All hands on the deck: Will animal spirits be back for the economy?

The noise over fiscal stimulation, including sector-specific interventions, has escalated since, particularly after the finance minister’s meetings with stakeholders to address the gaps and pricks. While any further policy responses need to be seen, it is worth considering several other initiatives to aid a recovery and speculating how agents might respond to these.

On August 7, the RBI pitched in with a novel 35 basis point repo rate reduction, exploiting low inflation to address growth objectives. It also responded explicitly to encourage borrowers and to specific trouble spots, viz. a 25 percentage point lowering of risk weights for consumer credit, including personal loans to 100 percent; relaxing exposure norms of banks to single NBFCs (to 20 per cent) and widening classification norms to include bank lending to registered NBFCs (ex-MFIs) for on-lending to agriculture, micro-small enterprises and housing up to specified limits.

The RBI is also prioritising transmission and liquidity management. The government has responded to complaints of tax terrorism, attempting a move to a friendlier environment; it has also come out with a wholesome credit guarantee scheme for banks’ takeover of good assets of NBFCs (non-banking financial companies).

Many banks quickly lowered their marginal cost of funds-based lending rate (MCLR) up to 25 basis points across tenors. SBI announced a repo-linked lending rate for home loans; several banks have reduced deposit rates, too.

The old issue of lower interest rates for new versus existing borrowers remains; and it needs to be seen if banks offset lower interest incomes by raising spreads or the risk premium. Past recapitalisation by the government has also improved balance sheets of public sector banks, which now have more growth capital.

The moot question is if an easier interest rate environment and other initiatives taken so far will succeed in attracting consumers and firms back to borrowing-spending once again. The latest bank credit data show that industry credit grew 6.4 per cent in June 2019 against corresponding 0.9 per cent a year ago, growth in personal loans declined 1.3 percentage points while the drop in services’ credit growth was a sharper 10.3 points.

Banks appear optimistic: The chairman of India’s largest public sector bank said recently that there is no supply side constraint, but corporate credit demand is absent.

Will these initiatives regenerate credit demand? One aspect here is the visible financial distress due to the existing debt, which is undoubtedly aggravated by falling inflation that increases its real value and therefore, the interest burden. Reports of downgrades and defaults in several segments have been rising while corporate earnings and profitability have been trending down each quarter. Certainly, financial stress holds back firms from borrowing, investing further. Nonetheless, brighter economic prospects encourage businesses to take a leap, which imparts confidence to incur risks.

This brings us to the key factor or determinant, i.e. future expectations. Do consumers anticipate their future incomes to increase? Do firms foresee improved demand prospects ahead?

It is perceptions about future, or the demand and income outlook, that is key to shaping agents’ responses to the positive initiatives. If they foresee these to improve, there is little to hold them back.

Currently, consumers’ expectations of future incomes (one-year ahead) have continuously fallen for four successive quarters (RBI’s consumer confidence survey, August 7); their confidence is down too.

For businesses, it is the expected demand and profits that makes all the difference. With FY20 GDP forecasts getting scaled down closer to 6 per cent from 6.5-7 per cent, the falling sales of automobiles, consumer goods and much else, capex cuts by central and state governments, and a global recession fast becoming real, there seems little on the horizon to entice businessmen to make more trips to their banks.

For a turnaround to transpire, the most important question is whether consumers and businesses will respond by starting to borrow and spend again.

Renu Kohli is a New Delhi-based macroeconomist. Views are personal.