,
9 tweets,
2 min read
Read on Twitter
So these past couple of days I've been speaking to people "in the trenches" of large, IRL industries. Without exception, they believe a credit crunch is the primary cause of the slowdown, and the 3 horsemen of the apocalypse are Bank NPAs, Demonetization and the NBFC Meltdown. 1/
Most supply chains in India are complex and often informal, and credit is the grease that keeps goods moving through them. Bank credit was scarce as it is, but in the past few years it has completely frozen. With rising NPAs, the banks have tightened the screws across the board.
There was, of course, the moneylender network - the "dedh taka" cash loan from a seth. Demonetization put an end to that. Apparently the seths suffered massive defaults during and after demonetization, and of course developed a fear of keeping large amounts of cash in circulation
In that sense, demonetization achieved its objective of removing unaccounted for cash from the supply chain, but without a commensurate increase in formal credit it ended up drying liquidity from the economy.
Till a couple of years ago, NBFCs seemed poised to take up the slack. They were willing to fund distributors, for example, who had some record of transactions if not full documentation, and who in turn extended payment terms to retailers.
A few missteps here, a little overextension there, and the NBFCs have their own liquidity crisis. Ergo, no paisa.
As a result, goods are getting stuck at the last well-capitalized point in the value chain. The factory churns output, the distributor buys it but can't sell it further as nobody has the cash to buy. Slowly his working capital gets stuck and the knot travels further up the rope.
It hits the headlines when the factory can't stuff the channel any more, which is what seems to have happened recently. No banks, no NBFCs and no seths to help move the goods along.
I apologize if this is an obvious point that was clear to everyone else. To me the big revelation was that it's not necessarily a demand crunch but a liquidity crunch that's causing the slowdown. Hopefully it is more solvable though, through monetary and policy measures. n/n
