Subramanian had flagged the twin balance sheet (TBS) problem - debt accumulated by private corporates becoming non-performing assets (NPA) of banks - back in December 2014, while he was CEA to the Narendra Modi government.
In his new paper, he has made a distinction between the original TBS and "TBS-2".
TBS-1 was about bank loans made to steel, power, and infrastructure sector companies during the investment boom of 2004-11 turning bad. TBS-2 is largely a post-demonetization phenomenon, involving non-banking financial companies (NBFCs) and real estate firms.
"Since the Global Financial Crisis, India's long-term growth has slowed as the two engines propelling rapid growth -- investment and exports -- sputtered. Today, the other engine -- consumption -- has also stalled. As a result, growth has plummeted precipitously over the past few quarters," he wrote.
India's GDP growth in the July-September quarter slowed to a six-year low of 4.5 per cent. This was the sixth consecutive quarter when the growth rate had fallen.
"Indeed, the economy seems locked in a downward spiral," he said. "Best capturing this stark reality is the astonishingly high interest-growth differential. The corporate cost of borrowing now exceeds the GDP growth rate by more than 4 percentage points, meaning that interest on the debt is accumulating far faster than the revenues that companies are generating."
This, he said, has caused "a resurgence in the amount of stressed debt, a second wave of the Balance Sheet Crisis".
If this process is left unchecked, the economy will continue to spiral downward, as stress reduces growth, which then intensifies the stress, he said.
"Clearly, action must be taken to stabilize the economy and get it back on the path of rapid growth," he said. "But in the current circumstances, the standard macroeconomic tools are not very useful. There are actions that the government cannot do (further significant fiscal stimulus); must not do (reducing personal income tax rates or raising GST rates); can do with only limited effectiveness (easing monetary policy)."
According to Subramanian, first major action -- almost a pre-condition for righting the economy -- could be a Data Big Bang, which instill confidence and produce a reliable basis for policy making.
"This must comprise the publication of unreleased reports together with a strategy for improving official statistics in at least three areas: the real sector (GDP, consumption, and employment), fiscal accounts, and stressed assets in the banking system," he said.
Next, a new asset quality review to cover banks and NBFCs must be conducted. Also changes to the Insolvency and Bankruptcy Code (IBC) be made to ensure that participants actually have incentives to solve the problem.
He also advocated the creation of two executive-led public sector asset restructuring companies (bad banks), one each for the real estate and power sectors, while at the same time strengthening oversight, especially of NBFCs. Recapitalization of banks should be linked to resolution and reforms such as shrinking public sector banking should be undertaken.
"There is, of course, a reason why these policies have not been implemented before. They are politically difficult and other, easier alternatives have seemed more attractive. But, the government currently has a tremendous amount of political capital. And by now all the alternatives have been tried and found wanting. So, finally, after a long and difficult decade, the government has both the opportunity and the clear need to resolve the Four Balance Sheet (FBS) problem," he said.
Dwelling into the current problem facing the economy, he said, after demonetization, considerable amounts of cash made their way to banks, who on-lent a major part of that to NBFCs. The NBFCs, in turn, channelled this money to the real estate sector. By 2017-18, NBFCs were accounting for roughly half of the estimated Rs 5 lakh crore of outstanding real estate loans.
The collapse of IL&FS in September 2018 was a "seismic event" not only because of the Rs 90,000 crore-plus debts of the infrastructure-cum-lending behemoth, but also its "prompting markets to wake up and reassess the entire NBFC sector," he said.
What the markets discovered was profoundly disturbing. A lot of NBFC lending in the recent period was concentrated in one particular industry -- real estate -- which itself was in a precarious situation.
The current slowdown, the paper says, is worrisome not just because GDP growth has slowed down to 4.5 per cent in the second quarter of 2019-20. Even more distressing is the disaggregated data.
"The growth of consumer goods production has virtually ground to a halt; production of investment goods is falling. Indicators of exports, imports, and government revenues are all close to negative territory," it said. "These indicators suggest the economy's illness is severe, unusually so. In fact, if one compares the indicators for the first seven months of this year with two previous episodes, the current slowdown seems closer to the 1991 slowdown than the 2000-02 recession."
Electricity generation figures suggest an even grimmer diagnosis: growth is feeble, worse than it was in 1991 or indeed at any other point in the past three decades, it added.
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