Economy in its worst shape in the last 70 years, its an unprecedented situation, says Niti Aayog’s Rajiv Kumar

Niti Aayog Vice Chairman Rajiv Kumar on Thursday said the government must do whatever possible to handle the high stress in the financial sector which has resulted in an economic slowdown.

Addressing the Hero Mindmine summit, Kumar urged the government to take suitable measures even if it meant taking some extraordinary steps.

"This is an unprecedented situation for the government of India. In the last 70 years nobody had faced this sort of situation where the entire financial system is under threat and nobody is trusting anybody else. Within the private sector nobody is ready to lend, everyone is sitting on cash.

"You may have to take steps which are extraordinary. It takes lot of courage to break the inertia. Now we are in a system where we are encouraged to take steps. The second point is that I think the government must do whatever it can to take away some of the apprehension of the private sector," he said.

"The whole nature of the game has changed after demonetisation, GST and IBC. The earlier period where you had 35 per cent cash sloshing around has become much less now. All of these put together it is fairly complex situation. There is no easy answer.

"I have no hesitation in saying that there is no business of the government to hold back payments which are due to the private sector. At the moment there is huge effort going on to try and get this sorted out", he added.

Noting that the government has taken steps to address concerns of the stressed non-banking finance company (NBFC) sector, Kumar said the government does acknowledge NBFCs as a growth driver and has prevented many of them from collapsing.

"This is an unprecedented situation and we are still grappling to find the right modality to get a fix. The government must take steps that eliminate apprehension from the minds of private sector players and encourage them to step up investments," he said.

Kumar also said some steps had already been announced in the Union Budget to address stress in the financial sector and give a push to economic growth which hit a 5-year low of 6.8 per cent in 2018-19.

Explaining the genesis of the financial sector stress that has led to a slowdown in the economy, Kumar said the entire phenomenon started with indiscriminate lending during 2009-14 leading rise in non-performing assets (NPAs or bad loans) post 2014.

Rising NPAs reduced the ability of banks to do fresh lending, which space was taken over by shadow banks with credit growth of around 25 per cent. The NBFCs could not manage this high loan growth, leading to defaults by some of the large entities that eventually triggered the economic slowdown, according to the Niti Aayog Vice Chairman.

"The whole nature of the game has changed after demonetisation, the Goods and Services Tax and the Insolvency and Bankruptcy Code. The earlier period where you had 35 per cent cash sloshing around..it has become much less now. All of these put together it is a fairly complex situation. There is no easy answer," he said.

On the issue of delay in payments by the government to the private sector in lieu of goods and services availed from them, Kumar said this could be one of the reasons for the slowdown, but the authorities are making all efforts to expedite the process.

Earlier, Reserve Bank of India governor Shaktikanta Das has highlighted several indicators of slowdown in the economy while supporting an aggressive cut of 35 basis points against the normal practice of 25 or 50 basis points change, in the third bi-monthly monetary policy of 2019-20.

According to Das, economic activity has shown signs of further weakening since the previous MPC meeting in June 2019. “Inflation expectations of households in the July 2019 round of the RBI’s survey moderated further by 20 bps for the 1-year ahead horizon, though they remained unchanged for the 3-month ahead horizon. Cumulatively, inflation expectations of households have declined significantly by 180 bps for the 3-month horizon and 190 bps for the 1-year horizon in last five survey rounds,” Das said.

"In view of weakening of domestic growth impulses and unsettled global macroeconomic environment, there is a need to bolster dwindling domestic demand and support investment activity, even as the impact of past three rate cuts is gradually working its way to the real economy," said the governor, according to the minutes of the MPC released by the RBI on Wednesday.

with IANS inputs