What is the cause of this slowdown and what is the government doing about it? There are several factors affecting the slowdown, including the previous tighter monetary policies of the Reserve Bank of India, several quarters of weakening consumer and business confidence, and the lack of significant structural reforms by the Modi administration. However, probably the most important factor has been the default to its creditors by the state-run Infrastructure Leasing & Financial Services (IL&FS) in September 2018, the largest infrastructure finance provider in the country.
Over the past few quarters, we have witnessed a rapid deceleration in consumption patterns and growth in India, but Indian policymakers have started to take action to tackle this slowdown.
Over the past twenty years, the company, which was considered ‘blue chip’, built debt to the equivalent of 18.7x its equity, with most of the debt used to directly finance large infrastructure projects in India. The company has put forward plans to reduce the number of projects it is involved in, putting 25 projects up for sale, and the government has appointed a new board to turn it around.
The IL&FS crisis has had an important ‘second derivative’ impact on the Non-Banking Finance Companies (NBFC) in India. NBFCs in India can accept medium-term deposits and make loans; however, they cannot offer payment facilities to customers like debit cards. Although NBFCs are registered with the Reserve Bank of India, there is no government guarantee to depositors in the event of a collapse. The availability of liquidity to the NBFC sector has reduced significantly over the past several months and this has been a major issue impacting the sector.