Resolution of stressed assets in banking, rural rejuvenation, implementation of reforms and rising global growth are the key factors that will be critical in driving the country's gross domestic product (GDP) growth to “a respectable 7.5 per cent” during the financial year 2018-19, rating agency CRISIL said in a report. On February 28, the Central Statistics Office (CSO) said that the India's GDP grew at the fastest pace in five quarters at 7.2 per cent during October-December on the back of sharp pick-up in the services sector and a rebound in agriculture and manufacturing. The second advance estimate, released by CSO, showed that the overall GDP growth rate for 2017-18 is estimated to inch up marginally to 6.6 per cent from the first advance estimate of 6.5 per cent released last month, but would be the lowest growth in four years. CRISIL pointed out that while its estimate of 7.5 per cent GDP growth for the next financial year may look like a “strong recovery” after two consecutive years of deceleration due to demonetisation and the impact of the goods and services tax (GST) being rolled out, it is still below the 13-year average of 7.6 per cent. One of the most critical factors for the country's GDP to grow at the estimated levels is the timely resolution of non-performing assets (NPAs) in the banking sector. With gross NPAs for state-owned banks touching 10.5 per cent, CRISIL said that the asset quality issues affecting these public sector lenders have grown to a level where “no meaningful and sustainable economic recovery is plausible without, at least, beginning of a resolution process”. “While these are early days, initial indicators do lend hope. We are particularly positive about the steel sector, where four large accounts have aggregate debt of Rs 1.3 lakh crore, given strong prices and uptick in domestic demand. Quick resolution of some large stressed assets cases is critical to establish the credentials of the new process, boost confidence of bankers and help kickstart the recovery process on a wider scale,” said Ashu Suyash, managing director and chief executive officer, CRISIL. At a time when state-owned lender Punjab National Bank is undergoing a controversy pertaining to a Rs 12,700-crore fraud through alleged fraudulent misuse of letters of undertaking (LoUs) by billionaire jeweller Nirav Modi and his associates, the finance ministry last week directed public sector banks to probe all NPA accounts of over Rs 50 crore for possible fraud and accordingly report the cases to the Central Bureau of Investigation. CRISIL noted that the process driven by the National Company Law Tribunal could prove to be a silver lining, and while haircuts are likely to be as deep as over 60 per cent in many large cases, “the scale and timeframe of recovery will mark a watershed for Indian banking”. On the flipside though, CRISIL said that an unintended consequence of NPA resolution could be possible slowdown or deferment in private sector’s capital expenditure, which will be driven by two factors– improvement in the utilisation of stressed capacities that move into stronger hands and reduced financial and management bandwidth for acquirers, especially the strategic ones, for new large projects. For the growth during third quarter of the current fiscal, private investment played a key role. A perceptible increase in two components of GDP based on expenditure — gross fixed capital formation (which is a proxy for private investment) and valuables (including gold and precious stones) — was sharply evident in the surge in October-December GDP growth. Gross fixed capital formation was up 12 per cent in the third quarter as against 8.7 per cent in the same period last year. For the full year, it is expected to decelerate to 7.6 per cent from 10.1 per cent last year. Apart from the stressed assets, CRISIL said that India’s growth story could be driven by the Centre’s focus on creating rural jobs that could, in turn, spur demand. “The focus on demand and job creation through spending on rural and labour-intensive infrastructure space is likely to support growth next fiscal, and push demand in the consumer sectors. Funding, though, remains a concern – with significantly higher reliance on non-budgetary resources for supporting the aggressive spending plan on rural roads, affordable housing and railways,” it said. The agency said the government's inability to address GST-related issues, and fiscal stress that could lead to a cut in capital expenditure by the Centre pose as key risks to the 7.5 per cent GDP growth estimate for 2018-19. “On the global side, faster-than-expected rate increases by central banks, flashpoints in trade policies, and geopolitical events impacting crude oil prices are among risks to other macroeconomic forecasts. But with more dominant domestic drivers falling in place, we remain convinced of a meaningful, though below aspirational level, recovery in macro and micro growth for fiscal 2019,” CRISIL said.
