not talking about those special microfinance institutions that keep giving out small loans. The money isn't coming back because people don't have any income or employment. So, we'll discuss a bit about what's really happening in the Indian economy.
The GDP growth looks really good. If you compare India with other countries around the world, you'll see that our GDP growth stands out. Over the last two years, we've had a growth of 7.1% and 8.2%, which is fantastic. In fact, even in the first quarter of the new financial year 2024-25, it was 7.2%. So, overall, things are looking positive, especially with GDP on the rise.
People's income should be increasing, and they should have more money to spend. But what we're seeing is a bit concerning: there's a dip in consumer goods sales, which means the growth we should be seeing just isn't happening. Everything feels pretty sluggish, and bank credit has dropped significantly compared to before—it's like people aren't even interested in taking loans anymore. So how can GDP be doing really well while sales are down and credit growth is slowing? It just doesn't add up.
People are really worried about the pyramid here, especially at the bottom, where folks have lower incomes. You see more people down there because, as you go up the pyramid and income increases, the number of people decreases. That's why we represent it as a pyramid. The people at the bottom of the income pyramid should benefit the most during a GDP boom. When the economy is doing well, those at the bottom should see significant advantages.
But the economists are divided on this issue. Some say that the Indian economy is facing trouble right now, while others disagree and believe that it’s a good time ahead. Specifically, I should mention that financial institutions are experiencing difficulties. When we talk about microfinance institutions, it usually refers to situations where, if you take a loan like a home loan or a big loan, you go to a bank, like scheduled commercial banks such as ICICI Bank or SBI.
They could get loans from there, but what microfinance institutions do is help needy people who can't get loans directly from banks because their credit scores aren't good or there are other issues. Microfinance institutions really assist them. But there are a lot of problems because these institutions lend to poor folks and small businesses. Even small finance banks, which have grown quite a bit nowadays, are facing loan defaults too.
Let me give you some examples. There's a pioneer in microfinance called Spanish Sphoorty. Just so you know, in the last financial year, 2022–23, they made a profit of 4,468 crores. But listen carefully; in the July-September quarter of this year, they reported a loss of 204 crores. So, they've gone straight from profit to loss. There's also another microfinance institution, Credit Access Grameen, where the profit has been cut in half. Equitas is also one of the top small players in this sector.
"Inside finance, we're seeing that profits have dropped by 90%. Suddenly, smaller microfinance institutions are facing a lot of trouble and dealing with losses. On the other hand, if we look at the big banks, their situation has improved quite a bit. Since 2010, the non-performing assets (bad loans) have risen significantly, reaching double digits, around 10-12%. For example, if they lend out ₹1 crore..."
"Right now, 10 crores aren't coming back, nor are 12 crores or 15 crores, and that's become a big problem. But today, you can see that the NPA has dropped to 2.8%, which is really good. Big banks usually deal with huge losses, so they don't care about the bottom of the pyramid. That's why there's no trouble here. But the real issue lies with the small microfinance institutions that I was talking about."
The question is, why is this happening? Why are these microfinance institutions facing problems? Look, the issue isn't just about rural distress. Sure, in rural areas, people might not have jobs, so there could be issues there. But if you look closely, there was also a mini-lending boom in the country. Let me explain what happened in 2022—RBI deregulated the whole microfinance sector. Before that, RBI had a lot of...
They used to keep an eye on things and control them, but in 2022, the RBI made a big decision and said that they were abolishing the cap on interest rates. So, for example, if a microfinance institution gives a loan to a poor person, the RBI had previously said they couldn't charge more than 10% or 12%. But now, in 2020, the RBI removed that cap, and on top of that, they did something else significant.
Anyone who has taken a loan shouldn’t have to pay back more than 50% of their income. For example, if a poor person earns, say, $15,000 a month, they shouldn’t be paying more than $7,500 a month, or else they’ll end up in trouble, right? So, has any decision been made about this? It seems like the RBI has deregulated things and removed the caps and all that. Just think about it: if you have a business and the government says you can’t make more than 5% profit on a product, then...
"You won't be able to take more than a maximum profit of 5. But if the government says you can earn as much profit as you want, then what will you do? You can set it to 10, 15, or 20—it's up to you. That's what happened after the deregulation when scrutiny was lifted. As a result, microfinance institutions jacked up the interest rates on loans given to the poor. Plus, if you look back, microfinance institutions used to be pretty cautious and didn't give out loans that quickly. For instance, if a poor person already had three loans..."
So, the thing is, this guy wasn't getting any loans because he was worried about whether he'd be able to pay them back. But then in 2022, the RBI relaxed the rules, and suddenly everyone started giving out loans like crazy. Some people have five loans, some have six. Just think about it—how is a poor person supposed to pay back all that money? It's kind of like what China does; they give a ton of money to small, struggling countries, and in the end, they end up owning a piece of their land.
They take it because those people can't make the payments. You’re seeing a similar situation here, and ultimately the RBI figured this out. So, the RBI said, “Look, if you don’t have collateral, don’t give out loans.” Basically, if someone comes to take a loan, they need to put up something like gold or property as collateral before you give them the loan. But this realization came pretty late, in 2022. At first, the RBI said to do whatever you want, and then suddenly they got scared and said, “No, don’t give out loans like this.”
"Just give it a thought, and because of this, you're going to see a lot of trouble around here. In fact, let me tell you what happened recently: the RBI has slapped penalties on four microfinance institutions. But is that really right? I mean, first, the RBI said to do whatever you want, and then they realized, wait, these guys are facing problems, so they started imposing penalties on them. There's a lot of debate going on about that too. And that's not all; remember last year when El Niño hit? It's still affecting us this year."
The ongoing El Niño has really affected food grain production in rural areas. Normally, agricultural growth would be around 4%, but now it’s only 1.8%. This means there's more distress in rural areas, and people have started taking loans, but they aren’t able to earn enough because farming has taken a hit due to El Niño. So, those are the reasons behind this situation. Now the question is, what’s the ultimate truth here?
There's a big debate going on about this right now. People are saying that India’s GDP might be inflated, showing numbers like 7% or 8%, but the actual situation on the ground is quite different. Former Chief Economic Advisor Arvind Subramanian was asked about this, and he mentioned that he thinks the GDP growth numbers don’t really line up with other indicators, like credit growth and electricity generation, which aren’t matching up.
Economists are divided on this issue. On one hand, you have pessimists saying that India is facing an economic slowdown with real problems. For example, the Index of Industrial Production has dropped, and there's a slowdown in the Purchasing Managers' Index for both manufacturing and services. Even GST collections aren’t growing rapidly; in September, they only increased by 6.5%, and in October, it was just 8.9%.
When it comes to estimating nominal GDP growth, it was projected to be around 10.5, so there should have at least been that much increase in GST. But that's not happening. A lot of pessimistic people think there are problems. On the other hand, the optimists, who tend to think positively about the future, believe that while there might be some issues now, the recent monsoon season has brought in a bumper crop. Harvesting is about to happen, which will boost farmers' incomes and increase earnings for laborers. That's what's being discussed right now.
You might not see the distress right away, and when people start getting money, they'll start paying it back too. So, it's still pretty early to say that there are major problems. Ultimately, what's important is the second half of this financial year, which will really show what’s going on in the Indian economy.
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