TWIN TROUBLES

Indian economy is facing the twin troubles of low growth and high inflation.

Latest GDP figures showed that, India grew at 4.5%, and IIP [index of industrial production] has fallen to 3.8%, while the CPI [consumer price index] reached a high of 5.5% making Indian economy experience stagflation.

Backgrounder:

Stagflation

Stagflation is a condition of slow economic growth and relatively high unemployment, or economic stagnation, accompanied by rising prices, or inflation. It can also be defined as inflation and a decline in gross domestic product (GDP).

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Index of industrial production :

Consists of 8 core industries.

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Causes of slowdown:

  1. Supply side reduced
  2. Monetary policy is not compatible
  3. Consumer demand is reduced
  4. Cyclical slowdown
  5. Reform was not carried according to the requirement

Extra coverage:

What is twin sheet balance problem?

It is two two-fold problem for Indian economy which deals with:

  1. Over-leveraged companies – Debt accumulation on companies is very high and thus they are unable to pay interest payments on loans. Note: 40% of corporate debt is owed by companies who are not earning enough to pay back their interest payments. In technical terms, this means that they have an interest coverage ratio less than 1.
  2.  Bad-loan-encumbered-banks – Non Performing Assets (NPA) of the banks is 9% for the total banking system of India. It is as high as 12.1% for Public Sector Banks. As companies fail to pay back principal or interest, banks are also in trouble.
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