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India’s economic landscape is often like an iceberg—what lies beneath the surface can be more problematic than what is visible. This analogy aptly applies to the issue of Non-Performing Assets (NPAs), economic growth trends, and job creation. While surface-level metrics like GDP growth rates and bank performance might provide a snapshot of the economy, the underlying dynamics demand careful attention.

The NPA Conundrum: A Deep Dive

Non-Performing Assets (NPAs) remain one of the critical challenges for India’s banking sector. During periods of economic strain, such as post-2014, NPAs accumulated over time due to practices like “extend and pretend” and moratoriums on recognition. Once the Reserve Bank of India (RBI) ended these moratoriums, banks were forced to recognize their bad loans, halting the unhealthy practice of rolling over unviable loans.

However, resolving NPAs is not merely about recognition but also about recovery. Writing off loans does not mean forgiving borrowers; banks must aggressively pursue recovery. Written-off loans impact a bank’s capital, compelling them to raise funds or reallocate profits to maintain health. While recoveries from these loans enhance a bank’s bottom line, the lack of active collection incentives remains a concern.

The RBI’s current focus on unsecured loans highlights the evolving nature of financial risks. New NPAs often emerge from unforeseen sectors, underscoring the need for vigilance in monitoring the banking ecosystem.

Economic Growth: A Tale of Contrasts

The Indian economy has seen fluctuating growth patterns in recent years. After surprising economists with higher-than-expected GDP growth in 2023, the first three quarters of 2024 witnessed a downturn, with growth estimates consistently revised downward.

A closer look reveals structural factors influencing these trends:

1. Base Effects and Pandemic Recovery: The robust growth post-COVID-19 was partly due to a low base from the pandemic years. As the economy rebounded, growth appeared stronger than it actually was.
2. Government Spending: Pre-election infrastructure spending played a pivotal role in boosting growth. However, with government spending slowing down, this growth driver has weakened.
3. GDP Deflator and Tax/Subsidy Effects: Fluctuations in the GDP deflator, along with changes in tax and subsidy regimes, have added volatility to growth figures.

Is 6% Growth the New Normal?

India’s long-term growth potential has seen a decline. From a robust 7.5% in the mid-2000s, the potential growth rate has now dropped to around 6%. This decline is concerning, given India’s demographic dividend. With millions of youth entering the labor market annually, even a 6% growth rate may be insufficient to generate adequate employment opportunities.

The secular deceleration in growth prior to the pandemic—where GDP growth fell below 4%—raises questions about structural weaknesses. A rate as low as 4% would signal stagnation, jeopardizing India’s aspirations for economic development.

Job Creation: The Elephant in the Room

India’s unemployment situation is stark. For every government job advertised, thousands of applicants highlight the desperation for stable and well-paying employment. Beyond generating jobs, the focus must shift to creating “good jobs” that offer security, dignity, and decent wages.

Economic growth, while necessary, is not a panacea. Policymakers must address structural issues like:

• Enhancing skill development to align with market demands.
• Boosting labor-intensive sectors like manufacturing and services.
• Encouraging private investment, which has been tepid despite economic recovery.

Avoiding Stagflationary Tendencies

While India is not in a textbook stagflation scenario, certain elements—like low growth coupled with persistent unemployment—mirror its characteristics. A growth rate of 4% would indeed resemble a recession for India, given its demographic dynamics.

The nation is in a demographic sweet spot, with a young labor force and a declining dependency ratio. Failing to capitalize on this demographic dividend would have long-term consequences.

What Lies Ahead?

To sustain growth and address underlying challenges, India needs a multi-pronged approach:

1. Reviving Private Investment: Encouraging corporate investment through favorable policies and reducing bureaucratic hurdles is critical.
2. Banking Reforms: Banks must prioritize recovery of written-off loans and strengthen mechanisms to prevent future NPAs.
3. Boosting Employment: Policymakers must focus on sectors that can absorb large labor forces, such as agriculture, MSMEs, and digital services.
4. Sustained Government Spending: Infrastructure projects should remain a priority, as they stimulate growth and create jobs.

In conclusion, while India’s economic story is far from bleak, complacency is not an option. Addressing NPAs, maintaining robust growth, and creating quality jobs are imperative for realizing the country’s potential. As policymakers and institutions navigate these challenges, they must remain alert, adaptive, and proactive to steer the economy towards sustained prosperity.