India’s economic slowdown: Goldman Sachs explains why this episode is different

or some time now, the question of economic slowdown has been weighing on India’s growth. The gross domestic product (GDP) growth for the June-quarter has hit a six-year low of 5 percent, while the manufacturing in August slipped to a 15-month low of 51.4 percent backed by weak demand and increased costs. Most analysts are debating whether this is a structural slowdown or a cyclical one.

“Our understanding is that at this point, it is perhaps a cyclical slowdown, not really a deep structural slowdown,” Reserve Bank of India (RBI) governor Shaktikanta Das said in the third bi-monthly monetary policy press conference in August.

On the other hand, several experts have characterized the slowdown as ‘structural’ and to have begun after the Infrastructure Leasing & Financial Services (IL&FS) mayhem.

Investment bank Goldman Sachs compared the current slowdown with the four previous slowdowns and said that as of June 2019, the current slowdown has lasted for 18 months — making it the longest episode since 2006. In comparison, the global financial crisis (GFC), post-GFC, and demonetisation events appear to exhibit a V-shaped pattern, with relatively shorter durations, the bank noted.

It also added that the current slowdown is more protracted but shallower, and more concentrated in consumption. In contrast, the other slowdown episodes, and in particular, the GFC and the post-GFC, were more concentrated in investment. While the auto sector was less affected during the GFC and post-GFC episodes, it declined during the demonetisation event, similar to the current episode.

Reasons For Slowdown

There seems to be a general perception in the market that the slowdown in India’s economic activity can be explained solely by tighter funding conditions. However, Goldman Sachs found that several factors for the same including tighter funding conditions, a sharp decline in consumer confidence, a negative central government fiscal impulse, and global headwinds.

Some of the slowdown could possibly also be associated with the implementation bottlenecks related to the introduction of the goods and services tax (GST) regime in 2017, it suggested.

Timeline of Key Events

The current slowdown began in January 2018, several months before the concerns relating to non-bank finance companies (NBFCs) started to surface during early September 2018.

“Given the timing of the slowdown, it seems to be the case that the default episode could not have been the trigger behind the slowdown. However, it could very well be a symptom of the underlying problems that likely predated the actual default. Even though the slowdown does not seem to be initiated by the default episode, the liquidity problems still intensified post the default, and seems to have contributed significantly to the overall extent of the slowdown,” the report said.

Government Action

The government has acted to mitigate the current slowdown, but policy responses seem less aggressive compared with earlier episodes, with fiscal restraint so far, the report noted.

“Policy interest rates have declined by 110 bps [basis points] in 2019. The RBI has urged banks to enhance transmission and is exploring a new regulatory framework to introduce external benchmarks for pricing of banks’ assets and liabilities. State-owned banks are being recapitalized, and a partial guarantee scheme for the securitization of loans to NBFCs by banks was announced in the FY20 budget. Still, the breadth and depth of policy easing have so far been much more limited than during previous occurrences of slower growth in India,

particularly during the GFC, or the post-GFC slowdown. Importantly, policymakers have exercised restraint in easing fiscal policies,” Goldman Sachs explained.


Goldman Sachs expects a moderate pick-up in economic activity, substantial improvement in consumer confidence, and a significant easing in domestic financial conditions, over the course of the year.

That said, the risks to the investment banks’ outlook for economic activity for FY20 continue to be tilted to the downside, given the continued weakness in consumption indicators, and persistent confidence concerns emanating from NBFCs that the Goldman Sachs India Financials equity analysts pointed out

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