The past few months raise important questions about not only the Indian economy but also the ability of Indians to grapple with the problems that are likely to take the centre stage in the next few years. It is another matter that the Indian, especially the more vocal elite and the middle classes would raise a hue-and-cry about the lack of responsiveness on the part of the government and the media will be full of hardships that the 'masses' are facing. Since the Indian media's perspective of the "suffering masses" often does not go beyond the middle class neighbourhoods, the whole issue may itself be important for a number of other reasons. IMF chief has already warned of a growing of "Japanisation": she was more polite and called it 'lost decade'. A large number of Indians seem to think that the government will continue to support them. Unfortunately the do not seem to understand that the present nature of financialisation simply a perfectly solvent government could in a short span of time become the equivalent of a sub-prime borrower.
First, the contesting claims for a discreet bail out from our corporates will gain greater centrality. Obviously, our businesses' are adept at incessantly harping on their 'developmental' role which will be stated to be in danger. The need for a bailout in the form of soft loans from public sector is considered to be important as they understand that the middle class sensibility is bound to be hurt if the term bail out is directly used. This needs to be seen in the context that a large section of Indian businesses and the middle classes claim that they are against subsidies. One of the compulsive logic when liberalisation started was that subsidies should not be given by a fiscally stressed government. This is now conveniently forgotten as businesses realise that surviving without government largess. As the Eurozone crisis that run concurrently to attempts to fight inflation begin to bite, capital will get more scare even in countries like India. Attempts by RBI to reduce the CRR may take longer than commonly expected. There is a possibility that food inflation will reduce for a few months, before its starts rising in the summer months. It is likely to reduce structurally only from about 2013 as more storage capacities become more operational.
There are a number of other issues including the problem related to repaying nearly Rs.70,000 crores of FCCB loans taken by the corporate sector in the next two years. That should emerge as a perennial reason for greater demand for fund. To this one may add the rush by Indian companies to expand their capacities - which to me is reminiscent of the mid 1990s when Indian companies borrowed money through the GDR market to expand capacities. Then, as now, the only reason to expand was a unreasonable expectation that Indian's will keep increasing their consumption. Government borrowings should continue to be a source pressure on the banking system. This apart, as with any slowdown, there will be rise in NPAs for the banks, forcing them to conserve capital. Since at least 2004, banks NPAs have declined for the simple reason that NPAs are always calculated as a percentage of credit disbursal - which till now has been growing. We may not be so lucky in the near future, thereby exposing the problems in the banking system. This is not to claim that the Indian banks are insolvent. They are unlikely to be insolvent as long as the Indian government is solvent because nearly 25% of their Statutory Liquidity requirements are invested in Indian bonds. At its worst, it will lead to liquidity issues for the banks, corporates and maybe the government. Foreign loans are out of the question as the European banks which had in the past few years lent nearly Euros 3 trillion are on the verge of inaugurating a multi-year process of contracting their balance sheet by an estimated Euros 7 trillion. The above as well as other macro factors will invariably make their impact fully felt. But, there are other important issues that have often gone unnoticed. Indians have never been so badly prepared for possible years of turmoil. There is a remarkable degree of complacency that "this time is different" for India. An example that is cited is that the downturn after the collapse of Lehman Brothers and the sharp recovery. Fond hopes of such a recovery pervade through all levels. Either ignorance is indeed bliss or they do not seem to realise that instantaneous death is always better than death from asphyxiation. The curse of Lehman Bros Inc., is that it will be the latter rather than the former.
A specific problem is that a large section of Indians who can afford to assume debt are nearly fully leveraged. Businesses have cleverly masked their leveraged through various means, but individuals have not been so smart. A large portion of their surplus has been invested in real estate or houses: good from a multi-decade perspective, but housing is always a highly leveraged investment. The benefits accrue only to those who live in it and capital gains realised from that asset may take years, if not generations. The lack of liquidity in such assets only makes things worse.
