India: A difficult climb ahead

  • India’s growth recovery is expected to be delayed and remain sub-par as the economy deals with a ‘triple’ balance sheet problem amid weak global demand.
  • Weak investments is also a contributing factor to growth and is impinging on job creation.
  • Weaker global demand is an additional headwind for India, where growth rate cycles are closely linked with global growth rate cycles.

Contrary to our expectations of a recovery starting in Q3, high-frequency indicators have plunged and domestic credit conditions remain tight amid weak global demand. As a result, India’s economic recovery is expected to be delayed and the subsequent pickup is expected to be sub-par. There are four main reasons why.

The first is that India is facing a triple balance sheet problem involving banks, corporates and now, shadow banks, which has tightened credit conditions. In the thick of resolving the twin balance sheet problem of banks and corporates, the economy is now additionally burdened with a “triple balance sheet problem”, involving shadow banks. Over a year after the crisis first erupted, differentiation among shadow banks persists due to elevated credit risks, while bank lending has remained subdued.

The second reason contributing to delayed economic recovery is that policy accommodation is a growth tailwind, but is working against two headwinds, namely clogged credit channel of policy transmission which counters the policy easing delivered by the Reserve Bank of India.

Thirdly, investments, particularly private, remain quite weak. At the heart of the issue is the ensuing deleveraging corporates and banks. Without investment, a durable and broad-based jobs-driven consumption recovery has been missing, and lower investment has also held back trend (potential) growth, and is also impinging on job creation.

Finally, an additional headwind for India is weaker global demand. Although India is a relatively closed economy and not part of the China-centered supply chain, India’s growth rate cycles are closely intertwined with global growth rate cycles due to both trade and confidence channels.

For a more detailed outlook on India’s growth recovery, read the full report here.


  • Sonal Varma

    Chief Economist, India and Asia ex-Japan

  • Aurodeep Nandi

    India Economist

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