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. 

How cronyism dictates Modi’s India

Gautam Adani & Narendra Modi

• Strategic litigations are being used by big corporates to curb free speech and discourage high-quality investigative journalism.
• While Prime Minister Narendra Modi claims that there’s not a single stain of corruption on his three-year tenure in the Centre, a barrage of attacks on media, creeping self-censorship and a belligerent government clamping down on those trying to do their job well and ask critical, uncomfortable questions about the state of the political economy.
• With 58% of India’s wealth owned by the top 1% of population, crony capitalism is thriving and under this government's regime. Despite PM Modi’s hard talk against corruption and claims of ending it altogether, there exists a concerted attempt to delete every mention of such collusions.
• The "collusions" of the alleged Modi-Adani nexus, whether in terms of bending of rules pertaining to special economic zones as to benefit the Adani Group per se, or helping the businessman deal with black money, give him undue loans from public sector banks on overseas projects that had run into troubles with local authorities there.
• It was SBI trying to extend a line of credit worth $ one billion to Adani Group for the Carmichael coal mining project in Australia, or helping the billionaire from Gujarat engage in "riskless capitalism" by tweaking SEZ rules, laying waste to India's environment, or saving Adani from green penalties, the collusion has been happening right before our eyes. 
• Of course, Gautam Adani* had reportedly poured money into Narendra Modi's Lok Sabha election campaign in 2013-14, making it the costliest ever in the history of India. The Gujarat-based businessman's proximity to the prime minister was flaunted in the politician flying all over India in Adani's private planes and choppers.
  *Adani is a college dropout, who spurned his father's textile shop to set up a commodities export firm in 1988. He survived the terrorist attack in Mumbai's Taj Mahal Palace Hotel in 2008.
• Adani Group allegedly took out over Rs 5,000 crore to tax havens abroad, using inflated bills for the import of power equipment from South Korea and China, and the SIT on black money was told by the Directorate of Revenue Intelligence (DRI) and the Enforcement Directorate (ED).
• Despite his anti-black money bluster, one of the biggest black money cases before the retired Supreme Court judge-led Special Investigation Team - a decision taken by PM Modi himself in the initial days of his taking office - has been that of the Adani Group of Industries. 
• What has happened to that investigation? No clue. Brutal clampdown on any mention of the alleged Modi-Adani nexus, strangling free press by using what in legal jargon has come to be known as a "SLAPP", or strategic litigation to avoid public participation.  
• Press freedom in India ranks at a dismal number 138.

Read the source article