Riskless capitalism leads to NPAs, in India

"Riskless capitalism" is a term first used by Raghuram Rajan in November 2014. The Indian growth story cannot be over-simplistically explained as a result of "market-oriented" reforms. Public sector bank credit-financed investments, particularly in the infrastructure sector, played a significant role in sustaining growth, most crucially after the global economic crisis. Such a growth trajectory, however, proved to be unsustainable with the expansionary phase coming to an end in 2011-12 and bad loans piling up in the banking system.


STYLIZED FACTS

• The Indian economy saw a boom between 2003-08 and a bust in 2008-09 whereas the second boom was for two years between 2009-11 followed by a decline.
• Private corporate investment grew faster than public investment during the booms increased from 6.5% to 10.3%.
• Credit from the public sector banks reached high levels during both the boom periods and a decline in between the two booms during 2008-09. Credit flow from the private sector banks did not follow this trend.
• By the time of the second boom, the banks were recklessly lending to already highly indebted companies.
• In the first boom, the real interest rates fell from 12% to 2.5%. In the second boom real rate of interest was increased.
• The fiscal deficit was reduced drastically during the first boom period. A “pause” button was pushed following the global recession and the fiscal deficit expanded from 2008-09.
• Import intensity of the Indian economy has been steadily rising in the high growth phase and continues to rise today.

GROWTH MODEL

• The internal constraint is the rate of profit should at least be equal to the interest accrued on the debt taken in the past. The external constraint is the Gross External Financing Requirements (GEFR) should be equal to net capital inflows and change in foreign exchange reserves.
• These two constraints are the boundaries for the economic system to function well where neither the domestic financial sector comes under severe strain nor the economy is faced with a balance of payment crisis.
• A developing country faces a foreign exchange constraint arising out of the current account needs as well as the international debt servicing payments accrued in the past.
• Investment decision of a private firm is aggregated to  - first, how much of investment is to be undertaken? Second, how is this investment going to be financed?
• The state-owned banks were made to relax their risk function. And the risk-taking of private investment, was passed on to the public sector banks. High profits of successful investment projects were not shared with the lenders. The losses incurred in failed investments was passed on to the state to clean up. This is being witnessed in India today as increasing NPAs and the clamour for debt write-offs. 
• This is the process of "riskless capitalism” , the former RBI  Governor Raghuram Rajan was alluding.

CONCLUSION

• The promoter enjoys riskless capitalism even in these times of very slow growth, how many large promoters have lost their homes or have had to curb their lifestyles despite offering personal guarantees to lenders? Who pays for this one way bet large promoters enjoy? Clearly, the hard working savers and taxpayers of this country! As just one measure, the total write-offs of loans made by the commercial banks in the last five years is Rs. 1,61,018 crore, which is 1.27% of GDP ... Raghuram Rajan in 1994
• The first boom was triggered by export surge accompanied by public sector bank lending, debt inflows and low real interest rates. The second boom was a result of a more reckless lending by the public sector banks in the face of interest rate hikes by the RBI. Such a “riskless capitalism” could not have thrived without the support, active or otherwise, of the state.
• The second boom was short-lived because of the unstable nature of this growth rate as well as a rise in the domestic real rate of interest from 2010-11 due to RBI’s efforts towards inflation targeting. The effect of this increase in the domestic interest rate was muted because international borrowing costs got lowered due to monetary easing in the US in the aftermath of the global economic crisis.
• While the cost of domestic credit increased, its international counterpart declined causing a change in the composition of corporate credit in favour of higher external commercial borrowings. With increase in domestic interest rates, the growth rate fell on the unstable path. The economy eventually hit the lower constraint implies debt defaults, which manifested in the large-scale accumulation of NPAs of the PSBs.
• Faced with an asymmetry of power, banks are tempted to cave in and take the unfair deal the borrower offers with massive haircuts. The banks debt becomes junior debt and the promoters equity becomes super equity. 

What is Gujarat model of development by Modi?

The word ‘development’ as a buzzword is in vogue for almost 60 years and its actual meaning is still elusive, since it depends on where and by whom it is used. President Truman merely wanted to include in his 1949 Inaugural Address as a fourth point that would sound ‘a bit original’. So from the very beginning, no one not even the US President really knew what ‘development’ was all about. Development fail to address poverty or to narrow the gap between rich and poor, but in fact it both widens and deepens this division and ultimately creates poverty, as natural resources and human beings alike are increasingly harnessed to the pursuit of consumption and profit.  'Development' has been widely used as a hard drug, addiction to which may stimulate the blissful feelings that typify artificial paradises. Development is not a buzzword but a toxic word.

• The Gujarat assembly elections have put under intense scrutiny Narendra Modi’s Gujarat model of development which is touted as worthy of replication throughout the country. Audit reports of the CAG provide ample evidence of it being inefficient, corrupt and not beneficial to the common people. 
• The standard indicators of development comprise a range of indices, and not necessarily the level of private investment in an economy. A combination of economic growth and redistributive justice ensues from the overall development of a state or a nation. Narendra Modi’s Gujarat model of development and its skewed impact on indicators that constitute holistic and comprehensive development doesn't include the quality of human life and is not a “development” at all. It appears that this model of development has been vulgarised to mean something quite different.
• Gujarat’s transformation under the then chief minister Modi for over a decade between 2001 and 2014, is based on perception rather than facts. The development is based on economic statistics rather than the parameters that reflect well being of lower classes. The harsh truth is that his claims of success as Gujarat CM were overly exaggerated.
• In his maiden speech in the Lok Sabha in June 2014, Modi said that the Gujarat model could not be universalized, and that India being a vast country, there was a need for many different models.
• Today, Gujarat stands nowhere with reference to common man. It is only haven for large investors with quid pro quo benefits to Modi & BJP.
• While demonetisation was aimed at disarming cash rich opposition for winning UP elections, GST and tax terrorism is aimed at promoting large & MNC businesses while dealing a deadly blow to informal sector which doesn't contribute to coffers and both failed to achieve any of its stated objectives and loaded the nation with unintended consequences. Yet he successfully convinces people that he is working for welfare of poorest people with his rhetoric and hammering selective truths while pursuing his own agenda.
• Gujarat elections will teach him that he can't fool all the people all the times.

In Modi's  Gujarat profit was privatized but loss was socialized, shamelessly

The rise of Narendra Modi ,... Vinod Jose

Modi suffers from worst possible type of corruption; an insatiable desire for personal glory at any cost; an extremely deep moral and spiritual corruption. Modi belongs to the line of autocratic ideologues rather than the western tradition of revolutionary neo liberalism, or marxist rationalism. He also represents the worst aspect of democracy: a demagogue who caters to an irrational populace’s cravings for self-identity and release from self-responsibility. He might not have taken any bribes in recent years but there is no way he could have risen to his position without having made massive and horrendous economic & moral compromises ... as described by Jayant Bhandari.