Weak global demand strongest challenge for economy: Finmin.

Weak global demand is among the "strongest challenges" in the near term for Indian economy, Finance Ministry said today while outlining the need for resolving bad-loans problem of state-owned banks so as to increase credit supply.

It said banks have passed on less than half of the 1.50 percent rate reduction benefit to consumers between January 2015 and August this year and hence the transmission of monetary policy has remained incomplete.

"Weak global demand is one among the strongest challenges in the near term. Exports and imports together constitute 42 percent of the GDP, even at the reduced levels in 2015-16," the ministry said in its background note for the 2-day Economic Editors' conference beginning tomorrow.

It identified the twin balance sheet problem of stressed financial positions of some large corporates leading to stressed assets of banks which may affect private investment as a "critical challenge".

The gross NPAs of PSU banks increased sharply from 5.4 percent in March 2015 to 9.8 percent in March 2016, mainly on account of cleaning up of their balance sheets.

"The problem of non-performing assets needs to be resolved and bank lending needs to pick up. Already there are some signs of improvement," the Ministry said.

As per RBI's Financial Stability Report, the proportion of leveraged companies declined sharply from 19 percent in March 2015 to 14 percent in March 2016 and their share in the total debt also declined from 33.8 percent to 20.6 percent.

The ministry said creating quality jobs is the imperative of the time and hence the government has focused its efforts on removing impediments to job creation, including addressing shortage of skills to the workforce.

The ministry noted however that reviving the savings and investment cycle in economy is challenging. The savings rate that stood at 34.6 percent in 2011-12, declined to 33 percent in 2014-15. Investment rate declined from 39 percent of GDP in 2011-12 to 34.2 percent in 2014-15.

The International Monetary Fund (IMF) has projected India to grow at 7.6 percent in 2016-17 and 2017-18, while World Bank has estimated India to maintain a robust growth of 7.6 percent in 2016 and 7.7 percent in the following two years.

"This growth compares favourably with the growth of 3.2 percent achieved by the global economy and 4 percent by the emerging market and developing economies as a block in year 2015. Thus, against the global background, the current Indian growth is remarkable," the ministry said.

It said that while RBI has cut rates by 1.50 percent since January last year and brought repo rate down to 6.5 percent at the end of August, "the transmission of monetary policy has remained incomplete. The reduction in average base rate has only been nearly 0.62 percent".

Source : moneycontrol.com