New Delhi: The Indian economy faces “serious downside risks" as the government’s demonetisation drive, implementation of the goods and services tax (GST) and corporate deleveraging could accelerate a slowdown and make recovery difficult, the United Nations Conference on Trade and Development, or UNCTAD, said in its Trade and Development Report 2017

It projected the Indian economy slowing to 6.7% in 2017 from 7% a year ago.

India’s economic growth decelerated to a three-year low of 5.7% in the June quarter of 2017-18 as companies reduced their production ahead of implementation of GST from 1 July.

In the previous March quarter of 2016-17, India GDP growth decelerated to 6.1% from 7% in the December quarter, owing to demand compression after the government withdrew 86% of currency on 8 November.

“The informal sector, which still accounts for at least one-third of the country’s GDP (gross domestic product) and more than four-fifths of employment, was badly affected by the government’s ‘demonetisation’ move in November 2016, and it may be further affected by the rollout of the goods and services tax from July 2017. Thus, even if the current levels of growth in both China and India are sustained, it is unlikely that these countries will serve as growth poles for the global economy in the near future," the report added.

UNCTAD in its annual flagship report said rising non-performing assets (NPAs) are making banks much more cautious in their lending practices, with signs of a reduction in the pace of credit creation.

“Since debt-financed private investment and consumption was an important driver of growth in India, it is more than likely that the easing of the credit boom would slow GDP growth as well. Thus, the dependence on debt makes the boom in China and India difficult to sustain and raises the possibility that when the downturn occurs in these countries, deleveraging will accelerate the fall and make recovery difficult. Expecting these countries to continue to serve as the growth poles that would fuel a global recovery is clearly unwarranted," it cautioned.

The Indian banking sector, which since 2003 has expanded credit to the retail sector for housing investments and car purchases and to the corporate sector for infrastructure projects, is now burdened with a large volume of stressed and non-performing assets and there are already signs of a reduction in the pace of credit creation.

“Since debt-financed private investment and consumption have been important drivers of growth in India, the easing of the credit boom is likely to slow GDP growth," it said.

Data for all banks (public and private) up to December 2016 point to a 59.3% increase in bad loans over the previous 12 months, making NPAs 9.3% of their advances, compared with NPAs to advances ratio of 3.5% at the end of 2012, according to the UNCTAD report.

Crisil Ratings on Thursday said banks have only recognized two-thirds of their stressed loans as NPAs, and estimated the bad loan ratio to rise by 1 percentage point to 10.5% by March 2018.

The agency said it estimates the total amount of stressed loans, which includes NPAs and standard assets that are under pressure currently and could deteriorate into NPAs, to add up to Rs11.5 trillion or 14% of the system.

Fresh NPA creation will decelerate this fiscal, but the overall stock will continue to rise because slippages will still outpace recoveries.

“In the past couple of years, recoveries have been poor and the bulk of the reduction in gross NPAs has been because of higher write-offs," Krishnan Sitaraman, senior director at Crisil, said.

He blamed sluggish economic growth, continued stress in some sectors, and slow place of resolution proceedings for hindering recovery efforts.

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