A more pertinent issue that one faces, especially in the smaller towns and villages is that the search for higher yield has forced a large majority to save with people of doubtful integrity, if not outright crooks. At times, such savings is also because of the institutional deficiency that exists with the banks ignoring the villages. There are innumerable instances where the poor (and middle classes) have saved money in the form of either chits (ROSCAs) or "deposits" with shady plantation companies or "saved" money in pyramid schemes. Luckily in some parts of the country (like Andhra Pradesh) the police have frowned on pyramid schemes but seem to have missed deposit taking by plantation companies. As credit supply tightens, these will be dissolve with the hard-earned savings of the people, thereby aggravating the problems of an over-leveraged section with few social security nets. These are issues that policy makers seem to have ignored - at least till now.
First, the contesting claims for a discreet bail out from our corporates will gain greater centrality. Obviously, our businesses' are adept at incessantly harping on their 'developmental' role which will be stated to be in danger. The need for a bailout in the form of soft loans from public sector is considered to be important as they understand that the middle class sensibility is bound to be hurt if the term bail out is directly used. This needs to be seen in the context that a large section of Indian businesses and the middle classes claim that they are against subsidies. One of the compulsive logic when liberalisation started was that subsidies should not be given by a fiscally stressed government. This is now conveniently forgotten as businesses realise that surviving without government largess. As the Eurozone crisis that run concurrently to attempts to fight inflation begin to bite, capital will get more scare even in countries like India. Attempts by RBI to reduce the CRR may take longer than commonly expected. There is a possibility that food inflation will reduce for a few months, before its starts rising in the summer months. It is likely to reduce structurally only from about 2013 as more storage capacities become more operational.
There are a number of other issues including the problem related to repaying nearly Rs.70,000 crores of FCCB loans taken by the corporate sector in the next two years. That should emerge as a perennial reason for greater demand for fund. To this one may add the rush by Indian companies to expand their capacities - which to me is reminiscent of the mid 1990s when Indian companies borrowed money through the GDR market to expand capacities. Then, as now, the only reason to expand was a unreasonable expectation that Indian's will keep increasing their consumption. Government borrowings should continue to be a source pressure on the banking system. This apart, as with any slowdown, there will be rise in NPAs for the banks, forcing them to conserve capital. Since at least 2004, banks NPAs have declined for the simple reason that NPAs are always calculated as a percentage of credit disbursal - which till now has been growing. We may not be so lucky in the near future, thereby exposing the problems in the banking system. This is not to claim that the Indian banks are insolvent. They are unlikely to be insolvent as long as the Indian government is solvent because nearly 25% of their Statutory Liquidity requirements are invested in Indian bonds. At its worst, it will lead to liquidity issues for the banks, corporates and maybe the government. Foreign loans are out of the question as the European banks which had in the past few years lent nearly Euros 3 trillion are on the verge of inaugurating a multi-year process of contracting their balance sheet by an estimated Euros 7 trillion. The above as well as other macro factors will invariably make their impact fully felt. But, there are other important issues that have often gone unnoticed. Indians have never been so badly prepared for possible years of turmoil. There is a remarkable degree of complacency that "this time is different" for India. An example that is cited is that the downturn after the collapse of Lehman Brothers and the sharp recovery. Fond hopes of such a recovery pervade through all levels. Either ignorance is indeed bliss or they do not seem to realise that instantaneous death is always better than death from asphyxiation. The curse of Lehman Bros Inc., is that it will be the latter rather than the former.
A specific problem is that a large section of Indians who can afford to assume debt are nearly fully leveraged. Businesses have cleverly masked their leveraged through various means, but individuals have not been so smart. A large portion of their surplus has been invested in real estate or houses: good from a multi-decade perspective, but housing is always a highly leveraged investment. The benefits accrue only to those who live in it and capital gains realised from that asset may take years, if not generations. The lack of liquidity in such assets only makes things worse.
A more pertinent issue that one faces, especially in the smaller towns and villages is that the search for higher yield has forced a large majority to save with people of doubtful integrity, if not outright crooks. At times, such savings is also because of the institutional deficiency that exists with the banks ignoring the villages. There are innumerable instances where the poor (and middle classes) have saved money in the form of either chits (ROSCAs) or "deposits" with shady plantation companies or "saved" money in pyramid schemes. Luckily in some parts of the country (like Andhra Pradesh) the police have frowned on pyramid schemes but seem to have missed deposit taking by plantation companies. As credit supply tightens, these will be dissolve with the hard-earned savings of the people, thereby aggravating the problems of an over-leveraged section with few social security nets. These are issues that policy makers seem to have ignored - at least till now.
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